13 minute read
Why we’re clearing the muddy waters of superyacht taxation
Exploring the complex world of superyacht tax arrangements
TSG explores how attitudes towards tax structures have changed, using the Maltese leasing arrangement as an example, from the perspectives of owners and the market itself.
BY RORY JACKSON
Possessing a superyacht may seem simple in theory, but in reality there’s complexity at every stage of the ownership journey, and it could be argued that some owners have fallen foul of poor taxation advice and off-theshelf ownership structures.
“While I do think it's important to obtain unbiased and well thought through advice, this can come from a variety of sources when you take into consideration the different profiles of superyacht owners; the large accountancy firms will be right for many, but not for all,” says Nic Arnold, UK head of JTC Private Office. “Sometimes clients, especially if they are at the lower end of the superyacht size spectrum, may require a more straightforward answer. But they do still need a well thought through answer, and I believe it is incumbent on the superyacht industry to make it clear to clients that the fiscal aspects of owning a superyacht are often not as straightforward as it might initially seem, even at the smaller end of the market.”
Arnold argues that those within the more professional superyacht services, including corporate service providers, brokers and lawyers, need to be brave when dealing with potential owners by clearly outlining the potential complexities of superyachting. The industry is wider and more nuanced than many could imagine and the smallest of changes in an owner’s profile could have a profound effect on how their superyacht should be owned and managed.
“The tax world is more complicated than people realise at times,” adds Arnold. “The EU Commission is of course all over it, journalists are increasingly interested in tax matters and there has been a material shift in the attitude towards paying tax over the last five years. Clients will find it useful to talk to a friend or advisor that they know well, but within that conversation there needs to be the context and awareness that no one-size-fits-all solution exists in the superyacht space. The aim is to ensure that clients and their advisors are fundamentally thinking about the complexity of ownership and operation.”
There are, of course, risks involved in giving clients advice that threatens to ruin the allure of a simplistic superyacht purchase. For a broker, for instance, being entirely upfront about the complications of ownership structures and the need for clients to seek additional advice may lead to a slower sale, or it may be the case that taking additional advice and time may not necessarily fit in with the client’s expectations and meet the time restrictions they have placed on using the yacht.
“Simply put, education is the key here across the industry,” says Richard Simm, private client director at PwC. “It is easy to say this flippantly, but it’s essential that we spread the knowledge. At the very least we need to get more people in the industry to be aware of the key complexities and how easily things can go wrong for owners if the right approach isn’t taken at the right time. All too often, owners don’t know the right questions to ask without the guidance of those around them. Clear, holistic [that is multi-tax] advice that’s grounded in prior experience is key to gaining a clear picture before jumping into ownership.”
Simm, while espousing the use of better, clearer advice, is well aware that not all owners or owners’ reps have the time to be educated on the market’s various tax complexities or the inclination to educate themselves. The onus, therefore, must be on the industry to professionalise to the extent that it is sufficiently educated and able to signpost things for owners. This is not only good for owners and keeping them in the industry, but it will help protect those professionals and brands in the industry that could otherwise get caught in the crossfire when things go wrong. For example – where mistakes are made after a client moves forward with a structure or acquisition without being giving all the necessary information.
“If you are associated with a client deciding to go in a particular direction that seemed simpler, quicker or because it’s what the last owner did, and it goes wrong, then it is likely to come back to you unfortunately,” adds Simm. “There are so many examples we can give of tax structures going wrong at every stage that the industry needs to be aware of.
“It can go wrong at acquisition, it can go wrong when you cross a customs border, it can go wrong when you interact with a supplier on the ground, when you have guests on board and when you sell the yacht. At nearly every point, something can go wrong from a fiscal perspective – often based on events that took place many years earlier because of lack of awareness. This might result in penalties, double VAT charges, the yacht being impounded, guests having to leave or the yacht losing its VAT status. All these are examples that have happened in our industry. Owners having the right, well-informed support team from the get-go is essential.”
