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Shipping and Aviation Tax

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25 July, 2013

Shipping/Aviation EU VAT

For owners and users of private yachts and aircraft in Europe, navigating the European Union’s all-pervading tax rules is a daunting task, especially when they are subject to change on a regular basis.


It is the task of the European Commission in Brussels to police the EU’s tax rules, in the interests of maintaining a level competitive playing field across all 28 Member States. Therefore, tax regimes which distort the single market or flout the key legal principles underpinning it, like freedom of establishment, and the free movement of capital, are frequently attacked.

As can be seen below, the European Commission has intervened in a number of cases affecting the taxation of yachts in recent months, leading to changes in tax rules in the Member States concerned. However, ongoing fiscal austerity and an increased emphasis on tax compliance is also relevant to yacht owners, as witnessed by the recent actions of the Italian tax authorities, also mentioned below.

France – Yacht Charters Subject To VAT

A notice issued by the French tax authority last month announced that pleasure yachting charter arrangements would be newly subject to value-added tax (VAT) from July 15, 2013.

The announcement followed the European Commission's decision to send a formal request to the French authorities in November 2012 requiring that the nation revoke a value-added tax exemption offered on the charter of yachts used for pleasure boating purposes.

In its reasoned opinion, the Commission explained that Article 148 of the EU VAT Directive allows member states to offer a VAT exemption for certain transactions concerning vessels. However, this exemption does not apply to luxury boats used by individuals for recreational purposes.

This was confirmed by the European Court of Justice in a case in December 2010, involving Bacino Charter Company SA. The court determined that a VAT exemption may only be granted in circumstances where a vessel is chartered for use on the high seas, for the purposes of commercial, industrial or fishing activities, but not recreational purposes.

France intends to offer a 50 percent VAT reduction to chartering arrangements impacted by the ruling, bringing them within the French VAT net but subjecting them to VAT at a rate of 9.8 percent, rather than the headline rate of 19.6 percent. Further guidance on this matter is expected from French tax authorities in due course.

In the interim, the French tax authority has released "BOI-VAT-FIELD-30-30-30-10-20130625," providing preliminary guidance on the intended changes.

Spain – Repeals Yacht Registration Tax

The European Union was also instrumental in the removal of the unpopular Spanish yacht registration tax on yacht charters.

This 12 percent tax was applied on the first registration of yachts of greater than 15 meters in length, and the Spanish maritime industry had argued that the imposition of VAT on top of the registration duty amounted to double taxation.

The registration duty has now been repealed after proceedings were launched by the European Commission following an investigation which found that Spain's tax treatment of yacht charter arrangements contravened European Union rules including on the free movement of goods.

Carlos Sanlorenzo, the Secretary General of ANEN, the Spanish marine trade industry association, commented: "The involvement and support we have had from the Directorate General of the Merchant Navy in recent years has been instrumental in achieving this outcome. The Ministry of Finance has now given the green light for the elimination of the registration duty on charter sailing, removing the onerous combined tax rate [of 33 percent] in recognition of the benefits to the economy of pleasure yachting, and the sector's tax contribution."

According to ANEN, the recreational boating industry in Spain directly and indirectly supports 107,000 jobs, and generates gross value added to the economy worth approximately EUR5.69bn annually.

UK – Must End Fuel Duty Concession

The European Union has also been active recently in trying to crack down on the use of lower taxed fuel by owners of pleasure boats in the UK.

In May, the European Commission confirmed that it had formally requested that UK amend its legislation to ensure that owners of private pleasure boats, such as luxury yachts, can no longer buy lower taxed fuel intended for fishing boats, known in the UK as "red diesel."

Under European Union rules on fiscal marking for fuels, fuel benefiting from a reduced tax rate has to be marked by coloured dye. In the United Kingdom, red diesel – so-called as it is marked with red dye – attracts a duty rate up to 40 percent lower and may be used only in the farming, fishing and forestry industries.

EU rules stipulate however that while fishing vessels may benefit from fuel subject to a lower tax rate, private boats must use fuel subject to the standard rate. The UK was allowed to offer the concession to pleasure boating until 2006 when a transitional period ended.

