Crackdowns on offshore yacht structures are becoming more common across Europe, with new withholding taxes coming into play in France and Spain. Yacht owners and managers, particularly those with yacht leasing schemes, would be wise to consider onshoring their structures to avoid a significant tax liability.
As popular and advantageous as it was traditionally for yacht owners to establish their yacht structures in offshore jurisdictions, the way in which the financial world has evolved over the past few years has rendered these types of structures increasingly disadvantageous and expensive to maintain. Apart from the stigma surrounding the offshore scene, which was greatly magnified through the leak of the ‘Panama Papers’, we are now also seeing the EU seeking to ensure that individuals are financially penalised for utilizing offshore jurisdictions for tax avoidance purposes, by implementing new onshore withholding tax regulations.
Withholding tax is not something that had in practice been widely applied to superyacht charter and management companies in recent years. However, the most recent changes in this regard, have directly affected yacht ownership structures established in territories such as the Cayman Islands, BVI, Isle of Man, Guernsey, Jersey, and a number of the other offshore centres frequently used by superyacht owners for corporate services. At present, the countries applying withholding tax to yachting include France and Spain, although it is very likely that more countries will follow suit.
Spain and France implement the tax in different ways, however they both trigger potential tax consequences when the yacht-owning company is established in a territory without a double tax treaty with the country where the charter takes place. Since offshore countries typically impose zero tax, they have very little bargaining power in negotiating double tax treaties, and as a result they tend to have very few such double tax treaties in place.
In France, based on Article 182 of the French tax code, the French fiscal authorities are now requiring that superyacht charter and management companies pay a 33% Withholding Tax on all funds transferred from French businesses to companies based in fiscally “non-cooperative” nations. The French tax authorities are applying the tax to the balance of funds after deduction of commissions transferred from French businesses to yacht-owning companies from non-tax treaty territories, and the French management or charter company is responsible for paying the withholding tax to the French government. Demands by the French authorities have reached into the millions of euros, and this has had a detrimental effect on French businesses in this sector.
In Spain and the Balearics, withholding tax for certain offshore yacht structures has been applied since 2014 and is collected by the fiscal agent appointed by the yacht owner as part of the pre-requisite arrangements before any yacht can commence charter operations.
The implementation of withholding tax to superyacht charters effectively means that most superyacht owners with structures established in offshore jurisdictions will be adversely affected by these regulations and hence liable to withholding tax based purely on the fact that their holding structure has been established outside the EU in a non-tax treaty country. One can therefore argue that these structures are being taxed unnecessarily, as if the owning structure for a yacht commercially operated within the EU were to be migrated to or established in a tax efficient EU country, which furthermore has a double taxation treaty in place with Spain and France, then the owner would not be subject to withholding tax when chartering their yacht in these territories.
It is therefore advisable that where punitive withholding taxes are at stake, owners should consider the migration of existing yacht-owning companies (or establishing a new company instead) in a more favourable EU jurisdiction for yachting, in order to ensure that no withholding tax issues arise and hence that their structure is not taxed unnecessarily. For this, we recommend Malta: apart from being an EU country, and hence covered by all EU Treaty and Directive protections, Malta also has the advantage of an extensive tax treaty network including well-established double taxation treaties with both Spain and France, which effectively ensures that no withholding tax implications should arise for yacht structures established or transferred to Malta.