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THE NEW REGIME OF THE CYPRUS YACHT VAT LEASING SCHEME

CATEGORY: SHIPPING

THE NEW REGIME OF THE CYPRUS YACHT VAT LEASING SCHEME

I. Introduction

The Cyprus Tax Department on 22 March 2019, released the unified Interpretative Circular 4 (VAT and Income Tax), referring to the registration, in the VAT Registry, of Cypriot companies which operate in the business sector of leasing pleasure yachts (recreational boats) in Cyprus.

The aforementioned Circular applies to leases commencing from 22 March 2019 and after, introducing new procedures, which are in compliance with the European and Cypriot Law and most importantly, they are approved by the European Commission.

More specifically, the new circular provides that the use and enjoyment (provisions of Article 59a of the VAT Directive 2006/112/EC) of a yacht, will be determined by reference to the distances travelled and not by reference to the yacht’s type and size, which was the method followed since 13 March 2012 and it was based on the repealed previous guidelines.

II. Registration for Vat purposes

According to the said Circular:

  1. For long-term leases of yachts, the lessor can only be a legal entity (company), registered in  the Cyprus Tax Department, possessing a valid Cyprus VAT identification number.
  2. During the Registration Process, the company is entitled to submit both:

a)       A copy of the Lease Agreement (if the business will operate based on the details of a single contract) or any other agreements signed with prospective customers (laisse); and

b)      A document which describes in detail the procedure to be implemented for keeping the logbook (if this is kept manually) or if a geotracking system is installed on board the vessel to track her movement.

  1. The Director of the Company, or any other authorised person must sign a statement approving and agreeing that the registration of the Company in the Cyprus Tax Department will be under probation for at least six (6) months, (with the possibility to be extended up to one (1) year maximum). During this period, the Commissioner of Cyprus Tax Department, has the authority to deregister or diversify the Company, for the purpose of protecting the public revenue, taking into consideration any new information that may ensue.
  2. In the event that a Lease Agreement provides to the Lessee the option to purchase the pleasure yacht at any point of time during the lease period, then the Commissioner of Cyprus Tax Department may reject the contract on the basis that the contract relates to supply of goods and not to supply of services and thus the company as the lessor, will be charged the amount of 19% as VAT.

It is worth mentioning that the question what it could be considered and characterised as a supply of goods and what as a supply of services is replied in the Mercedes- Benz Financial Services UK Ltd (Case C-164/16). In the said case the Court of Justice of the European Union (CJEU), took the view that  ‘’legal certainty requires that lease agreements should be regarded as supplies of goods for the purpose of levying VAT only when it can be assumed with certainty that in the normal course of events, at the latest by the end of the agreement term, ownership of the subject matter of the leasing agreement will be transferred to the lessee’’.

 III. Yacht Usage and Enjoyment Determination

  1. If at the time of the VAT registration, the Company cannot provide sufficient details of the place that the leasing services are expected to be used and enjoyed, then the Commissioner of Cyprus Tax Department may at his discretion and using the best of his abilities to predetermine the percentage of use and enjoyment within the European Union (EU).
  2. Whenever predefined percentages are used and if the length of the yacht is 20 meters long or more, the Company should provide details to the Tax Authority in relation to the lease and sail of the yacht, every six (6) months. Subsequently, the Commissioner of Cyprus Tax Department can proceed with a new calculation of the VAT due, if any details with regards to the use of the yacht deviate from the predetermined rates, during the 6-year-registration period, at any point of time.
  3. No input VAT on running expenses of the yacht can be claimed by Companies that use the predetermined rates for any operating expenses incurred in the course of running the leasing business.

