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Taxation of Long-Term Leasing of Yachts

In terms of the Guidelines issued by both the Cyprus Tax Department and the Maltese Revenue, the overall VAT liability incurred on the leasing of a yacht can be reduced substantially depending on the extent of the effective use and enjoyment of the yacht within EU territorial waters.

Introduction

In March 2019, on the strength of experience and knowledge acquired in the yachting industry, both the Cyprus Tax Department and the Maltese Revenue, issued a new set of Guidelines on the matter of yacht leasing services. Whilst still based on Article 59a of the EU VAT Directive, the new Guidelines reflect the recent EU VAT developments and practices.

In terms of the new Guidelines, VAT on leases that are deemed to take place in Cyprus or in Malta is calculated on the basis of the yacht’s effective use and enjoyment within EU territorial waters. Effectively, this means that no VAT is chargeable on the portion of the lease attributable to effective use and enjoyment of the yacht outside the EU territorial waters or within international waters. Hence, this supply of services by the lessor, is taxable at the basic VAT rate but only to the extent that the leased yacht is used within the territorial waters of the European Union (EU).

Rationale

The long-term yacht leases (i.e. leases covering more than 90 days’ of continuous possession or use of the yacht) is considered a supply of a service falling within scope of Cyprus or Maltese VAT when the yacht is put at the disposal of the lessee in Cyprus or in Malta, provided that the lessor is established in Cyprus or in Malta. Such rule applies provided that the lease contract does not include an “option to buy” clause and therefore there will be no transfer of ownership as per the lease agreement.

When leases fall within the scope of the Cyprus/Maltese VAT as aforesaid, in terms of the Cyprus/Maltese VAT Law and based on Article 59a of the EU VAT Directive, the Tax Authorities may consider the place of supply of such hiring of a means of transport to be outside Cyprus or Malta if effective use and enjoyment of the services takes place outside EU territorial waters.