Background

Malta’s position in the centre of the Mediterranean, its magnificent natural harbours and its warm climate makes it a natural choice for yacht owners. Over the years, Malta has also established a strong reputation in the industry by offering reliable solutions to yacht owners, depending on their specific requirements and the intended use of their yacht.

Main characteristics of the Guidelines

Earlier this year, the Commissioner for Revenue (“CfR”) issued a new set of guidelines (“the Guidelines”) in relation to the VAT treatment of the hiring of pleasure yachts, which shall apply to operating leases commencing on or after the 1st November 2018. In setting these Guidelines, the CfR has recognised the difficulty faced by the lessor of a pleasure yacht, at the start of a lease, to determine the geographical reach of the pleasure yacht during the term of the lease, especially in those situations where the lease payments are payable to the lessor in advance.

In order to prevent double taxation or non-taxation, the VAT Act1, in line with Article 59a of the EU VAT Directive, allows the CfR to consider the place of supply of the hiring of a pleasure yacht, if situated in Malta, as being situated outside the EU territorial waters if the actual effective use and enjoyment of such pleasure yacht is deemed to take place outside the EU. The Guidelines make reference to this section of the law but also provides additional conditions that need to be satisfied to determine the place of actual effective use and enjoyment of a pleasure yacht.

Calculating the output tax in the initial periods and in subsequent periods

According to the Guidelines, upon the inception of a new lease of a pleasure yacht which is intended to be effectively used and enjoyed outside the EU territorial waters, the lessor is required not to consider the expected effective use and enjoyment of the yacht, which in the past was estimated based on the size of the yacht and its method of propulsion, but to apply VAT as follows:

• If the lease of the yacht begins at least 30 days before the end of the tax period in which the lease commences (referred to as “the first tax period”), the lessor is required to charge the full VAT due on the consideration payable by the lessee during the first tax period.

• If the lease begins less than 30 days before the end of the first tax period, the lessor is required to charge the full VAT due on the consideration payable by the lessee for the first tax period and for the subsequent tax period (referred to as “the second tax period”).

Once the first tax period has elapsed (in the case of (i) above), or the first and second tax periods if applicable (in the case of (ii) above), the Guidelines oblige the lessor to obtain from the lessee “reasonable documentary and/ or technological data” in order to determine the actual use and enjoyment of the pleasure yacht during the tax period, or tax periods if applicable. This data is required to be used by the lessor to calculate the “Preliminary Ratio”, by dividing the actual effective use and enjoyment of the pleasure yacht within EU territorial waters by the total effective use and enjoyment of the pleasure yacht during that period. Since the lessor would have charged the full VAT during the first tax period/s, the Guidelines allow the lessor to make an adjustment for the tax overpaid by the lessor during the first tax periods (assuming that the calculated “Preliminary Ratio”
produces a result that is less than 100%), in its tax return for the tax period immediately following the first tax period/s.

This “Preliminary Ratio” is then required to be applied to estimate the effective use and enjoyment of the pleasure yacht within EU territorial waters for the following tax periods up to the end of the first 12 months (or less if the duration of the lease is shorter than 12 months) of the lease. 

At the end of first 12 months of the lease duration, the lessor is obliged to once again obtain from the lessee “reasonable documentary and/ or technological data” to determine the “Actual Ratio” of effective use and enjoyment of the pleasure yacht within EU territorial waters as a percentage of the total effective use and enjoyment of the pleasure yacht. 

According to the Guidelines, this Actual Ratio must then be used to calculate the actual output tax that should have been charged by the lessor during the preceding twelve months based on actual data. This is then compared to the output tax that was actually charged by the lessor during the preceding 12 months. Any difference should then be adjusted for by the lessor in its next tax return.

The Actual Ratio calculated for the preceding 12 months should also be required to serve as the “Temporary Ratio” for the subsequent 12 months. This ratio, which is an estimate for the next 12 months based on the actual data of the preceding 12 months, is required to be taken into consideration when charging VAT on the lease payments during the next 12 months. At the end of the next 12 months, the lessor is once again obliged to obtain “reasonable documentary and/ or technological data” from the lessee and repeat the process of comparing actual data against estimated output tax charged.

Concluding remarks

The Guidelines issued by the CfR in relation to the hiring of pleasure yachts strike a clear resemblance to the rules governing the calculation of the partial attribution ratio and should provide a more accurate method of applying the effective use and enjoyment principle set out in the EU VAT Directive. Having said this, the onus is now considerably shifted onto the lessor to obtain the data necessary to apply the Guidelines correctly.

Item 12 of Part Two of the Third Schedule to the VAT Act

A certified accountant and auditor, Mark is a Director at Mint Finance, a young accounting and audit firm established in 2017. He has previously worked within the Tax Department at one of the Big 4, where he specialised in indirect tax matters. He is also a member on the MIA Young Members Committee