Croatia to become 28th Member State of the European Union

Croatia will become the 28th Member State of the European Union on 1 July 2013.  According to Moore Stephens Isle of Man, the EU’s customs and fiscal territory will thereby extend solidly to the Western Balkans from that date.

Not that the yachting community needed reminding. Croatia’s entry has already been keenly noted and trailed - for more here-and-now reasons. First is the country’s natural assets. With its long ‘dalmatian’ coastline, its myriad coves, islands, channels and exceptional water quality, Croatia has been a magnet for yachting activity in the periphery of the EU.

Second, the Island archipelago has made much of these natural assets, which it promotes vigorously to the yachting industry in its special ‘nautical tourism’ strategy as a valuable part of its economy.

Third, lying just in the offing on the other side of Italy, where EU VAT was never an issue, Croatia provided the nearest foreign shore for yachts to touch on that side of the Adriatic or the Med in order to evidence tax-free export from the EU or tax-suspended temporary admission from outside the EU.

Thus despite being outside the EU’s fiscal fence, Croatia seemed to pick up the rebound benefits of EU yachting. Fourth, Croatia’s own yachting taxation regime, familiar but now bound to emerge in sharper relief, will remain largely intact in the enlarged EU which it is joining, on top of the EU VAT regime it must adopt.

Therefore the “substantial opportunities” anticipated by the Eurocrats will throw corresponding challenges and tensions too.

Five, and as if to prove the point early, Croatia introduced in November 2012 a new reduced VAT rate on yachts which, while turning heads, has created a bit of a stir which has landed the country in a tricky place.

By any standard that is a mixed balance sheet and a lively portfolio for an accession country to bring on the cusp of a new age in EU yachting VAT; and when this change is due to happen in only a few months’ time that concentrates minds.

The real surprise though is that not so many pleasure yachts are winging it to Croatia to avail themselves of the opportunity – at least, not yet. Croatia’s colours are radiant and its flag remains on the prized White List of the Paris MoU. Croatia is a member of the International Maritime Organisation and of the International Labour Organisation. It therefore applies all the conventions, protocols and codes as well as any other instruments and rules adopted under the auspices of these organisations. As concerns the registration of vessels, the conditions and procedures are laid down in its basic act of maritime legislation, which has been aligned with the relevant EU regulations as part of its preparations for membership.

Even the previously archaic technical rules for statutory certification, the restrictions on foreign companies and crew nationality have been reformed, and all indications point to a foreign owner not being caught up in local taxation by the simple act of flying the Croatian flag. So why is Croatia’s party turning out to be a bit of a damp squib?

Is it unfortunate timing? The pleasure yachts likely to be interested that are already in the Med are just beginning to stir from their winter hibernation. Those that were out and away in the Caribbean are only just making their way back.

Or is it the aforementioned reputation for petty officialdom? That cannot be discounted: the Croatian Register of Shipping (CRS) may have undergone massive reform, but old habits die hard. It is still a collective of harbourised registers, with register books consisting of inserts and folios, not an electronic register. The much that is new there currently is untried. Besides, by its own statistics the majority of yachts registered with the CRS are of the under 20 metres category, so the larger yachts would be trailblazers. Footloose yachties tend to be repulsed by too much formality and uncertainty.

But perhaps the likeliest explanation is the cold comfort poured over the measure by the European Commission once that eagle-eyed institution had noticed it. Commenting on the matter in its final Monitoring Report assessing the progress made by Croatia in its preparations for accession in the period between 1 September 2012 and 28 February 2013 [issued on 26 March 2013], the Commission is admonishing at best:

“Croatia introduced in November 2012 a new reduced VAT rate on yachts (sport and pleasure boats), which is contrary to the EU acquis but which will be aligned by accession. This may encourage releasing boats for free circulation in Croatia before accession. Croatia should without delay reverse this situation.”

All of which could explain Croatia’s apparent quandary and coyness in pushing the scheme hard and loud once it has been launched. In the brave new world of yachting taxation within the EU, national easements such as this and club rules can indeed clash. Croatia will of course “reverse this situation” by the date it integrates itself fully into the EU machine – after all that 5% VAT rate for pleasure yachts is designed to be short-lived. But even that admonishment from the Commission implies that Croatia is allowed just enough time to play her hand well and safely to pull in those yachts by 31 May. In those circumstances there could be no realistic comeback on the taxpayer picking up the bargain in good faith.

In the end the pleasure yachts that will take Croatia’s generous fiver will be the courageous ones; but there is no legal impediment or pragmatic reason why they should not avail themselves of the opportunity.