The Alternative to Leasing - Update

It is well known within the yachting industry that the EU Commission issued a notice to Malta and Cyprus in March earlier this year that they intended to commence infraction proceedings against them in relation to their leasing schemes.

Malta defended the scheme with a robust defence, so what was the basis of the EU's attack? The EU Commissioners contend that the lease schemes result in unfair tax competition and do not meet the tests set out in the ECJ ruling (Mercedes Case) meaning that the structures were actually lease purchases. Under another ECJ ruling (Eon Capital), lease purchase schemes are a supply of goods and therefore not entitled to the "use and enjoyment" relief, therefore only operational leases are entitled to the relief as a supply of services.

The two tests set out in the Mercedes Case are as follows:

1:  Is there an economical expectancy that the lessee will acquire the goods at the end of the lease? If there is, then the structure is a lease purchase. Malta contended that because there was no option for the lessee to acquire the yacht, the scheme was a supply of services. However, the arguments against this are as follows:

  • That the whole purpose of the scheme is to pay VAT under the reduced rate and acquire a VAT paid yacht at the end of the lease period.
  • Whilst there was no option to acquire, the client owned both the lessee and lessor companies and therefore should not require an option.
  • There was no economic facility for the lessee to structure a new lease on completion of the first lease period.
  • During the many years the leasing scheme has been in place, no yacht was ever not acquired by the lessee.

2:  If the total amount paid by the lessee during the lease period is equal to or more than the acquisition price paid by the lessor then the structure is a lease purchase scheme. In the leasing scheme, the lease payments were based on the acquisition price, usually payable over one year in four equal payments, plus an additional residual payment of one percent.

Following the success of the Monaco Rental Solution, Dominion Marine have recently established a second Rental Solution in Cyprus. In both Cyprus and Monaco, we have the full support of the local Government and all clients are pre-approved by the authorities before commencing the applicable Rental Solution.

The reasons why the Rental Solutions meet the tests laid out in the Mercedes Case, and are clearly an operational lease, are as follows:

  • There is no expectancy that the renter will acquire the yacht at the end of the rental period.
  • At the end of the rental period, it is expected that the client will enter in to a new rental agreement.
  • If the yacht is acquired at any time during the rental period, then the VAT will be payable at the full rate in the jurisdiction in which the yacht is moored at the time of acquisition.
  • The total rent paid during the rental period is only a fraction of the acquisition price.

Guidelines to the new Malta Leasing Scheme have been drafted but continue to be delayed in being formalised. What is certain is that the lease will be for a minimum of 5 years with an increased VAT payment at the end of the lease, resulting in the scheme no longer being cost-effective for clients wishing to purchase a Superyacht.

The conclusion of this whole saga is that the only alternative to paying VAT in full on the acquisition of a superyacht for EU clients is to use the socially acceptable Rental Solution in either Monaco or Cyprus.

For further information on our Cyprus & Monaco Rental Solutions, including our VAT comparison chart, please do not hesitate to contact us.

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