VAT in Spain falls mainly without wane
As the gateway to the Mediterranean, shouldn’t Spain be a dead cert as one of the most popular charter destinations in Europe? The reality is that the country relies purely upon its geography and has, until recently, offered no tax instruments to boost its appeal to potential charterers. Chartering in countries like France, Italy or Malta can benefit from reduced VAT rates on charter fees. This is not the case in Spain, but change could be on the horizon.
VAT is a complex subject in the EU and many do not understand why a harmonised tax can vary from state-to-state. The reality is due to a compromise made in order to create the EU in the first place – EU regulations and directives.
Regulations are law and are uniform across the region, however directives provide leeway to each state to create its own law within EU-set parameters. Without the compromise of the two, the EU would unlikely to have been formed given it is a relatively new group of countries, often with widely varying legal systems sometimes dating from Germanic and Roman times.
A prime example of this compromise is the EU directive for VAT, aka Article 97, which sets a minimum of 15% and no upper limit. As a result, VAT rates often vary, for example in Spain the rate is 21%, France 20%, Italy 22% and Croatia 25%.
The directive also offered EU members states the discretion to offer VAT reductions for those adhering to certain conditions. The provision seeks to minimise VAT taxation applicable to certain services, among them the hiring out of transport, for instance charter, when part of the trip takes place outside the community.
Subject to flat VAT rates
However, this is not the case in Spain which, making use of its optional right, did not implement this provision in the internal Spanish VAT law. Therefore, chartering in Spain is subject to a flat VAT rate which does not benefit from any reduction even sailing beyond 12 nautical miles.
Also, the second part of the article seeks to subject VAT to certain services. For example, if the charter started in Gibraltar and visited Spanish territory, that would oblige the yacht to register for VAT in Spain and pay VAT on the time spent chartering in Spanish waters.
However, since the amendments introduced in the Spanish VAT law came into effect on January 1st 2021, charters starting in the Spanish territories of Ceuta, Melilla or Canary Islands will no longer be subject to Spanish VAT. Thanks in the main to the initiative of the port authority in Melilla, according to Luis Soto, partner, Tax Group, Watson Farley & Williams.
He told SYI that the port authority is keen to “to promote its port for superyachts to start chartering itineraries therein”.
Now, instead of Spain’s VAT rate, chartering in the Canary Islands is charged with a local indirect tax called IGIC at a 7% rate and in Melilla and Ceuta with a municipal tax called IPSI at a rate of 4%, although Melilla can approve its reduction to 0.5% for charter as last Friday March 17.
“Therefore, yachts can already charter from Melilla to the rest of Spain and the Balearic Islands paying just 0,5% on the charter fees, which is no doubt the lowest rate in Europe by far!” Miguel Ángel Serra, partner, Albors Galiano Portales told SYI.
“I am completely sure Spain has lost business in recent years in favour of our neighbours and competitors,” Serra said. “We have lost share of the market to France, Italy, Croatia and even Greece because they have been interpreting the EU VAT directive in a much more flexible way.”
Spanish authorities disclosed to Serra on multiple occasions that they believed the interpretation of the EU directive by its ‘competitors’ was not sustainable and the EU Commission would eventually turn it down and they were right. Nevertheless, Spain still lost out. Serra said: “My argument was okay, they [France, Italy, Croatia] may be wrong, but let’s at least use the same weapons. If the EU stops it, then we all stop, but not acting has seen more and more of a market share slip away.” In Serra’s opinion, this is the biggest failure of the Spanish government.
Spain’s biggest port is Madrid
The problem in Spain is that its biggest port is Madrid. Serra said this is quite rightly questionable given that the Spanish capital is 200 miles from the nearest salt water. Nevertheless it is where the country’s tax authorities are based and operate from – yachts included.
He explained: “This is a problem because the tax authorities don’t know about yachts, yachting, or the industry and they do not have a clue on how to manage the issues we have. You cannot manage these remotely hundreds of miles from the sea, so it is very difficult to talk to them in the same language.”
So, what can be done to close the gap and better Spain’s appeal? Serra is hoping that market share will increase, if only slightly, following the recent amendments VAT law on charters starting in Ceuta, Melilla or Canary Islands.
Soto said: “Of course, the lack of any reduction of VAT for charters in Spain does not help, but still Spain is an attractive place for cruise charter. It is a little bit early [to gauge any boost in popularity due to the amendments] due that we are still in winter lockdown season, but I would expect attraction to grow in the next months.”
Expect attraction to grow
However, the country needs to do more especially with respect to yacht importation, said Serra. “The keystone in all these matters is that Spain lacks instruments that Italy, France or Malta possess. This is the capacity to be able to import commercial yachts with VAT exemption or deferral.
“When it is EU regulation [the union customs code and not a directive], how can those countries import commercial yachts with VAT exemption when Spain cannot? This is unexplainable.”
If it were possible to import the yachts into Spain, logically they would remain there as long as they have the charter clients, said Serra. However, the Spanish tax authorities will not allow this to take place.
“This is the key issue. If you were to allow VAT exemption or deferral on commercial yacht imports then you will have business for shipyards, for brokers, for marinas, for everybody. If you don’t, then you will see less of a market share, which is what we are seeing, this is the main battle,” concluded Serra.
As the gatekeeper to the Mediterranean, Spain has yet to realise its full potential as a superyachting destination. As Soto and Serra point out, there are voices in Spain calling for change and the battleground is an obvious one. But will Spanish tax authorities make the adjustments voices, like Serra’s, are requesting?