Every once in a while a judgment is handed down by the ECJ which, by reason of the ripples it causes in a particular sector of the industry it touches upon, comes to be referred to simply by one word - one such case is that which has come to be referred to as the "BACINO".
The full name of the case is "Etat du Grand-Duche de Luxembourg, Administration de l'enregistrement et des demains v. Pierre Feltgen, Bacino Charter Company SA (C-116/10)" 22nd December 2010 and consisted of a reference for a preliminary ruling made by the Luxembourg Cour de Cassation to the ECJ concerning the interpretation of Article 15(5) of the Sixth Council Directive 77/338/EEC – which was in fact overtaken by Article 148 of Council Directive 2006/112/EC as amended although the content of the article in question has remained unchanged.
The article of law which formed the object of this referral, headed "Exemption of exports for the Community and like transactions and international transport', provided that
"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse
...
4. the supply of goods for the fuelling and provisioning of vessels:
- used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities;
- used for rescue or assistance at sea, or for inshore fishing, with the exception, for the latter, of ship's provisions"
...
5. the supply, modification, repair, maintenance, chartering and hiring of the sea-going vessels referred to in paragraph 4(a) and (b) and the supply, hiring, repair and maintenance of equipment – including fishing equipment – incorporated or used therein".
The facts of the BACINO related to Bacino Chartering Company SA ("Bacino") making available on a regular basis between the 19th July 1998 and 8th August 1999 a vessel which it owned, together with a crew, to natural persons for the purpose of leisure activities on the high seas. On the basis of the assumption that this scenario fell squarely within the parameters of the above cited exemption, Bacino did not charge the natural person VAT on the hire and therefore did not pass any VAT payments calculated on such hire to the Luxembourg tax authorities.
The Luxembourg tax authorities were however of a different view and in 2001 they notified Bacino of the tax assessments for the financial years 1998 and 1999 which set out the amounts of VAT owned by the company for charters carried out during the said period in so afar as in their view the boat was not a commercial vessel but rather a yacht.
Bacino challenged that assessment before the District Court of Luxembourg which dismissed its action, subsequent to which Bacino was successful in arguing before the Court of Appeal that since the vessel was engaged in navigation on the high seas and carrying passengers for reward, the said activity did in fact fall within the parameters of the exemption outlined in article 15(5).
The tax authorities brought an appeal before the Court of
Cassation which decided to pose the following question to the ECJ
for a preliminary ruling:
"May services provided by the owner of a vessel who, for
reward, with a crew, makes it available for natural persons for the
purpose of leisure travel on the high seas by those clients, be
exempted under Article 15(5) of [the Sixth Directive]...where those
services are considered to be both vessel-hire services and
transport services?".
It is evident therefore that the question put to the ECJ by the Cour de Cassation in Luxembourg related solely to whether VAT is due on the hire paid by a private person to the owner of a yacht where the latter is in the business of operating the yacht for commercial purposes on the high seas.
However in so far as article 15(5) refers to other services besides hire, namely those of supply, modification, repairs and maintenance, and since the criteria referred to in article 15(5) (now article 148(c)) for entitlement to the said exception are identical in the case of all of these services in that the yacht in question must be used "for navigation on the high seas and carry(ing) passengers for reward or used for the purpose of commercial activities" the findings of this judgment may logically be said cover all of the cited services, besides naturally the supply of goods for the fuelling and provisioning of the vessels in question as referred to directly in article 15 4(a) (now article 148 (a)).
Turning to the actual findings of the ECJ, it held that "the actual wording of Article 15(5) of the Sixth Directive, which contains a reference to article 15(4)(a), covers the hiring of vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities. In order for such a hiring service to be capable of exemption under that provision, the lessee of the vessel concerned must use it for an economic activity
...It follows that if, as in the main proceedings, the vessel is leased to persons who use it exclusively for leisure purposes and not for financial gain, outside the sphere of any economic activity, the hire service does not meet the explicit conditions for VAT exemption set out in article 15(5)..
The exemption set out in Article 15(5) of the Sixth Directive cannot benefit vessel-hire services for charters who intend to use the vessel strictly for private purposes as final consumers".
Perhaps much of the alarm that has trickled down throughout the industry arises as a result of reading more into the judgment than there is. In the author's view, the ECJ in this case has not come up with new law. The court when faced with the facts of the Bacino Case was merely provided with a perfect opportunity of stating in black and white what the real spirit and meaning of the cited exemption is –placed simply being that where the lessee of a yacht uses the yacht for private (leisure) purposes, then the lessee is required to pay VAT on the said service to the owner who in turn uses the yacht for commercial activities on the high seas.
The real impact of the Bacino case is that, in clarifying when VAT is to be paid by the lessee and when there is an exemption from the payment of such VAT, it has removed any grey areas which previously allowed scope for an interpretation allowing VAT to be waived when in fact it ought to have been collected. In assessing whether VAT is due on a particular service, the Bacino has with the authority it carries, adjusted the collective focus of the industry to the use being made of the yacht by the person availing himself of the particular service. Therefore in case where service consists of making a yacht available for charter and the lessee is a private person using the yacht for leisure purposes VAT is due by him to the owner on the hire. By analogy, in case where the person ordering the supply of fuel, provisions or commissioning the refit of a yacht is the owner of the yacht who is using the yacht for commercial activities on the high seas, then no VAT is due on the said services by the owner to the particular supplier or service provider.
Debate has also arisen with respect to whether the court in referring to the lessees as being "natural persons", intended to exclude its findings in case where the lessee is a corporate entity (as opposed to a physical person) using the yacht for pleasure purposes. In this regard, one must firmly bear in mind that in making its pronouncements, the ECJ replies directly to the question and follows the precise wording put to it by the referring court. As a consequence, in the author's view, one cannot interpret the court's findings as meaning that the exemption does in fact apply in case where a corporate entity is set up to charter the yacht for leisure purposes e.g. to entertain employees on an annual boat trip.
The Bacino has attracted significant criticism directed from all angles of the international yachting community. The main concern for owners is whether they can retain competitive charter rates and whether the prevailing economic climate can support a proportionate hike in rates. Further criticism relates to the uneven playing field which this interpretation would create between persons opting for a holiday on board a yacht and persons opting for a holiday on board a cruise liner where no VAT is charted on tickets. It very much remains to be seen whether all of this will in fact translate into a tangible threat to the attractiveness of chartering a yacht, or whether this is effectively a storm in a teacup.
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.