In an effort to retain the concession, the UK developed a regime whereby pleasure boat owners could continue to use "red diesel" provided they acknowledge that its use is only permitted within UK waters, i.e. not in the rest of the EU.

However, the European Commission has pointed out that UK law does not require fuel distributors to have two separate fuel tanks, i.e. one marked for red diesel and one for fuel subject to the standard tax rate. As a consequence, private leisure boat owners often do not have access to fuel subject to full duty, placing these vessels at risk of heavy penalties if they travel to another member state's waters.

The Commission has now formally requested that the United Kingdom should change the regime to ensure that the use of red diesel is restricted to fishing vessels only. The UK was given two months to comply with the request or risk having the matter referred to the European Court of Justice.

Italy –Taxman on the Warpath

Meanwhile, yacht owners in Italy are choosing to sail their yachts away from the country amid a large-scale investigation into the tax affairs of the wealthy.

Italy, the country where tax evasion is perceived to be a national sport, has decided to crack down on tax evasion to restore its public finances. After a similar campaign on luxury ski resorts, Italian tax officials are investigating high-end yachts, in particular those over 20 metres in length, with a view to finding owners who have possibly declared low or zero income on their annual tax returns.

It was said that around one quarter of the almost 1,000 yachts moored in one Italian marina were owned by taxpayers who had declared no income or extraordinarily low income.

The Government has also implemented a new tax on yachts as part of the recent austerity package of up to EUR700 per day, adding to the massive outflow of Italian yachts towards foreign shores in the Mediterranean Sea. As a response to this, it is said that an estimated 30,000 yachts have already left the country.

High net worth individuals are not the only ones concerned with this major tax collection campaign. The yacht industry and marinas are also being hurt as a side effect of this crackdown on tax evasion. Due to the flight of yachts, marinas have faced an estimated EUR200m (USD245m) loss in revenue, and plans for the construction of tens of thousands of new yacht berths have been put on hold throughout Italy.

A similar crackdown on luxury car owners has had a similar effect during the first quarter of 2012, with sales of Ferrari and Maserati dropping by a reputed 50-70% during the period.


Interventions in the tax regimes of EU Member States have also affected the taxation of aircraft in recent times. Significant developments centred on the UK’s deeply unpopular Air Passenger Duty (APD) regime, which was extended to small aircraft from April 2013, although the Isle of Man has refused to extend the tax to business jets in order to protect its burgeoning Aircraft Registry.

Poland – Required to Scrap Aircraft VAT Exemptions

Recently, the European Commission formally requested that Poland amend its legislation on VAT exemptions for transactions related to aircraft, since it is based on criteria which are different from, and inconsistent with, the criteria set out in EU legislation.

Under the VAT Directive, certain supplies of goods and services related to aircraft can be exempt from VAT. The essential condition for those exemptions to apply is that the aircraft must be "used by an airline operating for reward chiefly on international routes". In Case C-382/02 the European Court of Justice ruled that the exemptions apply even for an aircraft operating on domestic routes, as long as it is used by such an airline.

However, Poland applies the exemptions to any aircraft weighing over 12 tonnes. Any aircraft under 12 tonnes is not exempted even where it is used by an airline meeting the relevant conditions. Conversely, an aircraft with weight over 12 tonnes is exempted even where the aircraft is not used by an airline operating for reward chiefly on international routes. Moreover, Poland grants the exemption for aircraft which are used mainly in international transport and not to aircraft "used by airlines operating for reward chiefly on international transport”. The rules  allow for the exemption to be applied to an aircraft which is used either by an airline not meeting the condition of the VAT Directive or by a person or entity other than an airline.

UK - Aircraft VAT Exemption Modified

In a similar case to that of the Polish VAT exemptions, the UK was requested by the European Commission to amend its legislation governing the VAT exemption for transactions related to aircraft back in 2009.

The UK was directed to amend its VAT rules in this area because, according to the Commission, they were based on criteria different from, and “inconsistent with,” those employed in the European VAT Directive.

