Crucial Superyacht Knowledge for the Modern Trustee Alison Vassallo and Ann Fenech

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1 Crucial Superyacht Knowledge for the Modern Trustee Alison Vassallo and Ann Fenech Partner Yachting Department Managing Partner

2 Info on next 8 slides - Martin Redman Chairman Superyacht Group, Marine Money Forum 2017

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13 Type of legal Info sought Quality and Reputation of the flag Efficient Corporate solutions Strong package of tried and tested legal solutions for private and commercial yachts

14 Services required by a prospective owner Assistance with sale and purchase Registration of the yacht Corporate requirements Financing/Mortgage requirements VAT/Tax considerations relating to purchase of yacht VAT/Tax considerations relating to commercial operation of yacht

15 Flag choice - Malta Flag As of December 2017 Over 65 Million Tonnes 687 yachts over 24 metres 449 Private 238 Commercial

16 WHY THE IMPRESSIVE STATISTICS A European flag English is an official language Central European Time Zone Very efficient Maritime Administration White list of the Paris MOU Member of the IMO Legal Committee.

17 A Registry which is open 24/7 Very competitive fees Excellent rapport between the administration and service providers. Excellent pool of professional service providers Tonnage tax regime for commercial yachts A legal system which supports the mortgagee

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20 Tax treatment depending on different scenarios EU/non EU resident Size and type of yacht Use - Private or commercial Location of shipyard/yacht at time of purchase Cruising area/s

21 Scenario 1 Private use EU Resident Purchasing yacht for private use Use in EU waters VAT due on hull VAT on supplies/services/fuel/refit etc. Irrespective of flag whether EU or non EU

22 Scenario 2 Private use Non EU Resident Private use Limited use in EU waters (18 months) Yacht built in non EU yard or exported after being built in EU No VAT on hull Owner may use Temporary Importation Regime Flag must be non EU

23 Scenario 3 commercial use EU/Non EU Residents Commercial Use EU waters Account for VAT on acquisition (Intracommunity/importation/local supply) VAT on charters Irrespective of whether the flag is EU or non EU Exemption/recovery of VAT due on supplies/services/fuel/refit etc

24 Application for a VAT number on the owning company Physical importation of the yacht into Malta Deferment of VAT on importation on the basis of a bank guarantee (20% of VAT due for four months)

25 Private Yachts Guidelines regarding the VAT Treatment of Yacht Leasing 2005 VAT payment for smaller yachts with limited geographical reach Efficient Temporary Importation Procedures

26 Payment of VAT on Hull Guidelines regarding the VAT Treatment of Yacht Leasing 2005 (i) Maltese lessor company as owner of yacht (ii) VAT registration in Malta and purchases yacht (iii) Yacht is delivered in Malta (iv) Enters into a lease agreement (12-36 months) with lessee in Malta. (v) Supply of service on which VAT is payable (vi) VAT accountable in Malta and a provisional VAT declaration

27 EC Directive 2006/112 Article 59a Member States may consider the place of supply of a means of transport as being situated outside the Community if the effective use and enjoyment of the services or part thereof takes place outside the Community

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30 The Yachting Sector Progress through the years 1. From a few small yachts registered under the Malta flag to the Malta flag being used by the largest most glamorous yachts in the world.

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33 Supply of a Service v Supply of a Good Mercedez Benz Financial Services UK Judgement (Case C-164/16) 4 th October 2017

34 Mercedez Benz Financial Services UK Judgement (Case C-164/16) 4 th October 2017 Essentially - when is a leasing arrangement a supply of a good? Article 14(2)(b) Supply of a good includes The actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment

35 Mercedez Benz Financial Services UK Judgement (Case C-164/16) Leasing agreement which excludes any transfer of ownership and sets a maximum mileage beyond which the customer has to pay a penalty; Hire Purchase agreement whereby the aggregate of the monthly payments represent as a rule the total sale price of the vehicle, including the cost of financing. A modest additional fee (the option fee) must be paid in order to acquire ownership of the vehicle at the end of the contract. An Agility agreement where the monthly instalments are as a rule lower than under a Hire Purchase agreement. The total installments represent only 60% of the vehicle sale price, including the cost of financing. If the user wishes to exercise the option to purchase the vehicle, he must therefore pay approximately 40% of the sale price.

36 Mercedez Benz Financial Services UK Judgement (Case C-164/16) Question put to the Court: Whether and to what extent, the words contract for hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment used in Article 14(2)(b) of the VAT directive, must be interpreted as applying to a leasing contract with an option to purchase, such as the type of contract at issue in the main proceedings.

37 Mercedez Benz Financial Services UK Judgement (Case C-164/16) First condition: The agreement pursuant to which the goods are handed over contains a clause expressly relating to the transfer of ownership of those goods from the lessor to the lessee. An agreement may be considered to contain an express ownership transfer clause where that agreement contains an option to purchase the leased asset. AND Second condition: It must be clear from the terms of the contract, as objectively assessed at the time when it is signed, that ownership of the goods is intended to be acquired automatically by the lessee if performance of the contract proceeds normally, over the full term of the contract.

38 Mercedez Benz Financial Services UK Judgement (Case C-164/16) Conclusion: The words contract for hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment used in Article 14(2)(b) of the VAT directive, must be interpreted as applying to a leasing contract with an option to purchase if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term, which is for the national court to ascertain.

