Abramovich tale fires warning to gamers of the system
Eclipse is one of Roman Abramovich's fleet of superyachts. Photo: Eduard Marmet.
Revelations into alleged attempts by Roman Abramovich to dodge tax due on his fleet of superyachts could be causing quiet alarm and sending out shockwaves to others trying to “game the system”.
British broadcaster the BBC reported on Tuesday that Abramovich operated a decade-long scheme to avoid paying millions of euros in VAT on the running costs of his yachts in EU waters.
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Abramovich, who was sanctioned in 2022 because of links to the regime of Vladimir Putin, is accused of presenting his fleet of five superyachts as a commercial leasing operation while hiring them out to himself through a web of companies, of which he was the owner.
“This is a big moment and a big story for our industry because it shows how far customs officials are prepared to go,” says Paul Dickie, a partner with law firm Jaffa & Co.
“There is a sense in which you go for Abramovich, you’re going for one of the most famous yacht owners of all. I think they will say this is a warning to people who try to game the system.”
The scheme was exposed after hundreds of thousands of files and emails were leaked during the International Consortium of Investigative Journalists’ Cyprus Confidential probe into Cypriot firms which helped backers of the Russian regime.
VAT efficient
The BBC said documents showed the yachts were leased to a Cypriot company called Blue Ocean Yacht Management, which then chartered them to other companies based in the British Virgin Islands. It claims Abramovich was the ultimate beneficial owner of those companies.
Photos appear to show the former owner of Chelsea Football Club on his yacht Eclipse on Christmas Day 2011 when the vessel was recorded as being on charter.
In a statement, lawyers for Abramovich told the BBC he had “always obtained independent expert professional tax and legal advice” and “acted in accordance” with it, saying their client denied having any knowledge of alleged tax deceptions.
Designating the yacht either for private use with occasional charter or fully commercial has implications for tax, not only the VAT on the purchase but also the VAT on operating costs. However, it is highly nuanced depending on the country and the flag of the yacht.
“It’s important there is a yacht-use strategy which matches the tax and structure strategy,” says Ian Petts, a family office adviser. “The problem is there are a lot of loopholes. You could write a book on all the treatments.”
Dickie explains that VAT schemes for commercial charter vessels allowing the owner private use generally means they can’t use the yacht themselves without paying VAT. If it is being operated commercially expectations are it is being chartered out, revenue is being obtained and VAT is being paid, he adds. However, the investigation into Abramovich will alert others that authorities are watching more closely than ever before.
“As long as you stay within the schemes the authorities will be happy enough, but if you step outside them there is nobody more dedicated than a customs official who believes there has been a deliberate attempt to keep him from his VAT,” says Dickie.
“It used to be far easier than it is now to construct a series of companies and trusts to hide the true ownership of any one of them because of all the rules against money laundering and KYC.”
‘Increased scrutiny’
He says the Abramovich exposé highlights how advisers focused on “aggressive VAT planning” can often miss out on other taxes which make up the big picture of yacht ownership.
“Our industry is guilty of focusing on just one tax,” he tells us. “A complete tax strategy for a yacht will cover VAT, corporate tax, benefit-in-kind tax and maybe in the future we will have customs tariffs to consider under Trump again. Also, there are social taxes to consider.”
He suggests structures to minimise VAT will come under “increased scrutiny” in the future because it is “very hard to justify that a charter operation is a real business”.
“You have to show the whole structure has some economic substance,” he adds.
“Eight weeks’ charter will never give you a profit, if you count depreciation, so increasingly the authorities will challenge whether there’s a real business intention.”
Petts recommends EU residents looking to structure their operation to minimise VAT when the yacht is in EU waters should aim for at least 65% legitimate third-party charters with a real charter broker. And they should always include a legitimate bank in the structure to create “economic credibility”. VAT can be deferred by leasing the boat from a bank (which comes with numerous restrictions) or it can be minimised by paying VAT in the lowest jurisdiction, such as Malta, he adds.
“People think it’s unfair to defer and avoid tax on a yacht, but each of us can lease a car or an airplane so why not a yacht?” he asks.
For non-EU tax residents, Petts says owners can additionally do temporary import for 18 months, but the boat must be private with no charter use. It then needs to exit the EU for a day before it is allowed back in for another 18 months.
Most corporate structures used to be VAT-driven but privacy is now one of the main drivers, says Petts.
One tactic is the use of ‘straw men’ – individuals acting on someone else’s behalf to withhold their identity – to buy bonds and then that bond structure owned by nominee funds will buy a yacht, he explains.
“This method completely obscures the ownership of the vessel, there is no due diligence on bond holders, just the bond fund, and anyone can buy bonds,” he adds.
The moral of the story, says Petts, is to consider all the taxes and get expert advice before you buy.
“If you get it right you can have a much bigger budget and buy a bigger boat; get it wrong and it becomes a nightmare with VAT due, plus interest, plus penalties,” he adds.
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