Under the prior UK VAT rules, any aircraft under 8,000kg was not VAT exempt even where it is used by an airline meeting the relevant conditions. Conversely, aircraft of a weight over 8,000 kg and not designed nor adapted for private pleasure flying were exempted, even where the aircraft was not used by an airline operating chiefly on international routes.

In December 2010, the UK tax authority, HM Revenue and Customs (HMRC), published guidance in respect to the change of the definition of an aircraft for VAT purposes, from one that is based on weight, to one that is based on the status of the customer. This guidance confirmed that a “qualifying aircraft” for VAT and customs duty purposes will, from January 1, 2011, be an aircraft that is used by an airline operating for reward chiefly on international routes. This change aligns the definition of qualifying aircraft with that in Article 148 of the Principal VAT Directive.

UK - APD Extended To Business Jets

From April 1, 2013, Air Passenger Duty (APD) has been extended to include private jets and other smaller aircraft. This means that operators of an aircraft with an authorised take-off weight of 5.7 tonnes or more, which takes off from a UK airport carrying chargeable passengers, will be required to register for APD within seven days of the flight occurring, and account for APD. The amount of APD to be paid by operators is determined by the number of chargeable passengers multiplied by the relevant APD rate. Helicopters and avgas fuelled aircraft are excluded from APD.

In February 2012, HMRC released guidance with details of a new accounting scheme for occasional operators, i.e. those with no more than 12 flights from the UK per year and an annual APD liability of less than GBP5,000; and an annual accounting scheme for operators with an annual APD liability of no more than GBP500,000.

The United Kingdom's APD is the most draconian tax of its type worldwide, and critics have said that the government has transformed the environmental levy into a crisis-time "cash cow." The tax is added to the price of a ticket and is based on distance flown and class of travel, so that short-haul economy flights attract the lowest APD rates, and long-haul flights in a class other than economy pay the most tax. However, APD on fares has risen markedly since the levy was first introduced in 1994, from rates of between GBP5-10, to GBP13-188 (USD20-290 at the time of writing) at present. The April 2013 changes also introduced a new higher rate band which ranges from GBP52 to GBP376 applying to flights aboard aircraft of 20 tonnes and above with fewer than 19 seats. A table of the current APD rates can be viewed on HMRC’s website.

Isle of Man – Rejects Business Jet APD

In October 2012, the Isle of Man's Treasury Minister, Eddie Teare, confirmed that, despite the territory maintaining many similar elements to the United Kingdom tax regime, the island will not follow suit with the UK government's decision to begin taxing small business aircraft under the APD regime.

The Isle of Man has no plans to reciprocate, Teare has confirmed, meaning that tax will only be due on flights inbound to the island.

The Isle of Man government has confirmed that 19-seat aircraft will not be subject to APD, although the Treasury is considering whether extending APD to other business jet sizes would impact the island's economic opportunities and the growth of the Isle of Man Aircraft Registry.

“Air passengers aboard 19-seat aircraft could potentially have been faced with paying an additional GBP13 on both legs of their journeys between the UK and Isle of Man,” Teare commented. “However, we have taken the decision not to introduce this duty on the Isle of Man to UK leg of flights. Whilst I will continue to raise the matter with my UK counterparts, the extension of APD to passengers aboard 19-seat planes on travel from the UK to the island is ultimately a matter for the UK government. In the context of the island, I believe that maintaining the status quo and not introducing it is the preferable solution, as a number of routes operated from the Isle of Man are served by aircraft that fall into this category.”

The Isle of Man Aircraft Registry has witnessed substantial demand since it was launched in May 2007 and there are now over 500 aircraft on the register, making it the fastest growing offshore register in the world. Its client base is global and the success of the Registry means that the Isle of Man is now home to a world-class group of companies who offer support services for owners and operators of corporate and private jets.

According to the findings of a 2012 survey conducted by aviation publication 'Corporate Jet Investor', which sought the views of leading aviation lawyers globally, the Isle of Man offers the world's most attractive registry for non-commercial aircraft.


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Privacy Unlimited FZE

Every maritime or aircraft vehicle owner, whether a businessman or a private person, requires a flag for their vehicle, i.e. the vehicle is to be registered.

