Words by Patrick Danis, Avocat-Associé CMS Francis Lefebvre Avocats.
On 29th July 2019, the European Commission initiated an infringement procedure against Italy before the European Court of Justice regarding their enforcement of VAT directives to yachts’ charter contracts1. These proceedings may likely result in Italy being forced to remove all tax exemptions
available for charter contracts, just like France did, three seasons ago. Commercial operation of yachts was traditionally based on the Charter Contract by which an owner would make their yacht and crew available, in an area and for a period of time defined by the charter party, to the charterer. In return, the charterer was liable for the charter fees and the additional
costs incurred by the use of the yacht, such as food provisions
and fuel bunker.
The European Court of Justice has stated (see Box) that
charter fees collected by the owner could not be exempted
from VAT when the charterer intends to make a private use
of the yacht as the end consumer. In a similar approach to the VAT ruling, European authorities also stated that the simple fact that a yacht was operating under a charter contract and commercially registered could not justify the excise duty-free delivery of bunker fuel for the use by the charterer during the time of the contract2. France has been complying with these obligations since October 2016. Italy has declined to do so, creating an unfair advantage solely based on non-compliance to the European ruling over which, French companies operating charter yachts on the French Riviera, bunkering for them or supplying goods, suffered noticeable economic impact. Therefore, a proceeding was initiated against Italy that had failed to change its laws despite receiving a reasoned opinion. Little doubt is left over the upcoming decision of the
Court where Italy’s failure to comply with the European law
regarding excise duty will be recognized. In this respect, it
would be beneficial that this ruling happens sooner rather
than later, allowing fair competition on the Mediterranean
1On the same day, the European Commission issued a reasoned opinion toward Cyprus and Italy, regarding the VAT regime these two countries apply to yacht charter.
2The Brussel’s Commission based its decision on article 14.1 of the 2003/96 Directive (27th of October 2003) that defines a ‘private pleasure craft’ as any craft used by its owner or the natural or legal person who enjoys its use either through hire or through any other means, for other than commercial purposes and in particular other than for the carriage
of passengers or goods or for the supply of services.
VAT AND CHARTER CONTRACTS, A BRIEF HISTORY
In the Bacino case (aff C 116/10 Bacino Charter Company), back in December 2010, the European Court of Justice (ECJ) ruled that charter fees collected by the owner could not be exempted from VAT when the charterer intends to make private use of the yacht as the end consumer. This principle was later confirmed by the ECJ in a decision dated 21st
of March 2013 (case C-197/12) against France, stating that it
was illegal to exempt operation of commercial vessels from VAT solely based on their registration as a commercial vessel and without proving their allocation to paid passenger transport in the high seas or another defined commercial activity. Finally, charter fees resulting from the hire of a commercially registered yacht are subjected to VAT following the territoriality criterion that applies to short term hire of means of transport (less than 90 days) and are enforced in
the EU country where the vessel is delivered to the charterer. It is to be noted that the part of the fee corresponding to the use beyond the national waters of said country are not subjected to the taxation.