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Digg On 13 March 2012, The Cyprus VAT Authorities published guidelines clarifying the VAT treatment of Yacht Leasing Schemes, effectively introducing the most attractive VAT yacht regime in Europe. As a result, VAT can potentially be reduced to as low as 3.4% of the initial value of the pleasure yacht, less than the 5.4% currently obtainable in Malta.
Under the VAT on Yacht Leasing Regulations of March 13 2012, only a percentage of the lease value should be subject to Cyprus's standard VAT rate of 17%. Depending on the size of the yacht concerned, the effective rate of VAT will vary between 3.4% to 10.2% of the lease value. The variation is by reference to length, type of yacht (motor or sailing) and the yacht percentage of use within EU territorial waters.
The assumptions of the new guidelines with regards to size of the vessel versus percentage of time spent in EU waters are as follows:
Motor yachts:
- With length up to 8 meters, yachts are deemed to spend 60% of time in the EU waters, giving an effective rate of VAT of 10.2 % (60% of 17%).
- With length 8.01 to 14 meters, yachts are deemed to spend 50% of time in the EU, giving an effective rate of VAT of 8.5 % (50% of 17%).
- With length 14.01 to 24 meters, yachts are deemed to spend 30% of time in the EU waters, giving an effective rate of VAT of 5.1 % (30% of 17%).
- With length over 24 meters, yachts are deemed to spend 20% of time in the EU waters, giving an effective rate of VAT of 3.4 % (20% of 17%).
Sailing yachts:
- With length up to 10 meters, yachts are deemed to spend 60% of time in the EU waters, giving an effective rate of VAT of 10.2 % (60% of 17%).
- With length 10.01 to 20 meters, yachts are deemed to spend 50% of time in the EU waters, giving an effective rate of VAT of 8.5 % (50% of 17%).
- With length 20.01 to 24 meters, yachts are deemed to spend 30% of time in the EU waters, giving an effective rate of VAT of 5.1 % (30% of 17%).
- With length over 24 meters, yachts are deemed to spend 20% of time in the EU waters, giving an effective rate of VAT of 3.4 % (20% of 17%).
For yachts licensed for use only within Cyprus waters, the effective VAT rate will remain 17%.
Important conditions regarding the Financial Leasing Agreement are as follows:
- The yacht must arrive in Cyprus within one month of the date of inception of the lease agreement. Any postponement to the above can be granted only by the Cyprus VAT Commissioner. The delay in any case cannot exceed the lease period whereby the right of purchase can be exercised.
- The lease agreement shall be between a Cyprus resident company and any person/company, irrespective of their nationality/domicile. It should be noted that full anonymity and confidentiality can be preserved through corporate structures.
- Initial lease fee should be at least 40% of the value of the yacht.
- Lease payments should be payable on a monthly basis, along with the applicable VAT based on the rates described above.
- The lease period cannot exceed 48 months (in comparison to 36 months in Malta).
- The yacht may be purchased outright by the lessee at the end of the lease period. The final payment should not be less than 5% of the initial value of the yacht. Such final payment is subject to VAT at the standard rate of 17%.
- A yacht valuation certificate should be submitted along with the leasing agreement and application for approval to the Cyprus Commissioner to confirm the effective VAT rate in each case. Every application for yacht leasing is considered separately on a case-by-case basis and requires separate written approval by the Cyprus VAT Commissioner.
- The purchase will be confirmed by the VAT Department in the form of a certificate, stating total VAT liability.
- The profit from the lease derived by the lessor should not be less than 10% of the initial value of the yacht.
The procedure for the approval of the VAT scheme is summarized below as follows:
- Prior Approval of Cyprus VAT Commissioner;
Upon submission of relevant details of the pleasure yacht, which will include certification and survey of the vessel, bill of sale, an application in writing to the Cypriot VAT Department will need to be submitted for a prior confirmation of the applicable rate of VAT. - Registration of Cyprus Limited Liability Company (CypCo);
- CypCo will apply for VAT registration;
- CypCo and Lessee enter into yacht lease agreement;
- Lease agreement and supporting documentation (including but not limited to certification, specification list, surveyor's valuation, and bill of sale if bought new) to be submitted to the VAT Department;
- Upon review of written request, the Cyprus VAT Department will issue a letter of approval confirming the applicable rate of VAT.
To illustrate the above, the following is a numerical example depicting the VAT and Corporate Income Tax arising from the yacht registration and leasing scheme:
Facts
- A motor propelled yacht with an initial value of €2,000,000;
- The yacht has a length of 25 metres;
- Lease agreement duration of 48 months, being the maximum allowable under the VAT scheme;
- As at the date of commencement of the lease agreement, the lessee (CypCo) will pay 40% of the value of the yacht, namely €800,000 (i.e. 40% of € 2,000,000), with the balance of €1,200,000 being payable over 48 months;
- Purchase option value will be 5% of initial value, hence €100,000;
- Taking into account that a 10% profit margin must be maintained for Corporate Income Tax purposes, expected profit of €200,000 will arise;
- The applicable rate of VAT, which is based on size of the yacht, will be 3.4% (i.e. 20% of the standard rate of 17%).
VAT Due on Scheme
|
DESCRIPTION |
AMOUNT IN EUR (€) |
|
VAT due upon initial payment of €800,000 (A) |
€27,200 (€800,000 * 3.4%) |
|
VAT due on payment of purchase of yacht at end of lease period for €100,000 (B) |
€17,000 (€100,000 * 17%) |
|
Expected profit of 10% |
€200,000 (€2,000,000 * 10%) |
|
Balance to be paid on initial to final installment (i.e. 47 installments if exclude first installment where down payment is made) |
€1,300,000 (€2,000,000 + €200,000 - €800,000 - €100,000) |
|
Value of each monthly installment, before VAT of 3.4% |
€27,660 (€1,300,000 / 47 installments) |
|
Total VAT due on all regular monthly installments (C) |
€44,200 (€1,300,000 * 3.4%) |
|
TOTAL VAT DUE ON LEASE SCHEME (A + B+ C) |
€88,400 |
It should be noted that once the lessee exercises the option to acquire the yacht at the end of lease period, and furnishes the VAT Department with supporting documentation of the same (i.e. invoice in relation to the aforesaid 5% and the applicable bill of sale), the Cypriot VAT Department will proceed to issue a VAT paid certificate confirming that all VAT due has been paid on the yacht.
Corporate Income Tax Due of Scheme
CypCo, being the lessor, is a Cyprus company, which if tax resident is subject to Corporate Income Tax (CIT) at the flat rate of 10%. Although in theory the CypCo can also be a non resident Cyprus company (i.e. company whereby management and control is not exercised in Cyprus) and thus not subject to Cyprus tax, we do not advise this due to foreign tax implications that may be created.
As such, CypCo, if tax resident in Cyprus, would be subject to
10% CIT on the €200,000 profit that would ensue during the
life of the lease agreement, hence €20,000 (in practice
this would be lower after taking into account local administration
expenses such as accounting, audit etc).
Savva & Associates and our team of VAT experts can assist you
with the full implementation of a Yacht Leasing Scheme,
substantially decreasing your VAT exposure upon purchase of a
pleasure yacht. We are able to assist fully with the setting up and
ongoing administration of the appropriate yacht-owning company in
Cyprus, yacht registration, outfitting of the yacht if necessary
and handling of all arrangements on your behalf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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