In the world of today, we see that a significant amount of vessels are registered in the so-called “offshore jurisdictions” that have developed their Maritime and Aircraft Management Legislation specifically to attract international customers.

What are the benefits that convince businessmen and private individuals to choose registration under the “offshore” flag?

Here is a short-list:

  • Security and confidentiality. Transfer of vehicle ownership to a corporate body registered somewhere outside of the highly regulated jurisdictions gives enhanced privacy to vehicle owners.
  • Low taxation or total exemption from taxation on registration and ownership of ships and aircraft. Having a vehicle registered, say, in Malta or in the British Virgin Islands, allows you to minimize or even attain zero taxation on income derived from the lease/operation of a boat/aircraft used for international transport.
  • Simplicity and convenience of registration procedures. Many of the offshore jurisdictions have straight-forward and simple registration procedures saving clients both time and effort. Registration of a boat or an aircraft can be done remotely, without the need for the vehicle owner to travel.

Today, Malta is among the most popular and admitted jurisdictions for its strong maritime and aviation sectors. Malta's respected flag and established connections with both European and non European states make it a convenient platform for international shipping or aircraft business. The Maltese Merchant Shipping Act was introduced in 1973; today, the Maltese Register is the second largest in Europe and the eighth largest in the world.

The enactment of the Aircraft registration act on 1 October 2010 was also designed to put Malta at the forefront of the aviation industry.

“Our aim is to create a cluster specifically for the aviation sector where Malta can attract and support the growth of a number of businesses”

- Mario Galea, Business Development of Malta Enterprise, Government agency for economic development said.

Malta currently provides one of the most tax-efficient regimes for international shipping and aircraft operations. It opens up to Maltese-resident shipping and aircraft operators the planning points applicable in respect of foreign source income, whilst enabling them to make use of Malta’s wide network of double tax treaties. The income derived from the ownership/lease/operation of a boat/aircraft used for international transport is considered a non-resident income, which is not subject to the local taxation. Shipping/aviation income receivable by a foreign incorporated, Maltese resident entity, is only subject to tax in Malta if remitted to Malta. These provisions of the local tax legislation make Malta a very attractive jurisdiction for re-domiciliation of foreign companies conducting international shipping and aviation operations.

More on incorporation in Malta can be found at http://www.privacy-solutions.com/maltese-company.html.

The Isle of Man is another well-recognized offshore jurisdiction that has a long Ship Management history. It passed the Merchant Shipping (Registration) Act 1984 in order to encourage the registration of ships on the island and there is a zero-tax regime for ship management companies based there.

In August, 2006, the Isle of Man reached the White List of the Paris MOU and in the same year was admitted by The Round Table of International Shipping Associations as the best shipping registry in the world in terms of safety, environmental and social factors.

Since then, the Isle of Man Ship Registry announced some important changes to it’s operating practices to enhance it’s registration process. The registration procedures and requirements were simplified and the range of accepted ship types was expanded. The Register also extended the number of countries accepted for ownership of ship vessels, thus making Isle of Man flagging more attractive for international clients.

In 2006, the government announced the introduction of an Aircraft Register. Unlike most other registries, where both private and commercially operated aircraft are accepted, the Isle of Man’s register is focussed solely on high quality private and corporate aircraft. It is supported by the Island’s well established banking sector, lawyers familiar with aviation law, insurance companies which can provide cover without the addition of an insurance premium tax and corporate service providers experienced in structuring companies to take advantage of the Island’s beneficial tax regime. You may find out more about the advantages for companies in the Isle of Man at http://www.privacy-solutions.com/isle-of-man-incorporation.html

Since the Registry was established, over 500 high quality private and corporate jets and twin turbine-engine helicopters have been registered. Despite the economic downturn in the rest of the world, the Registry continues its impressive growth.

These are just a few of examples showing that yacht and aircraft owners can significantly adjust their tax burden by transferring their vehicles ownership to more tax-efficient jurisdictions.


Contact Privacy Unlimited FZE
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Tel: +971 7 2434464
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