The ben­e­fits of reg­is­ter­ing a yacht in Malta

The Malta Business Weekly - - FRONT PAGE -

Be­ing an is­land sur­rounded by the Mediter­ranean Sea for sure one of the triv­ial in­dus­tries for Malta is the mar­itime in­dus­try. Due to its im­por­tance, our leg­is­la­tors have cre­ated op­por­tu­ni­ties to at­tract com­pa­nies and in­di­vid­u­als through the cre­ation of schemes which apart from be­ing ben­e­fi­cial to Malta will still ob­serve com­pe­ti­tion rules set by the Euro­pean Union (EU). The two schemes that are go­ing to be dealt in this ar­ti­cle are the Yacht Leas­ing scheme and the Ton­nage Scheme.

In 2017, the Mal­tese VAT de­part­ment is­sued guide­lines on the VAT Treat­ment for own­ers of plea­sure yachts who want to lease the yacht in re­turn for the con­sid­er­a­tion. In or­der for the guide­lines to ap­ply the fol­low­ing points need to be met: a) the owner of the plea­sure yacht (lessor) needs to be a com­pany and the other party (lessee) can be a le­gal per­son or com­pany and can be a Mal­tese na­tional or for­eign; b) the lease agree­ment shall not

ex­ceed thirty-six months; c) be­fore the lease agree­ment com­mences, ap­proval of the agree­ment needs to be sought from the Com­mis­sioner for Rev­enue as the com­mis­sioner may re­quest ad­di­tional con­di­tions to be ap­plied and may re­quest de­tails re­gard­ing the use of the boat; d) an ini­tial con­tri­bu­tion of at least 50% of the value of the craft needs to be paid by the lessee to the lessor; e) the lease in­stal­ments need to be

payable ev­ery month; f) at the end of the lease agree­ment the lessor is ex­pected to make a profit over and above the value of the boat; g) in the agree­ment there should be a clause pro­vid­ing the lessee the op­tion to buy the plea­sure yacht. The value of the pur­chase op­tion shall not be less than 1% of orig­i­nal value of the craft. This value will be sub­ject to the Mal­tese stan­dard rate of VAT of 18%. In the guide­lines set out by the de­part­ment the lease of the plea­sure boat is a sup­ply of a ser­vice. The guide­lines fur­ther pro­vide that this sup­ply of ser­vice is tax­able ac­cord­ing to the use of the boat, at­trib­uted within the ter­ri­to­rial wa­ters of the EU as long as the lessor is a Mal­tese com­pany. The lessor is re­spon­si­ble to keep as­sess­ment of the time that the plea­sure boat spends be­tween EU ter­ri­to­rial wa­ters and out­side EU ter­ri­to­rial wa­ters. As this can be dif­fi­cult for the lessor to keep track of the per­cent­age due to cir­cum­stances be­yond the lessor’s con­trol, the Com­mis­sioner for Rev­enue pro­vides a ta­ble de­ter­min­ing the per­cent­age of the lease tak­ing in the EU ter­ri­to­rial wa­ters based on the type of the boat. As the lessor uses this ta­ble and per­cent­ages pro­vided by the Com­mis­sioner for Rev­enue re­duces the el­e­ment of sub­jec­tiv­ity.

There­fore through the use of this scheme, for plea­sure boats over 24 me­tres in length when tak­ing the over­all value of the plea­sure boat and the VAT rate due, the VAT el­e­ment is re­duced to just 5.4%. This is cal­cu­lated by tak­ing the 18%, be­ing the stan­dard VAT rate, mul­ti­plied by 30%, be­ing the per­cent­age of lease tak­ing place in the EU for plea­sure boats over 24 me­tres in length. The scheme as­sumes that the big­ger the yacht, the more time will it be in non-EU ter­ri­to­rial wa­ters. As a re­sult of this scheme, the VAT will only be paid on the pro­por­tion of time that it will be in EU ter­ri­to­rial wa­ters.

When the pur­chase op­tion is ex­er­cised by the lessee, the VAT de­part­ment after car­ry­ing out all the nec­es­sary fi­nal checks, will is­sue the VAT paid cer­tifi­cate which will be proof that all VAT due has been paid on the craft.

Way back on 8 March 2018, the EU started in­fringe­ment pro­ce­dures against Malta, Cyprus and Greece as the Euro­pean Com­mis­sion (EC) has in­di­cated that th­ese coun­tries are not levy­ing the cor­rect amount of VAT on the pro­vi­sion of yachts. In its let­ter the EC has pro­vided two months to th­ese coun­tries in or­der for them to an­swer the com­mis­sions’ queries else the EC will for­ward their opin­ion and th­ese coun­tries can face pos­si­ble fi­nan­cial sanc­tions. Be­fore look­ing fur­ther at the EC’s con­cerns, one has to look what this scheme is all about.

