Brussels opens infringement against Malta over lucrative yacht lease VAT system

The European Commission has sent Malta a letter of formal notice – a first ‘warning’ in Brussels-speak – for not levying the correct amount of VAT on the provision of yachts.

In detail, the infringement procedure is over Malta’s use of a reduced VAT rate for the lease of yachts. The same warning was sent to Greece and Cyprus, two other maritime states with large ship registries.

While current EU VAT rules allow member states not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use.

“Malta, Cyprus and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate,” Brussels said.

The incorrect taxation in Malta of purchases of yachts happens in what is known as a ‘lease-purchase’, which is classified as the supply of a service, and not of a good. This means VAT is only levied at the standard rate on a minor amount of the real cost price of the craft once the yacht has finally been bought, the rest being taxed as the supply of a service and at a greatly reduced rate.

Le Monde has already reported that European Commissioner Pierre Moscovici, a Frenchman, had already sent a letter to the Maltese authorities asking for clarification on the scheme, whereby owners of yachts longer than 23 metres pay a reduced VAT rate of 5.4%. That rate is charged instead of 18% if the vessels are used for leasing.

Malta has two months to respond to the Commission. If they do not act within those two months, the Commission may send a reasoned opinion to their authorities. Any further refusal for remedial action, could mean action in the European Court of Justice.

The European Commission said the VAT scheme can generate major distortions of competition.

The Paradise Papers as well as the Malta Files revealed widespread VAT evasion in the yacht sector, facilitated by national rules which do not comply with EU law.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion. We cannot allow this type of favourable 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.”