On 8 March 2018, the European Commission sent letters of formal notice to Cyprus, Greece and Malta for not levying the correct amount of Value-Added Tax (VAT) on the provision of yachts. The issue was revealed by the “Paradise Papers” case; the European Parliament has recently indicated that its new Committee to follow up on the Paradise Papers would also look at this matter.

The infringement procedures concern in particular:

  • a reduced VAT base for the lease of yachts applied by Cyprus, Greece and Malta. On the one hand, the European Union law on VAT allows Member State not to tax the supply of a service where the effective use and enjoyment of the product is outside the European territory; on the other hand, those rules do not allow for a general flat-rate reduction without proof of the place of actual use. The concerned Member States have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in European waters, thus reducing the applicable VAT rate;
  • the incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as ‘lease-purchase’. According to their laws, the leasing of a yacht is considered as a supply of a service rather than a good. Therefore, the VAT is being levied at the standard rate on a minor amount of the real cost price of the craft once the yacht has finally been bought, while the rest is being taxed as the supply of a service and at a greatly reduced rate.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion”.

The three Member States have two months to respond to the arguments put forward by the Commission.