By Sara Ammannati and Camille Penquerch
January was a month of significant changes for charter activity in the Mediterranean following discussions that began March 8, 2018, between the European Commission and some European Union member states.
In Italy and France, new rules implemented in accordance with the EU principle of taxation of services on the effective use of the yacht outside the European Union mean that the lump sum VAT (value-added tax) criteria is no longer applicable.
The EU Commission’s goal was to harmonize rules by abolishing the separate laws that were in place in Italy, France, Malta and Cyprus for the reduction of VAT on the taxable base for charter contracts, and to instead apply the general criteria contained in articles 56 and 59a of the EU VAT Directive 2006/112/CE.
The aim of the EU Commission was to allow a reduction of VAT on charters only on an actual calculation method in accordance with the provisions of the above-mentioned articles in order to combat VAT evasion.
“In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion,” said Pierre Moscovici, commissioner for Economic and Financial Affairs, Taxation and Customs Union. “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 new Italian Law (Italian Budget Law No.160 of Dec. 27), published in the Italian Official Gazette (Gazzetta Ufficiale) on Dec. 30, changes the provision of the application of the Italian VAT due on short-term charters with departure from the Italian territory, and will be applicable as of April 1 to all Italian charters that start in Italian territory.
The ordinary Italian VAT rate of 22% will be due on all Italian charters, regardless of the date of signature and payment of the charter contract.
By Feb. 29, the Italian Tax Office will issue new guidelines for the calculation of VAT-free “effective use” of the yacht outside EU territory, clarifying whether effective use refers to the time or the miles spent in international waters.
“I’m currently involved with Ucina Confindustria Nautica – the Italian Association of Yachting – working close to the Italian Tax Authority on the new guidelines that will lead the VAT on charters starting from April 1, 2020,” stated Ezio Vannucci, of Moores Rowland Partners.
Similarly, the French Tax Authorities published the French Official Tax Bulletin on Jan. 29 that specified the French VAT lump sum reduction will be replaced by an actual reduction in proportion of the time spent outside European waters. At this stage, the Tax Circular is open for public comment and changes are possible up to March 1. In the meantime, the current proposal is applicable.
“I was unofficially warned of the change of rule in July 2019,” stated Thierry Voisin, director of SOS Yachting France and president of ECPY Association. “The formal information of the change was made on Nov. 29. On this date I had a meeting with French Authorities. Since then we have been negotiating with them, and the result is the publication of the Official Bulletin published Jan. 29.”
The new regulation specifies that the French VAT will be due at its full 20% rate for the time spent in French waters or EU waters. The time spent outside French and EU territory will be VAT-exempt, but the owning company will have to demonstrate by proper evidence the actual use of the yacht outside EU waters.
The new French regulation will be applicable from April 1 to charter contracts signed after March 30. This is different from Italy, where the new VAT regulation will be applicable to all charter contracts, even those with a date of signature and payment of first installment prior to April 1.
Both countries are still working out how to put the new regulations into practice. In France, for example, it is clear that time will be a determining consideration in calculating effective use, whereas in Italy, this has yet to be clarified.
Sara Ammannati and Camille Penquerch work with SOS Yachting, an independent, specialized service company (www.sosyachting.com) that offers fiscal agency and representation services to EU and non-EU yacht owning companies chartering in the EU. Comments are welcome below.