Maltese Yacht Leasing – A decade of VAT simplification and reduction for private yacht owners
Tuesday 01 December 2015
By Dr. Chris Cini, Legal Counsel, Equiom Malta
In November 2005 the Maltese VAT Department issued guidelines which allow a reduction of the overall VAT burden on the acquisition and use of a yacht in the EU. The guidelines set the standard of what is now commonly called ‘Maltese Yacht Leasing’ (MYL). Since then MYL has grown in appeal and gained in popularity. Hundreds of large yachts have already graduated from the programme and hundreds more are now said to enter every year.
The concept of leasing itself is common of course. It is after all one of the two main ways any business can pay for the resources and equipment that it needs. It entails paying for the use of an asset in instalments over a period of time. What has made leasing uniquely powerful in the context of MYL, however, is its simplifying effect on VAT payment. There is inherent complexity in planning and paying VAT in the world of yachting because of a combination of ‘triggers’. Yachting transactions can often be one-off but with lasting impact, such as an importation. They invariably involve large amounts. They are international in character, usually involving EU and non-EU movement. Use by persons connected with the yacht is frequently intermingled with use by complete outsiders. And this whole pattern of transactions does change regularly in response to changes in the EU tax environment. Each of these trigger points can give a useful warning of the need to check the VAT position of the yacht. When several trigger points appear at once, complications are guaranteed.
MYL reduces these tax triggers to a minimum in order to give yacht owners certainty. VAT on the value of a yacht is computed on a ‘deemed use percentage’ basis, i.e. the time that the yacht is deemed to sail in EU waters. This is the sole percentage on which the owner is liable to VAT on the value of the yacht since no VAT is due on sailing in non-EU waters. That taxable proportion of the yacht’s value is, however, predetermined and set according to the yacht’s size and means of propulsion. With that given, all that remains in computing the VAT burden is to multiply the standard Maltese VAT rate of 18% by the predetermined percentage use. The result is a sliding scale reduction in VAT which can be as low as 5.4%. In essence the bigger the yacht, the wider its sailing range; the wider its sailing range, the greater its capacity to sail outside the EU; the greater its capacity to sail outside the EU, the less VAT it pays on its value.
It is indeed an enviable achievement that MYL has managed to cut through complexity and reduce uncertainty for private yacht owners wanting to pay VAT and keep their privately used yachts permanently in the EU. But what is even more remarkable is that Malta has managed to do so while maintaining what is in effect a reduced rate of VAT. Not only has Malta sustained MYL for a decade already, that model itself has actually received the ultimate endorsement by being copied by at least one other EU Member State.
Yet MYL’s enduring success is less to do with Malta’s obvious pragmatism in matters of yachting VAT than with the legal pillars on which the model stands. It is rooted in both EU law and Maltese national law. Many of the key principles of VAT law are readily recognisable in the model:
- the ‘economic activity’ of leasing carried out by the lessor of the yacht
- the lessor’s obligation to charge VAT on the activity and its corresponding right to deduct VAT on its costs within the VAT system
- the lease of the yacht being treated as a supply of services, taxable according to the place of supply rules in Malta where the yacht is actually put at the disposal of the lessee
- the scope and territoriality of VAT itself, which limits the tax’s application to consumption or use of a boat within EU waters and not outside.
This last point is of special relevance to the MYL model since as a means of transport a yacht does sail both inside and outside the EU. In this regard, the inherent difficulty of any Member State trailing, for the purposes of the tax, how much sailing actually happens inside the EU is well recognised. Article 59a of the VAT Directive therefore gives EU Member States specific discretion to deal with this difficulty so as to ‘prevent double taxation, non-taxation or distortion of competition’.
Malta’s national law reflects and underscores this discretion too, in Item 12 of the Third Schedule to its VAT Act, which defines the ‘Criterion of effective use and enjoyment’ with regard to the hiring out of means of transport. The exercise of the discretion is the responsibility of the VAT Commissioner (the Maltese VAT Department) whose Guidelines Regarding VAT Treatment of Yacht Leasing, published in 2005, provide the official template for the tax treatment of leased yachts afforded by MYL.
It was always going to be the case that EU Member States would use their discretion to tax the ‘effective use and enjoyment’ of yachts used only partly in the EU differently. Some, for example, would deem outbound and inbound sailings in their territorial waters taxable, wholly or proportionally. Malta has, however, chosen the much simpler and pragmatic approach which continues to beckon a multitude of yacht owners to its shores. Good on Malta, those yacht owners seem to be saying. Their enthusiastic uptake of MYL proves the point that simplification and clarity in tax can breed positive compliance.
Equiom offers comprehensive Maltese Yacht Leasing programmes through its office in Malta.
To find out more, contact our Malta office.