The benefits of registering a yacht in Malta
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.