On the 24/11/2005, the Maltese VAT Department published its guidelines on the VAT treatment of yacht leasing.  These regulations have clarified the taxation of yachts which are lease-purchased to third parties by a Maltese International Trading Company (ITC).

A financial leasing agreement (lease-purchase) of a pleasure craft is an agreement whereby the lessor (the owner of a craft = an ITC) leases it to a third party (lessee) with an option in favour of the lessee to purchase the boat at a reduced price at the end of the lease.

With careful planning, these guidelines mean that the lessee of the yacht can now become the owner of an EU VAT-paid yacht by paying as little as 6.18% VAT on the original value of the yacht. However tax and costs on the transactions will have an incidence on the final outlay raising the total outlay by about 2%.

The Maltese VAT Department has established that when a Maltese company buys a pleasure yacht and lease-purchases it to third parties, then VAT is due on the lease at the normal rates of VAT in Malta, i.e. 18%, since this is a supply of a service deemed to be supplied in Malta.  But VAT is payable only on that portion of the lease during which the yacht is in EU waters. However, since it is very difficult to establish this with precision, the Department has issued its own “presumed” length of stay during which the yacht is presumed to have been in EU waters and thus the Department will charge VAT according to this table as follows:

Taking the first type of craft as an example, a sailing yacht over 24 metres in length will now be presumed to have sailed in EU waters for 30% of the time during which it was lease-purchased and therefore the VAT payable on the lease is the normal rate of VAT (18%) but only for 30% of the duration of the lease, i.e. 5.4% VAT on the value of the lease-purchase.

Conditions

• The boat must come to Malta, possibly at the beginning of the lease agreement or alternatively at the time when the purchase-option is exercised; the presence of the yacht in Malta at one of these times is a condition imposed by the VAT Department and cannot be waived.

• The financial leasing agreement shall be between a Maltese company and any
  Maltese or foreign person or company.

• Prior approval shall be sought in writing from the Commissioner of VAT who
  is to confirm the rate applicable according to the use in EU territorial waters
  (depending on the size and propulsion of the craft), as well as the acceptability
  of the value of the craft as declared. For this purpose a valuation certificate of
  the craft shall be submitted with the application for approval.

• An initial contribution shall be paid by the lessee to the lessor amounting to
  50% of the value of the craft.

• The Lease instalments shall be payable every month and the lease agreement
  shall not exceed 36 months

• The lessor shall be expected to make a profit from the leasing agreement over
  and above the value of the boat

• Any purchase value at the end of the lease agreement shall not be less than 1%
  of the original value of the craft, and this will be subject to the standard rate of
  VAT at 18%

• The ITC makes at least 10% profit out of the transaction.

(These financial transactions are however book entries and no real transfers of cash need take place.)

By way of illustration, a 25 metre yacht is owned by our client and has a market value of Euro 1,000,000. Our client will sell his boat to a Maltese ITC of which he will be the undeclared beneficial owner. Alternatively, if our client is buying a yacht from a third party, the third party will sell the yacht directly to the ITC. The ITC will then lease-purchase the boat to our client who will have an option to purchase the boat at the end of the lease.

The VAT and tax implications of the transaction shall be as follows:

a) Sale by Mr. X to ITC (or purchase by the ITC from Mr. X’s supplier) for 1,000,000 (market value of the yacht). There are no tax implications or VAT implications on this transaction both in the case where Mr. X is selling the boat to the ITC (private sale) and even if the ITC buys the boat from an EU or non-EU supplier. The ITC will at this stage register the boat under the Maltese flag.

b) Lease-purchase by ITC to our client

(i) Our client is to pay 50% of the value of the boat on the date of the contract

(ii) Mr. X is to pay not more than 36 monthly instalments to the ITC to make up for the balance of the value of the boat (plus 10% profit element for the ITC). In our example the balance is 500,000 and therefore lessee will make 36 monthly payments of 16,667 each as lease payments; this will give a payment of 600,000 and in effect means that the ITC makes a profit of 100,000 on the transaction

c) Purchase option by our client: our client is to pay 1% of the original value at the end of the lease to the ITC to become the full owner of the yacht and can transfer the yacht to his name (if desired).

As explained, all these transactions are in fact book entries and no transfer of funds from Mr. X to the ITC are required.

Tax and VAT implications:

a) on 50% of the value, VAT is paid at 18% but only on 30% of the lease, therefore 500,000 x 18% x 30% = 27,000

b) on the instalments, VAT is paid at 18% but only on 30% of the lease, therefore 17,000 x 36 x 18% x 30% = 33,048

c) on the redemption of the yacht, on the payment of the 1% value (10,000) VAT is due at 18% = 1,800

d) on the profit element made by the ITC (11% of the value (110,000) tax is due at 4.17% = 4,58

Therefore the total tax and VAT due is a total of 66,435.

This equates to 6.65% of the original price of the boat of 1,000,000 and in effect means that the lessee would, at the end of the transaction, be the owner of an EU VAT registered boat having paid 6.65% in total as VAT and tax on the whole transaction. And the structure also has the advantage that the tax and VAT is paid over a maximum three year period, thus helping cash flow problems.

Provided that certain conditions and certain aspects of the transactions are strictly adhered to, the Department of VAT will issue a certificate to the owner that VAT has been fully paid in Malta on the boat once the lessee has paid all the tax and VAT due.

Of course, fees and expenses will be incurred for the valuation of the boat, the registration of the boat under the Maltese flag, the registration of the ITC and the VAT procedures that need to be followed.