Richard Simm, private client director, PwC.
Perhaps the best example to highlight the evolution of superyacht taxation and ownership structures in recent years has been the development of the Maltese leasing structure and the broader development of its maritime/superyacht cluster. It must be noted at this point that there are a number of structures available to superyacht owners across a variety of well-respected nations. Nevertheless, the changes that have occurred in Malta showcase the direction in which the industry, and indeed its clients, has moved.
“Malta, given its maritime tradition, its geographical position at the centre of the Mediterranean Sea, its natural harbours and mild climate, has been a key player in the yachting industry for a number of years now,” says Mark Lautier, partner at PwC.
“Even prior to Malta’s accession to the European Union in 2004, there were a number of measures that sought to attract yacht owners to Malta including the possibility to acquire and register a yacht in Malta with the benefit of having a VAT paid vessel following Malta’s EU accession. From that point onwards, the measures continued evolving.”
What Malta offered at that time was largely modelled on similar arrangements applied by other EU Member States and consisted in the application of the ‘use and enjoyment’ principle contained in the EU VAT Directive and transposed in Maltese VAT legislation.
In brief, the arrangement provided that Maltese VAT should only be charged on that portion of the charter fee that relates to the ‘use and enjoyment’ of the yacht in EU waters. Furthermore, in order to provide an element of legal
Mark Lautier, partner, PwC.
certainty, VAT guidelines were issued by the Maltese Authorities (and which were regularly updated over the years) which set out the deemed use and enjoyment thresholds by reference to the size and mode of propulsion of the yacht.
“What you effectively had was a Maltese company, which acquires or imports the yacht in Malta for the purposes of chartering it out. On this basis, the Maltese company should be in a position to recover any Maltese VAT incurred on the acquisition or importation of the yacht,” adds Lautier. “On those charter payments, only that portion attributable to the use and enjoyment of the yacht in EU waters was chargeable to VAT in Malta at the standard rate of VAT in Malta, which is 18 per cent. Thus, in certain cases, the VAT liability on the entire charter arrangement could have been substantially reduced. It was an arrangement that was in place for a number of years and that had been fine-tuned along the way. It also reflected the fact that there was, and still exists, a strong preference in the yachting industry for leasing arrangements – mainly for non-tax reasons such as financing, cash-flow and asset ring-fencing reasons.”
According to Lautier, issues arose when new entrants to the market saw the opportunity that the superyacht market presented and started applying the above arrangement as a one-size-fits-all model. Some factions stopped thinking about the complexities and, arguably, the arrangements were being put forward with less diligence than was required.
“The success of the Maltese yacht leasing arrangement also began to raise attention and the Maltese leasing arrangement was put under increased scrutiny ,” says Lautier. “It also coincided with a key decision of the Court of Justice of the European Union (CJEU) which clarified when a leasing arrangement should be treated as a supply of a ‘service’ or a supply of a ‘good’ for VAT purposes. This judgement was particularly relevant in the context of the Maltese yacht leasing arrangement given that the ‘use and enjoyment’ principle mentioned
Nic Arnold, UK head, JTC Private Office
earlier only applies when there is a supply of a ‘service’.”
Lautier says the result has been to further polish the arrangement to make it as robust as possible and to continue to ensure that the lease arrangement as far as possible from a finance lease arrangement. The basis continues to be a ‘leasing arrangement’ that builds on the principle approved and confirmed by the CJEU that a person may opt for a leasing arrangement rather than a direct acquisition of the asset.
“We have now had a pure operational lease for a longer period of time, say seven to ten years, with no purchase option,” says Lautier. “The benefit of such a leasing arrangement is that instead of having a lump-sum VAT charge, you spread the VAT liability over a number of years. It is essentially a cash-flow advantage. Furthermore, we have noted that even without a VATpaid certificate, which was one of the unique selling points of the prior leasing arrangement, many yacht owners still opt for a leasing arrangement.
“What we have noted in practice is that having a VAT paid certificate, albeit helpful, is not essential. The purchaser, particularly in the case of superyachts, will probably also be considering setting up a leasing arrangement. Hence, the fact that VAT may be applicable on the sale and purchase of the yacht may be duly addressed with proper planning.”
That being said, the use of a leasing arrangement should always be explored on a case-by-case basis taking into consideration all relevant facts and not merely the cashflow benefit derived from spreading the VAT liability. Such other considerations include the owner’s
particular intentions, the size of the yacht, administrative costs and also the cost of transporting the yacht to Malta. What works well in one particular set of circumstances might not necessarily work in others.
The key to the development of the new system has been to understand the client rather than trying to fit them into an existing system and this is indicative of the direction in which the superyacht market as a whole should be moving when it comes to ownership structures. There have been cases where non-EU owners have flagged and structured the ownership of their superyacht in Malta, which effectively makes no sense when there are easier and more effective options for what they are hoping to achieve. Therefore, what does the client have in mind for the yacht’s use? What kind of yacht is it? Where was it bought? Has VAT already been paid or not? Where is the client domiciled? Where are their other tax liabilities?
“From a slightly wider perspective, we are talking about an arrangement that is an appropriate interpretation of the law and that now meets all the required criteria,” says Arnold. “You don’t get a VAT-paid yacht but you should get a perfectly viable solution for the right client. There are, however, things to consider beyond the legality of an arrangement and its practical implementation. Today, you have to consider whether or not you are the right client for any given arrangement from the perspective of media scrutiny and personal brand equity.”
When considering the use of any ownership structure, one must be wary of various characteristics beyond the cold legality of that structure. Is it likely, for instance, that if the arrangement was made public it could damage one’s personal brand? Could the loss of business as a result cost more than the savings made from the ownership structure? Is the structure so complex that it’s simply frustrating? Indeed, in recent years, there has been a gradual movement towards fiscal transparency and simplicity.
“I think there is a genuine movement within society as a whole, in much the same way that the tide of people thinking more sustainably has got traction over the last five years,” explains Arnold. “Where tax is concerned, people are bringing it into their strategic thinking when asking themselves, what are we doing and why are we doing it? What is our purpose? It feeds into that general societal debate and then it filters down into the superyacht industry.
“If, in order to get a low tax profile, you have to jump through many hoops, step into a world that you don’t understand or it seems too good to be true, then I would advise you to take a moment to consider whether or not a given structure is the right option for you. A lot more clients are looking to keep their tax interests uncomplicated and this may entail staying within your jurisdiction or paying VAT.”
A number of years ago there was a series of well publicised cases in which unwitting celebrities were convinced to use extremely complex taxation structures as a means to reduce their tax bills. These individuals had their names splashed across the newspapers and were vilified by the public. Later, the Paradise Papers highlighted the use (and occasional misuse) of perfectly legal tax structures.
Regardless of legality, those who were exposed as a result of the Paradise Papers still found their names all over the media, and their characters were brought into question. Today, HMRC and other authorities will no longer tolerate the extremely complex systems that were previously touted, and legitimate advisors are no longer offering such services. Not only have the perspectives of some superyacht owners changed, the tax market itself has also changed, and this is reflected in the evolution of the Maltese yachting cluster.
While Malta became known for its leasing arrangement and the various benefits to owners who used it, its success has spawned a whole professional cluster that not only offers leasing arrangements, but also provides the full suite of yachting services. Indeed, the same is true of Monaco, Cyprus and any number of other superyacht hubs. Legitimate advisors, such as those in Malta, should no longer be trying to pigeonhole owners into off-the-shelf-arrangements; instead they should be giving unbiased advice that will ensure any given structure or arrangement takes into consideration the full breadth of an owner’s profile and their various tax liabilities. By going back to the very beginning and asking the right questions, tax advisors, corporate service providers and various other stakeholders should be able to ensure that the headaches that have been associated with less than optimal tax arrangements are now avoided. RJ
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