Leasing schemes; opportunity ahead?

Are they, aren’t they? The argument about whether or not leasing schemes are legal and/or morally desirable has been a near constant source of discussion in the superyacht market in recent years. Now, with the European Commission (EC) eschewing the veiled threats of yesteryear in favour of a head-on assault, does this force the superyacht market to find solutions that are both palatable for the EC and digestible for the general public?

In the EC’s letter to Malta, Cyprus and Greece, it wasted no time in highlighting the coverage provided by the Paradise Papers as being the spark that ignited its attack on certain yachting communities. It is my gut feeling, however, that the wheels had already been set in motion and that the public outrage caused by the Paradise Papers merely served to accelerate the process for an easy political win.

It should be noted that one of the Paradise Papers’ defining characteristics, unlike the Panama Papers, was that the practices that were brought publicly to light are not illegal – and this remains the case until further notice. It should also be noted that the legality of a practice in the present day is not a prerequisite for its continued legality, history has at least taught us this much. Nevertheless, the rhetoric used within the EC’s letter to Malta, Greece and Cyprus is a clear indication of where the EC believes the infringement procedures levied are heading.

For starters, the phrase ‘tax avoidance’, an unpopular but legal method of limiting tax liabilities, has been switched for the dreaded ‘E’ word – evasion. To paint a fairly vivid picture, one might imagine Pierre Moscovici, commissioner for economic and financial affairs for taxation and customs union, stood in a boxing ring facing government officials from Malta, Cyprus and Greece and removing his gloves.

“In order to achieve fair taxation, we need to take action wherever necessary to combat VAT evasion,” comments Moscovici in the letter. “We cannot allow this type of favourable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end.”

No more is Moscovici asking ‘are they, aren’t they?’; the EC believes that certain leasing structures are illegal, although this is yet to be proven.

In many ways, the superyacht market has not helped itself. By leveraging the benefits of low-taxation schemes, the superyacht market put a big target on its back. One of the two themes that the infringement procedures will follow concerns the use and enjoyment of the superyachts in question. According to the EC, current EU VAT rules allow Member States not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU. In other words, taxes on the supply of the vessel (service) to owners need not be subject to VAT for period of time that they are outside of the EU.

Issues arise because the Cypriot, Greek and Maltese leasing structures levy reductions assuming that the larger the superyacht, the less time it is going to spend in the EU. After all, superyachts are means of transportation, albeit luxury ones, and, as such, it is fair to assume that they will travel, isn’t it? However, I have come across a number of documents from a number of different nations, some of which have not incurred infringement procedures from the EC, which state that leasing structures are most effective for those owners that wish to spend the majority of their time within the EU. I have no doubt that the EC has acquired similar documentation and much more beyond that. So, as I say, it was only really a matter of when, not if.

This does not, however, spell the end of leasing structures - not in the countries highlighted within the EC’s letter and certainly not for those countries that the EC has chosen to omit. I strongly believe that by casting its eye on the superyacht market the EC may be killing the patient with the medicine in the short term. But, in the long term, I firmly believe that leasing structures will remain relevant for certain owners.

For many owners this may be a wakeup call. If paying the requisite VAT on a 90m is irreconcilable with the budget the owner has set themselves, perhaps getting a 60m superyacht will be more palatable. For others, for whom budget is no object, it may well be that they simply chose to pay the VAT on their vessel and avoid any possibility of scorn, be it public or bureaucratic. For other owners, who genuinely use their vessel outside of the EU regularly, the tax breaks are permissible in the EU, provided the use of their vessel in these areas is provable. This may also encourage owners to use their vessels outside of the EU and start exploring yachting destinations beyond the milk run, opening up new markets and opportunities.

Will a crackdown on leasing schemes damage the superyacht market in the short term? Probably. However, if the EC’s issues can be resolved and systems are put in place that guarantee the legitimacy of yacht owning structures, I believe that the market will have the political and public space to grow organically. 

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