On 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 Company.
A financial leasing agreement (lease-purchase) of a pleasure craft is an agreement whereby the lessor (the owner of a craft = the Malta Company) 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:
|Type of yacht
|% of lease subject to VAT
|Effective rate of VAT
|Sailing boats or motor boats over 24 metres in length
|30% of consideration x 18%
|Sailing boats between 20.01 to 24 metres in length
|40% of consideration x 18%
|Motor boats between 16.01 to 24 metres in length
|40% of consideration x 18%
|Sailing boats between 10.01 to 20 metres in length
|50% of consideration x 18%
|Motor boats between 12.01 to 16 metres in length
|50% of consideration x 18%
|Sailing boats up to 10 metres in length
|60% of consideration x 18%
|Motor boats between 7.51 to 12 metres in length (if registered in the commercial register)
|60% of consideration x 18%
|Motor boats up to 7.5 metres in length (if registered in the commercial register)
|90% of consideration x 18%
|Craft permitted to sail in protected waters only
|100% of consideration x 18%
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.
The Maltese solution through which VAT payments are made involves:
- the setting up of a Maltese company;
- the acquisition of the yacht through the Malta company;
- the registration of the yacht optionally under the Malta flag;
- the arrival of the yacht in Malta at the beginning of the lease;
- the leasing of the yacht by the company to a third party;
- the sale of the yacht to a third party for at least 1% of the purchase value on the return of the yacht to Malta at the expiration of the lease;
- subject to all the relative VAT payments, the issuing of a VAT paid certificate in relation to the yacht by the authorities, following which the yacht may circulate freely in the EU.
Effective Tax Rates
- Sailing boats or motor boats over 24 metres– 5.4%
- Sailing boats between 20.01 to 24 metres – 7.2%
- Motor boats between 16.01 to 24 metres – 7.2%
- Sailing boats between 10.01 to 20 metres – 9%
- Motor boats between 12.01 to 16 metres – 9%
- Sailing boats up to 10 metres – 10.8%
- Motor boats between 7.51 to 12 metres – 10.8%
- Motor boats up to 7.5 metres – 16.2%
- 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 40% 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 Malta Company makes at least 10% profit out of the transaction.
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 Malta Company of which he will be the shareholder. Alternatively, if our client is buying a yacht from a third party, the third party will sell the yacht directly to the Malta Company. The Malta Company 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 tothe Malta Company(or purchase by the Malta Company 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 Malta Company (private sale) and even if the Malta Company buys the boat from an EU or non-EU supplier. The Malta Company will at this stage register the boat under the Maltese flag.
- b) Lease-purchase bythe Malta Companyto 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 Malta Company to make up for the balance of the value of the boat (plus 10% profit element for the Malta Company). 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 Malta Companymakes 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 Malta Company to become the full owner of the yacht and can transfer the yacht to his name (if desired).
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 theMalta Company(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 Malta Company and the VAT procedures that need to be followed.