Following a temporary suspension period last year, the guidelines for the VAT treatment of hiring of Pleasure Yachts (the “Guidelines”) have been recently published just in time for the kick-off to the Summer Yachting Season 2019.
Maltese Authorities, on the strength of the experience and knowledge acquired in the yachting industry, recently launched a major overhaul of the Guidelines since their introduction in 2005. Whilst still based on Article 59a of the EU VAT Directive, the new Guidelines reflect recent EU developments and best market practices.
The Guidelines will allow the overall VAT incidence incurred on the leasing of a yacht to be reduced substantially depending on the extent of use and enjoyment made of the yacht in EU territorial waters.
In terms of the new Guidelines, Maltese VAT on leases that are deemed to take place in Malta is calculated on the basis of the yacht’s effective use and enjoyment within EU territorial waters. This means that no VAT is chargeable on the portion of the lease attributable to effective use and enjoyment of the yacht within non-EU or international waters.
What is the rationale of the Guidelines?
The short-term lease of a yacht (i.e. not more than 90 days’ continuous possession or use), is considered a supply of a service falling within scope of Maltese VAT when the yacht is put at the disposal of the lessee in Malta. On the other hand, for long-term yacht leases (i.e. leases covering more than 90 days’ continuous possession or use) to be deemed taking place in Malta, the lessor must be established in Malta in addition to having the yacht put at the disposal of the lessee in Malta.
When leases fall within the Maltese VAT net as aforesaid, in terms of the VAT Act and based on Article 59a of the EU VAT Directive, the Commissioner for Revenue may consider the place of supply of such hiring of a means of transport to be outside Malta if effective use and enjoyment of the services takes place outside EU territory.
Indeed, the 2019 Guidelines lay down the conditions for the Commissioner to exercise such discretion and to approve that the lessor levies VAT only on the portion of the lease covering effective use and enjoyment within the EU.
Conditions for application of the Guidelines
In order to benefit from the yacht leasing Guidelines a number of conditions must be satisfied:
- For long-term leases, the lessor must be established for VAT purposes in Malta;
- For long-term leases, the lessee, who can be established in or outside Malta, must be a non-taxable person, i.e. a person who does not lease in the yacht for business purposes;
- In all cases, the lessor must possess a valid Maltese VAT identification number and the yacht must be placed at the disposal of the lessee in Malta;
- The lessor and lessee must enter into a yacht leasing agreement, which agreement must be presented to the VAT Department;
- Prior approval must be sought from the VAT Department in writing for the lessor to apply Maltese VAT on the basis of effective use and enjoyment;
- The lessor must maintain adequate and appropriate records to demonstrate effective use and enjoyment of the yacht by the lessee within/outside the EU territory.
- An annual declaration must be filed by the lessor with the Commissioner for Revenue within the prescribed timeframe.
Levying VAT on the basis of effective EU use and enjoyment
Following standard VAT rules, the lessor would be obliged to charge VAT to the lessee on the lease fee and declare and pay same to the VAT Department upon submission of the VAT returns. Typically Maltese VAT returns are filed on a quarterly basis. In this context and given that generally yacht lease fees are paid in advance, the Guidelines provide an adjusting mechanism to ensure that the ultimate VAT charge reflects the actual effective use and enjoyment of the yacht within the EU.
In essence, the Guidelines require that on the monthly lease fees charged in a year, VAT is levied provisionally based on the actual percentage of effective EU use and enjoyment of the yacht in the prior year. Such provisional VAT must be adjusted for annually to reflect the actual ratio of effective EU use and enjoyment in that relevant year. The Guidelines further lay down rules on how such provisional VAT is to be charged during the first annual lease period. No penalties or interest would apply for VAT adjustments made in accordance with the Guidelines.
In this manner, over the term of the lease, VAT would only be charged on the portion of the lease reflective of the effective use and enjoyment within the EU.
Other VAT considerations
Purchase of the Yacht by the Lessor
The VAT treatment of the purchase of the yacht by the lessor will depend on whether the yacht is procured locally, acquired from another EU Member State, or imported into Malta from a third country. However, in any case, the VAT implications follow standard VAT rules and the transaction should be VAT neutral for lessors who use their yachts exclusively for business.
Sale of the Yacht by the Lessor
The VAT treatment of any sale of the yacht by the lessor will depend on the place where the sale takes place for VAT purposes. If the sale takes place in Malta, 18% VAT would typically be due on the consideration charged for the sale.