 III. Conditions for VAT Registration

 The following conditions need to be satisfied, for the VAT registration to be successfully completed:

  1. A guarantee payment is required – based on the market value of the pleasure yacht on the registration date, (it cannot exceed 3% of the market value of the pleasure yacht);
  2. If the yacht is new, then its value should be verified by a purchase invoice, in order to determine the value of the yacht at the time of the registration. If, however, the yacht is second hand, its value should be verified by an expert valuation;
  3. The Director of the Company, or any other authorised person needs to sign a specific statement, in order to confirm the predetermined rates of use and enjoyment, as well as the terms and conditions that shall apply during the period that the Company will be registered for VAT purposes, which cannot be shorter than six (6) years;
  4. The yacht should be placed at the disposal of the Lessee in the Republic of Cyprus, which means that the yacht should sail to Cyprus prior the commencement of the lease agreement, in order to be set at the disposal of the lessee in Cyprus. The Lessee, who can be established within or outside the Republic of Cyprus, should be a physical person (under any nationality) that does not lease the yacht for business purposes.

 V. Time and Duration of VAT Registration

The Company should remain registered for VAT purposes for at least six (6) consecutive years and submit VAT returns, even if the Company has already paid the total tax due. By maintaining its registration, the Company always has the obligation to consistently submit the required tax returns.

 VI. VAT Deregistration

In case the Company ceases its engagement in the leasing activity and/or becomes deregistered from VAT at any point of time prior to the lapse of a 6-year-period from its registration, this will result in the imposition of VAT at the prevailing standard rate on the replacement value of the yacht at that date.

VII. Other Taxes 

a)      Income Taxes

 For income tax purposes, the income tax due shall be calculated in accordance to the Income Tax Law in the Republic of Cyprus, or on the basis of any other methodology that may be determined by the Commissioner of Cyprus Tax Department at the time of the Company’s registration.

 The tax payment – as it is calculated on an annual basis – shall be made in 2 instalments; the 1st instalment shall be paid no later than the 30th of June; and the 2nd instalment on the 31st of December, of each calendar year, as per Commissioner’s of Cyprus Tax Department decision.

 b)      Stamp Duty

 For non-Cypriot flagged vessels, the lease contract is subject to stamp duty. The value of the lease shall be calculated based on the market value of the vessel, its operational expenses and the expected profit of the Company.

VIII. Penalty 

The Commissioner of Cyprus Tax Department has the right to withdraw any authorisation he has granted, in respect of the use of the aforesaid instructions, when there is an unjustified delay in the payment of any amount due and/or an incomplete presentation of information that may be requested.

 OVERVIEW:

In the light of the above, the VAT is calculated on the basis of the yacht’s effective use and enjoyment within EU territorial waters. Effectively, this means that no VAT is chargeable on the portion of the lease attributable to effective use and enjoyment of the yacht outside the EU territorial waters or within international waters. Thus, this supply of services by the lessor, is taxable at the basic VAT rate, but only to the extent that the leased yacht is used within the territorial waters of the EU.

 This long-term yacht lease, is considered a supply of a service falling within scope of Cyprus VAT when the yacht is put at the disposal of the lessee in Cyprus, provided that the lessor is established in Cyprus. Such rule applies provided that the lease contract does not include an “option to buy” clause and therefore, there will be no transfer of ownership as per the lease agreement.

CONDITIONS FOR VAT REGISTRATION AND APPLICATION

In terms of the new Circular and its guidelines of the yacht leasing services, the following conditions should be satisfied:

  • The Lessor and the Lessee must enter into a yacht leasing agreement, which must be presented to the Cyprus Tax Department;
  • The Lessor must possess a valid VAT identification number in the Republic of Cyprus;
  • Concerning the long-term leases, the Lessor must be established in the Republic of Cyprus and the Lessee, who can be established within or outside the Republic of Cyprus, must be a physical person (under any nationality) that does not lease the yacht for business purposes;
  • The yacht should be put at the disposal of the Lessee in the Republic of Cyprus, which means that the yacht should sail to Cyprus prior the commencement of the lease agreement;
  • A guarantee payment is required, which cannot exceed 3% of the market value of the pleasure yacht on the registration date;
  • At any time of VAT registration, the Lessor must maintain and provide enough records, in order to prove the percentage of use and enjoyment within or outside the EU; otherwise the Cyprus Tax Commissioner may, at his discretion, to predetermine the said percentage within the EU;
  • A six-month declaration should be filed by the Lessor with the Tax Commissioner, in order to state the use and enjoyment records, as the Tax Commissioner has the power to adjust the pre-agreed rates.

