It is the purpose of this guide to set out some of the principal considerations for the charter of yachts in the EU from a legal and fiscal perspective.
1.) Yacht Ownership
One of the key first steps is to decide on a suitable location for the establishment of a corporate structure to own the yacht and act as the charter business.
Usually the owner will seek legal and tax advice from their accountants on where best to incorporate the yacht charter business as the best choice of jurisdiction will depend heavily on the client’s own personal circumstances.
EU companies or a company incorporated in a country or territory that holds a double taxation agreement with the relevant EU member state where the vessel will charter are commonly used to avoid withholding tax on charter income and cabotage restrictions in certain EU states.
2.) Yacht Registration
In parallel to the set up of the yacht charter business it is important to determine the most suitable flag state for the registration of the yacht.
The registration of the yacht is an important decision determining the vessel’s nationality and in turn the applicable operating system. Yachts operated for commercial activities such as charter must hold a registration allowing them to operate commercially under its flag state rules.
It is important to select a flag state that holds a high ranking under the Paris Memorandum of Understanding in respect of Port State Control as well as providing yacht friendly interpretations of international maritime standards for commercial yachts.
3.) Yacht Operation
In tandem with flag state selection consideration must be given to how the yacht will comply with operational rules and regulations including, for example, minimum safe manning levels, safety management systems and labour laws.
4.) Fiscal Compliance
It is important that the yacht charter operation is conducted in compliance with the relevant EU fiscal regulations and any local legislation, for example:
- The yacht should be formally imported into free circulation within the EU.
- The yacht owning company and vessel should comply with all relevant local VAT and fiscal regulations, i.e. VAT registration in the member states from where it will commence charters.
- VAT should be charged and accounted for on all charters (including charters undertaken by the underlying owners and their friends or family).
- Income should be declared and, where applicable, tax should be paid to the relevant member state. .
- The yacht owning company and vessel must comply with all relevant local regulations, i.e. charter licence in Spain.
5.) VAT Exemption
Yachts that are run as earnestly pursued commercial businesses can in certain circumstances qualify for VAT exemption on the yacht itself and certain supplies.
There are many ‘business tests’ to ascertain whether the operation can benefit from VAT exemption varying between EU states but typically the authorities will expect to see a bona fide yacht charter business demonstrating the following commercial characteristics:
- A central professional charter agent must be appointed and vessel must be marketed for charter at a reasonable market rate compared to other similar vessels.
- All usage of the vessel by guests must be performed under a charter agreement, (including any usage by the underlying owners and their friends or family).
- Charter by the underlying vessel owners and their friends or family should be proportional to the amount of actual third party charter activity.
- The owning company must be able to show the receipt of charter proceeds onto an account of the company.
As a caution, yachts benefiting from VAT exemption face constant scrutiny from the EU authorities who take steps to check that owners are not using the yacht charter model as a method of VAT avoidance. In summary any arrangement whereby the principal purpose of which is to obtain a VAT advantage, and which is lacking is an underlying commercial objective, may be challenged by the EU authorities as being abusive.
“The existence of one or more of the following features might indicate an abusive structure (the list is not exhaustive – the indicators are illustrative of the points that HMRC might take into account, together with others):
- The main user of a pleasure craft is the ultimate owner of the chartering or leasing entity.
- The main user of a pleasure craft funded the purchase of the vessel (directly or indirectly).
- The person who funded the purchase of a pleasure craft (directly or indirectly) uses the vessel for prolonged periods in the peak chartering season.
- The chartering of a pleasure craft to third parties would not, alone, be of sufficient continuity and substance to comprise an economic activity.
- The chartering or leasing entity shows significant ongoing losses in its financial statements.
- Charter fees or lease instalments due from the main user of a pleasure craft are paper transactions only (for example being offset against loans).
- Charter fees or lease instalments are below open market value.
- The terms of a lease differ significantly from normal commercial practice (for example, the duration of the lease is unusually long).”
Caveat & Conclusion
As a caveat we would stress that we are a yacht registration and documentation agency and not legal and/or tax advisers so none of the foregoing information should be treated as any kind of formal legal or tax advice. Readers are therefore advised to take appropriate professional advice specific to their individual circumstances before taking any action based on the contents of this or any other page of this website or any correspondence with ourselves.
As the rules for the charter of yachts varies considerably between EU member states we would always suggest taking local advice before the commencement of any charter activity in any particular country.