by Ulrika Lomas, Tax-News.com, Brussels

08 March 2018

The European Commission has sent letters of formal notice to Cyprus, Greece, and Malta for not levying the correct amount of value-added tax (VAT) on yachts.

Specifically, the infringement procedures launched on March 8 concern:

First, the reduced VAT base for the lease of yachts offered via a general VAT scheme in Cyprus, Greece, and Malta. The Commission said while current EU VAT rules allow member states to not tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use. Malta, Cyprus, and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate.

Second, the Commission is challenging the incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as “lease-purchase.” The Commission said the Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. This results in VAT only 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, the rest being taxed as the supply of a service and at a greatly reduced rate.

This VAT issue can generate major distortions of competition and featured heavily in the coverage of last year’s “Paradise Papers” leaks, the Commission said, explaining: “The Paradise Papers revealed widespread VAT evasion in the yacht sector, facilitated by national rules which do not comply with EU law. As well as the infringement procedures launched today by the Commission, the European Parliament has recently indicated that its new committee to follow up on the Paradise Papers would also look at this issue.”

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. We cannot allow this type of favorable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end.”

The three states have two months to respond to the arguments put forward by the Commission. If they do not act within those two months, the Commission may send a reasoned opinion to their authorities, after which it could refer the states to the European Court of Justice.