 

VAT PAYMENT

In terms of effective use and enjoyment of the standard VAT rules within the EU:

  • During submission of the VAT returns, the Lessor is obliged to charge any VAT to the Lessee on the lease fee, declare and pay any resulting VAT liability to the Tax Department of the Republic of Cyprus;
  • Thus, in this scope of Guidelines, an adjusting process is provided, ensuring that the terminal VAT charge reflects the actual yacht’s effective use and enjoyment within the territorial waters of the EU; and
  • In light of the above, the use and enjoyment records shall be submitted as this is required by the Guidelines in a semi-annual basis to the Cyprus Tax Department, since the Cyprus Tax Commissioner has the power to adjust the pre-agreed use and enjoyment rates.

 

CALCULATION OF USE OF THE YACHT WITHIN THE TERRITORIAL WATERS OF EU

The Yacht Leasing Guidelines provide:

  • The Cyprus Tax Commissioner shall determine the use and enjoyment based on the data that will be provided to the said, during the VAT registration process;
  • The Director of the Lessor must sign a statement approving the agreed rates resolved by the Cyprus Tax Commissioner, whilst the Lessor must maintain enough records to prove this effective percentage of use and enjoyment within or outside the EU; and
  • In conclusion, the use and enjoyment records shall be submitted to the Cyprus Tax Department in a semi-annual basis, as the Tax Commissioner has the power to adjust the pre-agreed rates.


 
Example

In order to provide a better understanding to the reader of this article, we set out below an example reflecting the circumstances of a case handled recently by the Shipping Department of our Law Firm, which is related to the registration of a company, which is operated in the business sector of leasing pleasure yachts in Cyprus, before the Cyprus Tax Department.

For the sake of consistency and clarity, it is imperative to be emphasised that the below example is based on the unique characteristic and facts of this specific case per se and it can only be used for general information. This example does not create a precedent and should not be regarded as a standard to be relied upon with regards to the subject matter and for any decisions to be taken thereon.

 Pleasure Yacht’s Description

  • Length: 25m
  • Market Value: 1.200.000€
  • 20% agreed percentage of Yachts’ Usage and Enjoyment, within the EU.

I. Guarantee Payment

A guarantee payment of the amount of 36.000,00 € is required and it is due to be paid as soon as the company is registered in the Cyprus Tax Department (it cannot exceed the 3% of the market value of the yacht). The amount is based on the market value of the pleasure craft on the registration date and it could either be paid via bank cheque or bank transfer.

II. Duration of VAT Registration

 The company should remain registered for VAT for at least six (6) consecutive years and it is due to pay the following amounts:

III. Payments

 a) VAT Tax amount:  80.256,00€

The above mentioned Vat Tax amount is indicative and it is subject to any changes or amendments may occur after the Cyprus Tax Department receives further information about the yacht. The amount of 614,67 € shall be paid by the 10th day of each month.

It is well mentioning that in case the VAT Tax amount is paid in advance (in one instalment), accepted on the registration date, then the applicant may receive a discount, which ranges depending on the circumstances of the case, which normally does not exceed 3% of the market value of the pleasure craft.

 b) Income Tax amount: 24.000,00 €

The payment of the Income Tax amount shall be made in 2 instalments, each year throughout the period of six (6) years (unless the applicant elects to settle the VAT charged in advance as mentioned above). The 1st instalment should be paid no later than the 30th of June and the 2nd instalment on the 31st of December, of each calendar year. The amount of each instalment is 2.000,00 €.

 c) Stamp Duty amount: 4.139,00 €

 For non-Cypriot flagged vessels, the lease contract is subject to stamp duty, which is payable on the registration date.

 

 Author: Zacharias L. Kapsis

 

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