EU VAT is not unique in having fixed rules which then make allowance for reasonable variances. The system has points and counterpoints, you might say. From the perspective of operators and users of means of transport, and of yachts and aircraft, the VAT law does project fixed rules. However, these are counterpointed by several “schemes” across the current EU landscape of 27 countries.
Some of these schemes are themselves fixed by the common law. For example, the scheme which allows VAT on certain asset sales to be charged on the profit margin rather than on the sale price. Or the scheme stipulating that a reduced rate of VAT may be charged on certain transport activity.
Other VAT schemes emerge because of derogations in the common law. VAT derogations may authorise individual EU countries to adopt an alternative rule to the agreed common rule. Derogations are meant to simplify the procedure for charging VAT or prevent certain types of tax evasion or avoidance. But in a bloc of competing interests, their effect can create uncertainty and inconsistencies, even conflict.
Take the derogation from the ‘use and enjoyment’ rule in Article 59a of the VAT Directive. This concerns the place of taxation of certain services (like hiring out a yacht or aircraft) when they take place only partly inside the EU. Member States are authorised in such cases to decide whether to tax the service as belonging inside or outside their territory. Each Member State is thus responsible for the implementation of that rule. The use made of that rule by any taxpayer must be verified with the Member State concerned, and not by reference to the common EU rule.
Consequently, there is no uniform rule for the taxation of a yacht charter that begins outside the EU and enters the EU for part use within the territorial waters of a Member State. France requires that such a charter is not taxed at all. Spain would require that the yacht is taxed for the time spent in Spain after it enters from outside the EU. In Italy and Croatia, the charter is taxable pro rata. In Greece no tax provided the passengers do not change in Greece, although it would collect non-VAT levies instead.
For many extra-EU charterers using their assets typically on charter itineraries spanning more than one EU country, such varying counterpoints present murky waters and unpleasant booby traps. In fact, the use that some EU countries have made of VAT derogations is partly to blame for the millions of Euros of back taxes, interest and penalties paid by yacht owners in the last year alone.
The European Commission and the Court of Justice intervene occasionally to curb over-deviation by EU Member States. They seek transparency and consistency among the Member States, but it is the taxpayer who bears some responsibility when a VAT scheme fails. Even when they seemingly encourage certain behaviour, a Member State can always use the taxpayer’s error of judgement against them when a scheme is withdrawn.
Since 2018, several use and enjoyment related yacht leasing schemes have been quashed in Italy, Malta, Cyprus and Greece. Tax-exempt fuelling of commercial yachts has petered out everywhere. The “lumpsum” VAT reduction schemes for charter yachts have ceased in France and Italy.
National schemes derived from EU VAT derogations offer piquant counterpoints to the fixed VAT rules. Schemes ought to be used prudentially. Can the end user preserve the benefits they receive from a VAT scheme without costs if the scheme is pulled in the long run?
Information in our Blogs is very general in nature and should not be acted upon without first consulting with a tax advisor. Please feel free to contact Y & A Group, LP to schedule a complimentary consultation.
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