Malta VAT as applicable to Yacht Leasing

In line with Guidelines issued by the Maltese Revenue Authorities, the incidences of vat incurred on the leasing of a yacht will depend on the extent of its use in EU territorial waters.

These guidelines were originally issued in 2005 and were further amended in March,2019 following continued developments and best practice in the industry.

Although both sets of Guidelines are based on the EU Vat Directive -Article 59a, the main changes of the new Guidelines of 2019 relate to the deemed period of use of the leased yacht in EU territorial waters. Whereas previously this was pre-established and depended principally on the size of the boat, the new Guidelines provide for a ratio based on actual usage, irrespective of yacht size. Such usage will be determined on data supplied by the yacht captain and the vat rate applicable will be the full rate but reduced by the ratio that the non EU use bears to the overall use of the yacht.

The purchase of a yacht for leisure purposes normally attracts Vat in any EU state. This is the same in Malta. However, when the yacht is purchased for leasing to third parties, this becomes a commercial transaction and the purchasing party will have a right of refund of any vat paid on the yacht acquisition, the same as another other commercial entity. In order for the purchase to qualify as a commercial transactions, it must prove that the yacht is generating trading income, hence the lease provisions.

The Maltese VAT legislation includes a procedure whereby a Maltese company, purchasing a pleasure yacht for leasing to third parties, can benefit from significant vat savings. The main principles behind this procedure is that a leased yacht will not spend all its time sailing in E.U. waters and therefore, although lease payments are normally subject to vat, such vat is only chargeable on such part of the lease payments that such yacht spends in EU waters.

The aim of these special vat provisions are complimentary to Malta’s position as a leading ship register, now ranked as no. 4 in the world. The main Characteristics of this procedure are as follows:

Conditions applicable:

  1. The yacht must be purchased in the name of a Maltese company set up to own the yacht. The company will be registered with a valid VAT number in Malta as any commercial enterprise .
  2. The yacht purchased needs then to be leased under a formal lease agreement which must not be more than 36 months.
  3. The lease agreement of the yacht can be made with another person, a Maltese or foreign company – the Lessee.
  4. The yacht must be put at the disposal of the lessee in Malta;
  5. The lease agreement must provide for a down payment by the lessee to the lessor equal to not less than 50% of the value of the yacht.
  6. The lease purchase agreement must also provide for the possibility of the lessee purchasing the yacht at the end of the lease. The pre agreed purchase price must not be less than 1% of the cost of the yacht itself. Vat is also payable on this final payment.
  7. The lease agreement plus the proceeds from the sale should leave in the hands of the owners at least a profit of not less than 10%
  8. On the termination of the lease and the purchase of the yacht by the lessee, the VAT department will issue a VAT PAID certificate to the new owner, thus permitting the free movement of the yacht in EU waters.

Malta Vat payable on Acquisition.

On acquisition of the yacht the vat normally payable would either not be paid at all or , if paid, would be totally refundable. This depends on the location of the supplier of the yacht.

  • If the yacht is purchased from a local source, then the local supplier is bound by our legislation to charge vat. This vat will be totally recoverable by the acquiring company. Normally such refund is received within 4 to 5 months of the company filing its first vat return.
  • When the yacht is purchased from an EU supplier, such supplier will invoice the Malta purchasing company, exclusive of vat. This follows the standard vat rules for transactions between two taxable persons within the community. The purchasing company, will report such purchase in its first vat return and any vat payable would be immediately deductable under the reverse charge mechanism. Thus no vat would be payable on such purchase.

 

  • When the yacht is imported from outside the EU, the supplier would again not charge any vat and the lessor may apply for a deferment of the payment of vat that is normally paid on the purchase.

On commencement of the lease agreement, the lease payments themselves would be subject to Malta vat at the local standard rate, currently 18%. However, as it is presumed that the yacht will not spend all its time in EU waters, than only that part of the time spent in EU waters is actually chargeable to Malta vat.   This introduces the problem of how would the department ascertain the extent of time spent in EU waters, which in practice would be impossible to control. By special regulations, the VAT department has introduced a scale which predetermines the amount of time spent and therefore introduces full certainty and clarity to the whole procedure.

Compliance with current regulations

  • .
  • The prior approval of the Malta vat department must be obtained prior to the purchase of the yacht. Consequently, data on the size and type of the yacht, its cost and the proposed lease agreement must be supplied for their review.
  • Once such approval is confirmed by the vat department, a provisional certificate confirming that the yacht purchase qualifies to benefit from the provisions of the yacht purchase lease provisions.
  • The valuation of the yacht must be done in Malta, and consequently at least one visit, possibly at the beginning of the lease agreement must be made.
  • Should the lessee, at the end of the lease, decide to acquire the yacht, then the VAT department will issue a VAT PAID certificate to the new owner indicating that Malta vat has been paid in full.
  • At this stage, seeing the Lessee thus become the owner of the yacht and VAT thereon has been paid in full, the VAT Department will issue a Yacht

 

Malta Income Tax on the lease payments

Where leasing arrangements of yachts do not fall within the scope of Legal Notice 369 of 2005 and where the aforesaid lease is deemed by the Commissioner of VAT to be in accordance with guidelines issued by the VAT department from time to time, the Inland Revenue Department has decided that in such special case, the following tax treatment is to be adopted for each year for the duration of the lease:

  1. the lessor is charged to tax only on the annual finance charge, namely the difference between the total lease payments less the capital element divided by the number of years of the lease;
  2. the lessee is allowed a deduction in respect of the (i) the finance charge; (ii) maintenance; (iii) repairs; and (iv) insurance;
  3. the lessee is allowed capital allowances in respect of the yacht and the parties may not opt to shift the burden of wear and tear onto the lessor;
  4. where the lessee exercises an option to purchase the yacht on the termination of the lease, the purchase price received by the lessor shall be considered to be of a capital nature and no tax thereon shall be payable by the lessor.

Disclaimer

The above information is being provided as a general guide only and should not be considered as a substitute for professional advice.

Date of latest update… 05.03.2019

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