39 Parallel Developments It was reported in the press in November 2017 that on same day of this judgement a letter was sent by EU Commissioner Moscovici to Minister Scicluna Malta s minister of finance

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41 A Joint Communique was immediately released by local yachting associations as a specific reaction to articles reported in the press

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44 Four months later on the 8 th March 2018 a Letter of Formal Notice is sent by the Commission to Malta, Greece and Cyprus

45 Letter of Formal Notice Commission acknowledges that Member States are allowed not to tax the supply of a service where the effective use and enjoyment is outside the EU however it is alleging that these rules do not allow for a general flat rate reduction without proof of the actual use Alleging incorrect taxation of purchases of yachts by means of a lease purchase whereby the leasing of a yacht is classified as a supply of a service rather than a good.

46 Reaction by Malta and Industry Initial reaction was indignation and surprise given that the system is fully compliant with Article 59a and fully respects EU regulation. France and Italy apply the same principles of effective use and enjoyment and no similar letter was sent to them Malta had based its schedule on the Italian system Disappointment at the inequality of treatment by the commission to different member states having the same structures. Task Force mobilised by Government involving the industry in order to work on a response to the Notice of Infringement

47 Maltese system has always been fully compliant with VAT Directive from its inception: Application of effective use and enjoyment in line with the VAT Directive that speaks of effective not actual Application of principle in line with other Member States What we have here is indeed a lease agreement not a purchase the supply is one of a service of a lease and not a sale of a good.

48 Application of principle by other jurisdictions: France: since 2005 applies a 50% reduction on the total lease amount irrespective of the category and size of the yacht and irrespective of the yacht s actual use and enjoyment within/outside EU waters. Official Tax Bulletin No 15, 24 th January 2005 Article 13 It is accepted that the hirers who find it difficult to carry out this assessment, shall determine, on a flat rate basis, the time spent outside community or French territorial waters by applying a 50% reduction in the total rental time whatever the category of the pleasure craft concerned.

49 Application of principle by other jurisdictions: Italy: applies article 59a of the VAT Directive by reference to the deemed used and enjoyment of the yacht inside/outside EU waters, with percentages for deemed use which are identical to those adopted by Malta

50 Fine tuning of Guidelines in November: Reinforcement of the fact that the lease agreement is a stand alone lease only of the yacht making it clear that the Guidelines relate to a supply of a service The VAT Department will review all lease agreements submitted to ensure compliance with Maltese law and recent case law, and to ensure that the leasing supply is one of a leasing services and not the supply of goods for VAT purposes. Upon the end of the lease term and re-delivery of the yacht, the Lessor company and the Lessee remain free to discuss and contract a possible eventual sale of the yacht in Malta.

51 The way forward: There are currently no infringement proceedings against Malta what has been received is a Letter of Formal Notice Continuity of the application of the guidelines - lease applications are being processed as per normal Malta is working hard to produce a reasoned reply to this letter within the 2 month deadline. In the meantime Malta remains open to and indeed encourages guidance from the EU on the further fine tuning of the product. Hopefully common sense will prevail and the matter will end there.

52 Commercial Yachts - VAT on Charters

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54 Up until December 2010 No VAT on charters collected by owners and operators.

55 Council Directive 2006/112/EC Article 148 Member States shall exempt the following transactions: (a) the supply of goods for the fuelling and provisioning of vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities, or for rescue or assistance at sea, or for inshore fishing, with the exception, in the case of vessels used for inshore fishing, of ships' provisions;.. (c) the supply, modification, repair, maintenance, chartering and hiring of the vessels referred to in point (a), and the supply, hiring, repair and maintenance of equipment, including fishing equipment, incorporated or used therein;

56 Etat du Grand-Duche de Luxembourg, Administration de l enregistrement et des demains v. Pierre Feltgen, Bacino Charter Company SA (C-116/10) 22 nd December 2010 In order for such a hiring service to be capable of exemption under that provision, the lessee of the vessel concerned must use it for an economic activity It follows that if, as in the main proceedings, the vessel is leased to persons who use it exclusively for leisure purposes and not for financial gain, outside the sphere of any economic activity, the hire service does not meet the explicit conditions for VAT exemption The exemption set out in Article 15(5) of the Sixth Directive cannot benefit vessel-hire services for charters who intend to use the vessel strictly for private purposes as final consumers.

57 EC Directive 2006/112 Article 56 (1) The place of short-term hiring of a means of transport is the place where the means of transport is actually placed at the disposal of the customer. (2) short-term shall, in the case of vessels, mean the continuous possession or use of the means of transport throughout a period of not more than ninety days.

58 Malta The Ministry of Finance launched Guidelines for the VAT treatment of Short-Term Chartering on the 29 th July 2013 Standard rate of 18% VAT is applied to the established percentage of the charter deemed to be related to the use of the yacht in EU waters Owner/Operator to be registered for VAT in Malta Application to Director General VAT for approval and confirmation of percentage of charter subject to VAT (i) Charterparty to indicate Malta as place of delivery (ii) Charterparty to specify area of cruising as touching international waters 5.4% (iii) Details of yacht and proof of payment of charter fee

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61 Conclusions More and more international persons involved in yachting are looking at Malta as the base for their yachting activity whether it is for the purposes of registering their yacht, for the purposes of paying VAT or both. Malta appears to tick a number of boxes as there is an apparent growth in such persons wanting to fly a European flag. There is equally a growing percentage of persons who actually want to pay VAT rather than avoid it and Malta offers such persons the opportunity to do so.

62 Conclusions This is good news all round not only for Malta but for Europe. The prominence of Malta as an EU member state in the world of international yachting means that it is fulfilling the function and one of the key pillars of the European Integrated Maritime Policy pioneered by our own Commissioner, Commissioner Joe Borg in 2007 who heralded this important perspective of attempting to harness the mass exodus of maritime activity outside Europe and of making the Maritime sector important in Europe again by encouraging maritime activity, which in turn regenerates entire which provides maritime jobs.

63 Thank you Ann Fenech Managing Partner & Alison Vassallo Partner Fenech & Fenech Advocates