The FCE’s Journey to reality

To its detractors it is a failed experiment in legal fiat within an EU Member State, but its supporters counter that it is more proof of the EU’s heavy-handedness towards the luxury yacht sector. However, few will disagree that the French Commercial Exemption has now had its fair run after two decades.

At the time when France created the FCE by administrative order in 2004, they premised it on the hopeful ground that yachts could be assimilated to the commercial vessel category for VAT purposes if they complied with certain basic requirements – flagged as a commercial yacht, employs a permanent crew on board, and used exclusively for commercial purposes.

By contrast, under the EU VAT Directive, then and now, yachts are classified as pleasure vessels regardless of whether they carry out chartering activities. So, really, the battle lines looked drawn even then with the European Commission. The role of the Commission, as the “Guardian of the Treaties”, consists of ensuring that the national legislation and general practice on VAT complies with EU Law.

The “exemption” in France offered benefits which were reserved in EU law for ‘working’ ships, defined firmly to exclude yachts and other ‘pleasure craft’. The FCE offering meant that non-EU yachts could be customs cleared without paying VAT upon importation into France. There was duty-free fuelling and VAT-free provisioning, VAT-free supplies of services including of repairs or refit of the yacht, and VAT-free charters. Altogether, this was a great French boon to commercial yacht owners. Alas, it was never going to last.

Since 2004 there have been several adaptations of the FCE, but the two most impactful changes have come from actions initiated by the Commission. Both were in 2010. First, the Commission determined that the conditions of FCE breached EU law. VAT exemption cannot be open to any vessel just because it was used for commercial purposes. Also, usage for navigation on the high seas, which was an aspect of the EU VAT law so far overlooked in setting the FCE conditions, was a delimiting factor in a vessel’s entitlement to VAT exemption that it said must always be considered.

Then came the ruling on the Bacino Yacht Charter case which the Commission had been pushing at the Court of Justice of the European Union (CJEU) against a Luxembourg company. The CJEU held that a correct interpretation of the relevant EU law meant that the exemption from VAT must not apply to charters of a vessel to natural persons for purposes of leisure travel, even on the ‘high seas’. VAT must be payable on such an activity since the charterers are private individual users of the vessel for leisure, and not for an economic end.

There have been other Commission proceedings since the seminal Bacino ruling. These have knocked off the remaining aspects of the FCE, such as tax-free fuelling and provisioning, which has caused the FCE to totter on, as it were, punch-drunk. In more recent years, the French authorities have implemented administrative practices which make the FCE benefits subject to harder evidence or to prior validation by them. And, because the validation is hardly given, any incentive to apply has all but fizzled out.

Fast forward to January 2022 and France introduces the mandatory import VAT reverse charge. Now level with most other Member States, yacht importations must be declared on a controlled VAT return. Automatic VAT exemption no more. Any VAT recovery is subject to strict and regular accounting.

Born and nurtured by French administrative fiat, the French Commercial Exemption regime has crashed into the reality of the EU legal order which demands uniformity.


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