* * The European Court of Justice (ECJ) established clearly that the chartering of yachts cannot enjoy a VAT exemption as claimed prior to the Bacino case. VAT applies even to yachting charters with crew and even on the basis of International Passenger Transport. In Italy, where applicable, the final rate is of 6.6% on the charter fees.
On 22nd December 2010, the European Court of Justice (Third Chamber), ruled in the case known as “Bacino case” (ECJ Case C-116/10) of whether a VAT exemption applies to chartered yachts with crew. The ruling concerned the interpretation of Article 15(5) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes. A case in which Bacino Charter Company SA and Tax Authorities of Luxembourg were disputing VAT regulations applicable to charter activities.
Bacino assumed the charter activities were exempt from VAT because of international passenger transport (yacht with crew), whereas the Luxembourgish tax authorities claimed VAT was due as the vessel was a yacht and not a commercial vessel.
The European Court of Justice (ECJ) thereby clearly established that the chartering of yachts cannot enjoy a VAT exemption as claimed prior to this case. It was in fact established that VAT applies even to yachting charters with crew and even on the basis of International Passenger Transport. The Court considered the articles in European Law concerning VAT exemptions for vessels used for paid passenger transportation and for industrial, trading or fishing activities.
The court found that, when a vessel is used to practice such an economic activity, the VAT exemption applies. However, when the vessel is used by private persons for leisure purposes, VAT is due on the charter fee. So the Court found that when a vessel is used for leisure purposes, as is the case with chartering activities, the mentioned VAT exemptions cannot be applied and VAT is due on the charter fee.
Furthermore and more importantly, the Bacino case has clarified that regardless of where the yacht is registered or whether the ownership lies abroad, the legislative framework that applies to chartering yachts is always the EU VAT Sixth Directive. This means that for any type of boat (commercial or not), with crew or not, and independently of the country of ownership, VAT needs to be charged over the charter activities in accordance with the VAT legislation in the country of departure, i.e. where the yacht is put at the disposal of the customer.
However the way each country applies this new legislative framework with regards to VAT on yachting charters and at what rates, may slightly vary. Through a comparative study, one can conclude that Italy at the moment offers the most advantageous VAT rate where applicable.
In other words, The Italian Tax Revenue Office (Agenzia Delle Entrate) has decreed to implement VAT on charters. The charter of yachts within Italian Waters that are registered as Commercial Vessels and are used exclusively on “Charter” (Short-Term Hiring of a Yacht, not exceeding 90 days) cannot legally be exempt from paying VAT. But by using a combination of rules with regards to VAT in Italy on charter yachts above 24 metres of length overall, the related due VAT will normally be at a final rate of 6.6% of the total charter fees.
It is important to bear in mind that the normal Italian VAT rate is of 22% since the 1st October 2013. This means that the application of the above mentioned reduced VAT rate (6.6%) on charter fees it will not operate automatically, but as result of a combination of applicable rules and only if complying with the obligations well explained by the Italian Revenue Office: in certain cases it has been confirmed that the full rate of 22% of Italian VAT (IVA) can be applied only to a percentage of the total charter fees.
So if the motor yacht or sailing yacht is above 24 metres overall, the full VAT rate will be applied only to three-tenths of the total charter fees (22% of VAT on 30% of the total charters fee). This will therefore reduce due VAT to a final rate of 6.6% on the total charter fees as difference between the percentage taxed at full rate and the rest of the total charter fees. So while for yachts over 24 meters the full VAT rate applies to 30% of the total charter fees (in certain cases as per below), for a motor yacht of length between 16,01 and 24 metres the full VAT rate will apply on 40% of the total charter fees as well as sailing yachts of length between 20,01 and 24 metres and so on.
Furthermore, in order to benefit from the above mentioned reduction, the chartering company will have to obtain an Italian VAT No. (also known as Partita Iva or simply P.IVA) and comply with the annual obligations of submitting the related VAT returns in Italy at the competent Offices. The payment of due Italian VAT will have to be made directly at Banca d’Italia within precise deadlines and quoting specific tax codes. It is therefore advisable to appoint professionals to do so.
It is important to highlight that opening a VAT position for the chartering company does not involve a registration of a branch in Italy, but only the obtainment of a Italian VAT Number (P.IVA). The appointment of a VAT / Fiscal Representative or the direct identification became obligatory starting in 2011 as per Circular 43/E – September 29th 2011.
Also, some clarifications of the applicable general principles might be useful:
1. If a charter starts and finishes in Italy but, at some point, cruises 12 miles offshore into non-Italian Waters, VAT at a reduced rate of 6.6% will apply;
2. But if a charter starts and finishes in Italy and remains within 12 miles of the Italian Coast, VAT at the full rate of 22% will apply;
3. If a charter instead starts in another EU state before entering Italian waters, the VAT applicable in that state will apply;
4. Whether a charter starts outside the EU (e.g. Turkey) and then enters Italian Waters, then VAT at the reduced rate of 6.6% will apply only to the portion of the charter taking place in Italy, providing it is demonstrable; as well as if a charter starts in an Italian port but then cruises to a non-EU state.
Therefore a VAT of 6.6% might apply to most of the charters of 24 metres of length.
An example might be a good summary of all the above mentioned information: a Motor Yacht with a length of 25 meters. Charter Fees: Euro 100.000. VAT to be paid in Italy = Euro 6.600 which represents a VAT at 6.6% rate on the total or a full 22% VAT rate on only 30% of the charter fees as explained above.
We can assist for the entire procedure of obtainment of an Italian VAT Number, the payment of due Italian reduced VAT (where applicable) and the submission of the related VAT returns in Italy through the competent Authorities.
For more information and assistance, please do not hesitate to contact us: