To lease or not to lease

Guest Column

with Gianfranco Puopolo and Domenico Rinaldi

Gianfranco Puopolo and Domenico Rinaldi, of PG Legal’s superyacht team, assess the risks of using leasing schemes when purchasing vessels in Italy.

Guest Column

with Gianfranco Puopolo and Domenico Rinaldi

Leasing schemes are an alternative way to acquire a yacht as opposed to a standard sale and purchase. Such schemes, quite common in Europe, allow the ultimate beneficial owner (UBO) of a yacht to mitigate the VAT applicable to the purchase price and/or to defer the payment of the VAT. However, recent developments regarding anti-avoidance tax laws and anti-money laundering (AML) regulations have created serious doubts about using such schemes when purchasing a yacht in Italy.

AML rules and international information exchange agreements Italy has fully implemented EU directives on anti-money laundering (legislative decree No 231 of 21 November 2007 and subsequent amendments). These rules require Italian legal professionals to identify the UBO of corporate structures involved in the transactions for which they provide their professional services. This information is fully accessible to both the tax and judicial authorities. In addition, these professionals are required to report suspicious transactions (including tax fraud) to the national anti-money laundering authorities.

The past 20 years have seen a worldwide radical evolution of financial information exchange. Until a few years ago, it would have been unthinkable for Switzerland and Monaco to give out information on the beneficial owners of bank accounts; today, it’s normal. In this context, Italy has adhered to the Common Reporting Standard agreement and every year obtains the names of ultimate beneficial owners of bank accounts (even if they are formally in the name of corporate entities) located in foreign banks. Moreover, thanks to its network of double taxation conventions, Italy can carry out effective bilateral information exchanges with the tax authorities of other countries, both EU and non-EU. This means the UBOs of any corporate structure are visible to the Italian tax authorities.

General anti-avoidance rules (GAARs) GAARs are sets of rules to combat tax avoidance provided by the national legislation of many countries. Antiavoidance rules typically apply by focusing on the substance of a transaction or arrangement. One common feature is limiting or denying tax benefits when the economic substance of a transaction does not justify it. Italy is among those countries that have adopted general anti-abuse legislation. Indeed, article 10-bis of Law 212/2000 states “an abuse of law exists when one or more transactions lack any economic substance and, despite being formally in compliance with tax laws, are essentially aimed at obtaining undue tax advantages.”

For example, according to the above rule, Italy may impose VAT payment if a VAT exemption rule is applied for a transaction without economic substance, with the sole purpose of saving on taxes. In the worst-case scenario, this kind of transaction may also be considered a tax fraud, with criminal implications for all involved (for example, when the invoices underlying the transactions have never been paid).

The Italian leasing Until 2020, Italy applied a reduced VAT rate on leasing installments depending on the yacht’s length (6.6 per cent for yachts over 24 metres instead of the ordinary rate of 22 per cent). In such cases, leasing agreements had to be executed exclusively with authorised Italian companies such as banks and financial institutions. Therefore, this was a genuine financial operation with a third party, subject to all the conditions of the financing company. Since this tax regime is no longer applicable, Italian leasing contracts now don’t have any particular fiscal advantage.

Conclusions In light of the above, leasing schemes, including the most frequently used Maltese scheme, must be carefully assessed when they involve Italian residents, whether individuals or companies. Indeed, if such schemes present issues related to the economic substance or the ‘transparency’ of the parties involved, Italian authorities could easily investigate them.

For example, it must be carefully checked whether a leasing scheme:

1. Is carried out at ‘arm’s length’ value (to avoid objections of lack of economic substance);

2. Is not ‘circular’, that is executed between the same UBO with the absence of third parties (to avoid the accusation of ‘simulation’);

3. Is always executed in full, paying all the relevant leasing instalments (to avoid accusations of the fraudulent transaction).

In this regard, see judgment 89/13/2013 of the Liguria Regional Tax Court in a case that resulted from an investigation by the Guardia di Finanza (Finance Police). The court ruled that setting up a yacht charter company and then purchasing a single yacht, leasing it for years to the same person, was an operation to avoid tax obligations. Moreover, in this case, the agreed rental was far below the market price. Judgments of this kind have been increasing in recent years.

Therefore, it’s advisable to consult an Italian tax advisor, who can assess and/or exclude the risks (administrative and/or criminal) of applying the rules. GP & DR

Time for a touch of class

When is a defect not a defect? When it’s a negotiating tool, say Giovanna Cabbia of Clyde & Co and John Leonida of LP Squared.

The sale and purchase of nearly all superyachts is conducted using the MYBA Memorandum of Agreement (MYBA MOA). Last year, John Leonida, writing in this magazine, considered the MYBA MOA to be a cavalier document compared to the Roundhead that is the BIMCO Norwegian Sale Form 2012 (NSF2012), the sale and purchase document upon which most, if not all, commercial ships are bought and sold.

We were going to put the case for NSF2012 to replace the MYBA MOA, then we had a sleep thought. In the way that the standard MYBA MOA Addendum One originated from the documentation clause of NSF1993 (we know that because we added Addendum One to a MYBA MOA in July 1998!), perhaps there are things done better in NSF2012 which we might usefully import into the superyacht world.

The most common area of dispute within the MYBA MOA is Clause 27 which relates to defects found during the condition survey of a yacht. The original intention of the clause was to provide a mechanism for buyer and seller to agree either a new price or a scheme to rectify the defects. The unscrupulous buyer sees this clause as an opportunity to reopen negotiations on the original contract price, even if the defect complained about is not within the meaning of the MYBA MOA – that is, a defect that goes to the operational integrity of the yacht as certified by the buyer’s surveyor.

It’s not unusual for buyers to use an actual or questionable defect as a hook on which to drive down the price. The price renegotiation often has no link to the actual cost of remedying a defect, and if the parties don’t reach an agreement on the price reduction or repair works, the contract falls away, therefore adding pressure on a seller who has been marketing the yacht for some time, and there is often little appetite to jeopardise a real potential buyer on a technicality.

So how does NSF2012 deal with the same set of circumstances? The only defects contemplated are not subjectively within the control of the buyer’s surveyor but are objectively determined to be defects only if they affect the ship’s classification society status. It’s a typical superyacht delivery document that confirmation of class is delivered by the seller which confirms there are no conditions or recommendations on the vessel’s class records.

The effect of the recommendation or condition on any ship’s class record would effectively make it (and that includes superyachts) documentarily and potentially physically unseaworthy. If the ship’s classification society requires the defects to be rectified before the next dry-docking survey, the seller would have to rectify the defect to the satisfaction of the classification society without condition or recommendation. If, on the other hand, the defects can wait until the next class survey, clause 6 (ii) provides:

“If the Classification Society do not require the aforementioned defects to be rectified before the next class drydocking survey, the Sellers shall be entitled to deliver the Vessel with these defects against a deduction from the Purchase Price of the estimated direct cost (of labour and materials) of carrying out the repairs to the satisfaction of the Classification Society, whereafter the Buyers shall have no further rights whatsoever in respect of the defects and/or repairs. The estimated direct cost of the repair shall be the average of quotes for repair work obtained from two reputable independent shipyards at or in the vicinity of the port of delivery, one to be obtained by each of the Parties within two (2) Banking Days from the date of the imposition of the condition/ recommendation, unless the Parties agree otherwise. Should either of the Parties failed to obtain such a quote within the stipulated time then the quote duly obtained by the other Party shall be the sole basis for the estimate of the direct repair costs.”

In our opinion, redefining what is meant by ‘defect’ and limiting it only to matters that affect the class status of the yacht would remove the temptation to threaten to walk away or drive down the price. It would encourage potential buyers to undertake proper due diligence on a yacht before making a respectful offer that would be fixed and not open to renegotiation. Too often, the MYBA MOA is not outright and definitive. Perhaps it’s time it should be.