The is­sues put for­ward in the in­fringe­ment pro­ce­dures put for­ward against Malta by the EC in­cluded the fol­low­ing:

i) The EU rules pro­vides that Mem­ber States are not to tax the sup­ply of a ser­vice where the ef­fec­tive use and en­joy­ment of the prod­uct is out­side the EU. How­ever it does not al­low the mem­ber state to give a flat-rate re­duc­tion with­out the proof of the place of ac­tual use.

ii) The leas­ing of a yacht un­der the Mal­tese laws, is clas­si­fied as a sup­ply of a ser­vice rather than a good. Based on this, the VAT is charged only at the stan­dard rate on a frac­tion of the real cost price of the plea­sure craft once the yacht is fi­nally bought. There­fore the rest is taxed as a sup­ply of a ser­vice and so the lessor is ben­e­fit­ting from the re­duced rate.

A num­ber of lo­cal bod­ies and author­i­ties which are di­rectly linked to the in­dus­try have com­mented al­ready that such reg­ula- tions have been set quite some time ago and were not scru­ti­nised by the EU be­fore. They in­di­cated that our pro­ce­dures are in line with EU law. They also claim that sim­i­lar pro­ce­dures are also adopted by other EU mem­ber states but they are not be­ing chased by the EC for ex­pla­na­tions and rec­ti­fi­ca­tion of the do­mes­tic law to be in line with the EU reg­u­la­tions. They have also pointed out that other EU Mem­ber States have sim­i­lar schemes how­ever th­ese are not be­ing in­ves­ti­gated.

The other scheme which has been high­lighted be­fore is the Mal­tese ton­nage tax rules. This scheme has also been un­der in­tense in­ves­ti­ga­tion by the EU for the last six years, how­ever this has been con­cluded last De­cem­ber. The out­come has been quite pos­i­tive as Malta has been al­lowed to re­tain the scheme with sub­ject to some changes. The ECs de­ci­sions and mea­sures agreed upon are valid for the next ten years un­der EU state aid rules.

Through its in­ves­ti­ga­tion, the EC has iden­ti­fied that there were fea­tures that were in breach of the EU State Aid Rules. There­fore Malta com­mit­ted it­self to re­move those tax ex­emp­tions for Mal­tese res­i­dents which constitute State aid and also the range of an­cil­lary ship­ping ac­tiv­i­ties that were pre­vi­ously el­i­gi­ble to ben­e­fit from Malta’s Ton­nage Tax Regime has been lim­ited to the in­ter­na­tional car­riage of per­sons and goods.

Un­der the Mal­tese Ton­nage Tax Regime a ship­ping com­pany is taxed on the ba­sis of the ship’s net ton­nage rather than ac­tual prof­its of the com­pany. So, in or­der for a com­pany to avail it­self of the Mal­tese Ton­nage Tax regime: • a com­pany must be a li­censed

ship­ping or­gan­i­sa­tion; • all rel­e­vant reg­is­tra­tion fees and

ton­nage taxed are duly paid; • the main rev­enues are from the in­ter­na­tional car­riage of per­sons and goods; • if a com­pany has mixed sup­plies, that is ship­ping re­lated ac­tiv­i­ties and non-ship­ping re­lated ac­tiv­i­ties, sep­a­rate ac­counts should be kept for dif­fer­ent op­er­a­tions; • if there are an­cil­lary rev­enues that are closely con­nected to ship­ping ac­tiv­i­ties, th­ese are capped at 50% of a ship’s op­er­at­ing rev­enues; • for rev­enues from towage and dredg­ing, th­ese are sub­ject to cer­tain con­di­tions that is they must fly an EEA flag, the ma­jor­ity if their ac­tiv­i­ties within a cal­en­dar year con­sists trans­port at deep sea of ex­tracted ma­te­ri­als in case of dredgers and mar­itime trans­port in case of towage. Thus, for a ship­ping com­pany to make use of the ton­nage tax regime sig­nif­i­cant part of the fleet must be of an EEA Mem­ber state. For each new en­trant to the scheme, it must have at least 25% of the fleet sub­ject to ton­nage tax within an EEA flag.

Due to the im­por­tance of this in­dus­try, the Mal­tese author­i­ties worked hard and will con­tinue to strive to at­tract fur­ther ship­ping com­pa­nies to reg­is­ter un­der the Mal­tese flag. So far, the reg­is­tra­tion of ves­sels with the Mal­tese Flag has reached the first flag in Europe and the sixth world­wide. With the re­cent ap­proval of the EC, this track record will help fur­ther the lo­cal author­i­ties and will be able to see fur­ther growth in this in­dus­try.

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