End of the French VAT lump-sum reduction, unchartered territory?
Under direction from the European Commission, French Tax Authorities announced on Thursday (30th January) that from March 30th 2020 a reduction on the proportion of time spent outside of French and EU waters will replace the current tax regulation governing charter contracts.
Currently, Article 59bis of the EU Directive 2006 112/CE applies to charter contracts starting from a European country. This is where charters qualify for a VAT lump-sum reduction of 50% of the taxable base in case of cruising into international waters. Now this directive will no longer be applied in France.
The new regulation stipulates that the French VAT will be due at its full rate, 20%, for the time spent in French and EU waters. This means that only the time spent outside of French and EU waters will be exempt from VAT.
The owning company will remain liable and has to demonstrate to the French Tax Authorities by proper evidence the “actual use and enjoyment” of the service outside European waters. But how does one demonstrate this? For yachts of more than 15 metres, the time spent outside EU waters can be proven with the Automatic Identification System (AIS). Evidence provided by AIS compliant with the Safety of Life at Sea (SOLAS) Convention cannot be challenged by tax authorities and is considered conclusive proof unless there is a fraud involving the system itself. In the event the vessel does not have an AIS, it is assessed via the technology present within the vessel.
The European Committee for Professional Yachting (ECPY) has negotiated the new regulation with French authorities and their EU counterparts. ECPY President, Thierry Voisin, spoke to Superyacht Investor about the reasons for the change in regulation, what it means for yacht charters and charterers and what can be done to adapt to the new regulations.
Question: Why have French tax authorities decided to make changes to the legislation, how long until a decision was reached?
Thierry Voisin: The EU commission, taking into consideration the situation of the Maltese and Cypriot leasing that was not in conformity with the spirit of the law, has indicated to the EU countries using the lump-sum reduction of VAT on rental that they have to change their practice.
The spirit of the law is: you pay VAT on charter fees in EU waters, you do not pay outside of EU waters. The situation with Malta and Cyprus, and France and Italy as well, was that lump sum reductions were tolerated when yachts were not even exiting EU waters in reality. This reason explains the EU Commission’s reaction, and the request to change the lump sum reduction practice for a proportionate practice. All the EU countries using lump sum reduction must change their practice for charter contracts taking place in 2020 as requested by the EU commission. The countries are Italy, France, Greece, Cyprus and Malta.
As President of ECPY, I was warned unofficially of the change of rule in July 2019. The formal information of the change was made on 29th of November 2019, I had a meeting with French authorities on this date. Since then, we have been negotiating with the French tax authorities and the result is the publication of the Official Bulletin (BOFIP) published on 30th January.
Q: What difficulties does this present for superyacht owners?
A: The charter contract is based on the time spent in EU waters (taxable time) and the time spent outside of EU waters (non-taxable time). It will certainly mean that more VAT will be paid by the charterer on the charter; in 2019 the lump sum reduction of the taxable base applicable in 2019 was 50%. It was generous as a yacht is, in general, never spending 50% of its time while in charter outside of EU waters. It will certainly mean that the amount of VAT paid in 2020 will be higher than the amount paid for the same charter in 2019.
Q: Are charter contracts signed before March 30th, 2020 subject to this ruling?
A: No, I have negotiated that the charter contracts signed (and with the first instalment paid) will be subject to the 2019 rules (lump sum reduction). The application of the new rules will be for charter contracts signed after March 30th.
Q: In what ways can potential charters be assisted in preparation for the change in legislation?
A: It is mainly up to the brokers to convince their clients to sign before March 30th. What ECPY will do together with its members, such as SOS Yachts, will be to inform the industry of the new regulation and to organize training for the brokers, charter managers, etc.
Q: What solutions can be offered?
A: Obviously, the cost of a charter in 2020 will be higher than the cost of the same charter in 2019 (taxwise). To overcome this situation, there is the option to use a transport/cruise contract. Contrary to a charter contract, where the yacht is put at the disposal of the charterer to do whatever he/she wants, the transport contract covers the transportation of clients from one point to another with an itinerary and the fuel is included in the transport contract. Basically, this is the difference between hiring a limo and making a trip in a taxi.
The advantage of the transport contract is a reduced VAT rate of 10% against 20% for the charter contract for cruising in national waters. In the case of embarkation in France and a validated stop in another country, the VAT goes down to zero because this is an international cruise.
The second point is that the cost of fuel for charter contract is the price of taxed fuel less VAT (between 1.10 and 1.20 euros per litre). And the cost of the fuel for transport contract is the price of taxed fuel, less VAT and excise (around 0.60 and 0.70 cents per litre).
It is obvious that, as long that a client agrees with the terms of a transport contract and itinerary, the transport contract will cost much less than the charter contract in 2020.
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