VAT Treatment of Long-Term Yacht Leasing

January 2018

kpmg.com.mt

Page 2Changing the Game / Tax Services / June 2016

With centuries’ old of maritime tradition, its geographical position in the Mediterranean, its favourable weather conditions, its straightforward registration procedures for a flag of trust, its efficient importation procedures; for the past years Malta has experienced significant growth and investment in the yachting industry. Since 2005, the application of VAT Guidelines on the VAT treatment of long-term leasing of pleasure crafts was one of a number of contributors attracting owners of yachts to Malta. In terms of such VAT Guidelines the overall VAT incidence incurred on the long-term leasing of a pleasure yacht can be reduced substantially depending on the use of the vessel within or outside EU waters.

The Rationale behind the VAT GuidelinesWhen leasing a movable asset like a yacht for a long period, an inherent difficulty of the lessor is to determine the exact period of time which the yacht, whilst in the hands of the lessee, spends inside and outside EU territorial waters. As a consequence, charging the correct amount of VAT on the right proportion of the lease may prove challenging. Such difficulty is amplified by the nature of such vessels, being crafts used for pleasure purposes not on any established commercial routes. In addition, the geographical location of Malta at the centre of the Mediterranean Sea and between two Continents, makes non-EU waters reachable by lessees in no-time.

The VAT Department acknowledges such challenges beyond a lessor’s control and thus, it may, upon application in writing and with justification, consider accepting an estimated percentage of the lease that would be VAT-taxable in Malta.

Conditions for application of the GuidelinesThe conditions for the application of the VAT Guidelines by lessors of pleasure yachts are the following:

• the owner of the yacht, i.e. the lessor, must be a company established in Malta with a valid Malta VAT identification number. The lessee may, however, be a Maltese or foreign individual or company;

• the lease must be a long-term lease that strictly qualifies as a supply of services for VAT purposes;

• the yacht must be put at the disposal of the customer in Malta;

• prior approval for the application of the VAT Guidelines should be sought in writing by the lessor together with the submission of documents which are subject to the VAT Department’s scrutiny.

It is also expected that the lessor makes a profit on the lease.

“KPMG’s Shipping & Yachting Advisory Team prides itself of its Maritime Accounting, VAT, Auditing and Legal Specialists able to provide a 24/7 pre- and post-registration service and to ensure ongoing compliance vis-à-vis Maltese Authorities.”

“Effective VAT rate is reduced

to as low as 5.4%”

VAT Treatment of Short-Term Yacht Chartering / Tax Services / June 2016Page 3

Applicable VAT ratesSubject to justification by the lessor and the approval by the VAT Department, the applicable Maltese VAT rate of 18% can be applied on a proportion of the lease as follows:

Type of Yacht% of lease taking place in the EU and

subject to Maltese VAT

Yachts > 24m 30%

Sailing yachts:20.01m - 24m 40%

Motor yachts:16.01m - 24m 40%

Sailing yachts:10.01m - 20m 50%

Motor yachts:12.01m - 16m 50%

Sailing yachts< 10m 60%

Motor yachts:7.51m - 12m* 60%

Motor yachts< 7.5m* 90%

* If registered in the commercial register

Other considerations for lessorsVAT on the acquisition of the yacht

The VAT treatment upon acquisition of the yacht by the lessor Malta company will depend on whether the yacht is acquired locally, acquired from another EU Member State, or imported into Malta from a third country. In any of these three situations, VAT due would be refundable on the basis that the yacht is being used for the economic activity of the lessor.

VAT on the sale of the Yacht

Should the lessor Malta Company decide to sell the yacht after the period of lease, the VAT treatment will very much depend on the place where the yacht is sold. Should the yacht be sold in Malta, 18% VAT would be due on the consideration charged by the lessor. The tax team at KPMG has extensive experience with the sale of such assets and would be pleased to assist you to structure yacht transfer disposals in an efficient manner.

Income Tax Implications

The lessor may take advantage of the beneficial Maltese tax system, leading to a maximum effective Malta tax incidence of 3.5% or 5% depending on the financing of the yacht.

Paul Pace RossDirector Tax Services+356 2563 1119paulpaceross@kpmg.com.mt

Pierre PortelliPartner Tax Services+356 2563 1132pierreportelli@kpmg.com.mt

Stephan PiazzaManager Tax Services - Shipping and Yachting+356 2563 1156stephanpiazza@kpmg.com.mt

Follow KPMG in Malta:

© 2018 KPMG, a Maltese civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

Information correct as at 19 January 2018.

Anthony PacePartner Tax Services+356 2563 1137anthonypace@kpmg.com.mt