Last week’s Global Superyacht Forum in Amsterdam had a lot of interesting content, but one session really stood out to me. The panel session led by PwC on the ‘future fiscal landscape’ really highlighted the fact that many experts within the industry are still making costly mistakes when it comes to VAT planning. Avoiding these mistakes will require us to recognise and respond to several facts.
The division of labour
Firstly, yacht managers, brokers, and other non-VAT specialists continue to be expected by many clients to provide VAT advice. This is a trend that we need to address as an industry. Key players in yachting should be developing good relationships with providers that specialise in yacht ownership structuring and VAT and be firm about referring clients to these specialists, for their own benefit as well as the benefit of their clients. Of course yacht managers should still have a general understanding of the fundamental VAT rules affecting the superyacht industry – however, managers do need to recognise that expert support will be needed by the client. Also, this needs to happen sooner during the yacht purchase process. VAT is – perhaps understandably – often an afterthought when ‘selling the dream’ of owning a superyacht. Although VAT isn’t quite as glamorous, getting a specialist advisor involved early in the process can substantially reduce headaches for everyone involved down the line.
The dangers of complexity
This is only a problem because of the complexity of the subject matter. We have to recognise that specialist VAT advice is very much still a necessity in the EU and there are good reasons why brokers and managers remain uncertain about EU rules. Although VAT is supposedly ‘harmonised’ at EU level, there remain substantial differences in both interpretation and application across member states. Combined with the significant variation in the actual VAT rates across Europe, this leads to a complex web of different frameworks. For example, a recent change in France has meant that in order to qualify for VAT exemption commercial yachts must, in addition to complying with the original three essential criteria of the former ‘French Commercial Exemption’, now be able to show that 70 per cent of the commercial yacht’s trips are conducted outside French national waters.
The cost of non-compliance can be significant both in pecuniary terms as well as other potential adverse consequences, such as seizure of the yacht by customs authorities. As such, not engaging VAT experts early in the process can be a major risk. Introducing an expert to the client, on the other hand, can reflect very well on the broker or manager when it becomes clear what proper structuring can achieve. When looking for a partner to do this, the key thing to look for is someone who is sensitive to the particular needs of a client, rather than just selling an ‘off the shelf’ registration service in their jurisdiction of choice. For example, we still see clients going through the expense and hassle of full commercial registration in order to achieve the expected corresponding VAT advantages, when in substance the owner actually wants to use it privately and only charters the yacht to others rather infrequently – and often reluctantly! This shows that poor advice has been given. Tax laws and enforcement are catching up with the superyacht industry and it is becoming increasingly inadvisable to try to get away with an artificial commercial structure when the yacht is in essence a private leisure boat. I expect that authorities will be increasingly clamping down on this. Furthermore, the costs of complying with the various commercial code requirements (plus having to charge VAT on one’s own charters which start within the EU) make it unnecessarily onerous and inflexible. We strongly advise that the appropriate structure to own and operate a superyacht should depend on the client’s specific situation and wishes so, to follow the same example, if the intention is for a yacht to be the owner’s pride and joy as a private yacht for himself, family, and friends, we would instead consider whether temporary importation relief can be availed of (strictly when the owner is non-EU resident, among other conditions.) Otherwise, VAT has to be paid and in this case one ought to determine the most appropriate and ideally VAT-efficient option to do so – again by way of example, Malta’s yacht leasing structure has been very successful over the past ten years, providing full EU VAT paid status to EU yachts at a substantially mitigated effective cost of 5.4%.
One of the concerns amongst brokers and managers is that introducing an advisory firm might somehow endanger their relationship with the client. Whilst there may be situations in which these concerns are valid, perhaps a lot of this misunderstanding comes from financial service firms stating that they provide ‘management services’, which could be perceived as a competitive threat to yacht managers! In most cases, however, what these firms mean is that they will provide end-to-end management of the structures that hold the yacht (in terms of setting up the legal entity owning the yacht, and handling all the required corporate administration, accounting work and tax returns, etc.), and there is no conflict of interest involved. Certainly when we work with brokers and managers, we aim to fit in comfortably with the existing relationship and provide value-added services that reflect well on our partners, not competing services. Indeed, we do not offer yacht management and brokerage services, and virtually all of the yacht structures that we administer have their own yacht managers and brokers, with whom we work hand in hand in securing the client’s best interests.
As always, if you require any support with yacht registration, ownership structuring, and VAT, I am always happy to discuss the topic.
Photo courtesy of The Superyacht Group.