In the real world of VAT, the ‘passenger’ and ‘commercial’ vessel distinction dissolves into insignificance. It sounds like a counterintuitive thing to say but here’s why.
The classification or registration of a vessel as a ‘passenger vessel’ or ‘commercial yacht’ does not define whether a vessel is exempt for VAT purposes. What matters is how the vessel is hired and used.
The exemption from VAT is provided for in Article 148 of the EU VAT Directive, which relates to international transport. That provision covers the supply, modification, repair, maintenance, chartering and hiring of “vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities”.
For a hiring service to be capable of exemption under that provision, the lessee of the vessel concerned must use it for an economic activity. ‘Economic activity’ equates to financial gain. It contrasts with use for leisure or sport, which is non-economic.
If the vessel is hired to persons who use it exclusively for leisure or private purposes, then the hire service does not meet the conditions for VAT exemption set out in Article 148. This is precisely how yachts and other vessels for pleasure or sport are excluded from exemption from VAT.
The question, therefore, is never whether the vessel is classed or registered as a passenger vessel or a commercial yacht.
The settled case-law of the CJEU, above all Bacino Charter Company SA, repeatedly underlines how strictly VAT exemption ought to be interpreted and applied by EU countries, and how they must not depart from the established conditions. Whether a specific transaction is subject to or exempt from VAT cannot depend on its classification in national law, let alone in the statutory arrangements of a flag state.
With the growing fleet of ultra-sized pleasure craft, a so-called ‘Passenger Vessel fallacy’ has emerged. This equates the enhanced class notation of a vessel to its VAT exemption, with costly consequences for yacht owners who act on this misconception. Whether a vessel is classed as ‘passenger’ or ‘commercial’ or called a ‘ship’ instead of a ‘yacht’ is not at all key in any VAT exemption.
And if the question is whether the charterer uses a yacht for financial gain, or for their private leisure or sport, the answer in the conventional yachting context is more often the latter use. Hence why VAT exemption should not be presumed.
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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