One native speaker described it as ‘a very dense piece of Italian prose’. Another suggested a portside official in blue overalls, not an IVA insider, could have written it. And several heroic attempts made at rendering it into English for a wider audience have yielded only elliptical meanings at best. The Circolare No 43/E issued on 29 September 2011 in Rome by the Agenzia Entrate has been called many names already. But there is little doubt that it represents a rare statement of policy towards yachting by the Italian tax administration. It comes exactly one year after some unseemly drama at Italian ports and courts over yacht arrests there. Since then speculation about Italy has been rife, much of it an attempt to ‘gap-fill’ in the absence of comprehensive official information.
Time then for the Italian Revenue Office in Rome to shine a light. The Circolare No 43/E is cast as a ‘clarification’ of the Italian perspective on the VAT treatment of yachts and yachting transactions. In truth it is a cobbling together of answers to questions posed by the Pleasure Yachting Association in Italy, an industry body. It covers two broad areas. First is ‘territoriality’, meaning the extent to which transactions are taxed in Italy. Second is the applicability of the concept of VAT exemption in particular cases.
Of course neither of these aspects is new in wider EU VAT law. But their iteration would have particular resonance in Italy, because of recent anti-avoidance legislation introduced there to deal with perceived mischievous use of shell companies to avoid tax.
My Home Turf
The Circolare tells us that for the purpose of VAT the chartering and hiring out of a boat by a person identified for VAT in Italy is treated as a supply of services. This is taxable according to whether the boat is used within the territorial waters of the EU or not. “Use” and the consequent tax liability are currently defined by the place in the EU where the vessel is actually put at the disposal of the customer. Therefore, where a vessel is hired in say Sardinia for two months the hire will be subject to Italian VAT at standard rate regardless of who is hiring the boat and where it goes. However for some leasing arrangements beginning in Italy, where it has set a taxable percentage of deemed use in the EU, that taxable amount applies regardless of the duration that the boat is put at the disposal of the user. The concept of territoriality means the fact of putting the boat at the disposal of the customer in Italy counts above all else.
By the same token where a boat is put at the disposal of the user outside Italy but in another EU Member State, it is that Member State’s VAT that applies, not Italian VAT. So there would be no obligation to bring such a transaction to account in Italy. For boats put at the disposal of the customer outside the EU and not used in Italy, there is no Italian VAT chargeable. But where the boat is actually made available to the customer outside the EU but is used in Italy, Italian VAT is due at standard rate on the full amount of the consideration received, not at any discounted rate or any rate referable to the distances covered.
And Doing the Bacino Too
The Circolare also addresses the concept of exemption in connection with the hire of a commercial yacht. Essentially, exemption is only allowable in business-to-business hire, where the charterparty puts the yacht directly towards a commercial purpose. A ‘commercial purpose’ is defined narrowly under Italian legislation to include instances of dry lease to another professional party whose business it is to sub-charter the vessel. Other commercial purposes cited include: the provision of training and instruction in the art and craft of sailing; use by diving establishments for the provision of diving instruction and diving courses; and the provision of similar supplies where the vessel is used for sport or physical education.
By contrast, any hire to a final consumer intending to use the vessel for leisure or pleasure purposes is excluded from exemption. This is the case, even where such a transaction is ‘commercial’ in the ordinary sense, or where the vessel used is ‘commercial’ under standard yachting codes. The Circolare underlines this point by citing the ECJ’s ruling in the Bacino case (C 116/10) , which has become the perennial reference on this question for all EU Member States.
As to transactions involving the owner of the vessel and other connected parties, whether these can be of sufficient substance to constitute a business for VAT purposes, the Circolare is sceptical and dismissive. When companies claim to have purchased vessels for business purposes, it notes, these claims are to be examined with particular care. If they put their vessel exclusively to the private use of their owners or relatives - whether free of charge or for a consideration less than the market rate or indeed at a market rate - they are all in principle not considered to be in business at all for VAT purposes. This is because even where VAT is charged at an average market rate there is a risk that the VAT deducted on the purchase of the yacht itself and on the cost of the yacht’s operation would exceed any VAT charged to the connected persons in respect of the charters. Therefore exemption, whether on the purchase of the asset itself or on fuelling, provisioning, repair, maintenance, chartering and hiring, cannot be applied in such cases. VAT exemption was after all designed to facilitate activities between economic operators, not to enable purchase of assets to be used partly or wholly for private purposes.
The only exception, which could be made in the interest of ‘simplification’, was where the scale of the activity was such that the vessel is hired mainly to third parties whilst being occasionally made available to the owners at a market rate. This would be regarded as a business, and exemption would be possible. However in all other cases where there is substantial private use of the vessel the standard rules would apply. These require VAT to be paid first on purchase of the vessel and on the services provided with it, and then deducted only to the extent of business use.
For long-established businesses claiming exemption, the scale of activity as between third and connected parties can be determined by considering the revenue amounts and/or the number of days of use per vessel over the preceding two years. For new businesses without a history, the business could provide a two-year forecast of its activities, which can then be reviewed once historical data is available. Other factors, such as whether the vessel is managed by an independent charter broker, is advertised for charter in relevant media or can demonstrate by serious charter enquiry records that charters were being earnestly sought, may all be brought to bear on the determination of the prevailing character of the business for the purposes of claiming VAT exemption.
Bunker and Go
No examination of VAT on yachting is complete without considering fuelling and provisioning; and the Circolare does not disappoint. It confirms that for businesses that qualify for exemption on any of the foregoing basis access to tax-exempt fuelling and provisioning is allowable. This is also the case where the qualifying businesses are involved in preparatory and other activities directly related to their trade, such as moving the vessel in-between charters, sea trials, exhibitions and the like. These activities can be shown to be germane to their trade. By contrast, shipyards and similar facilities cannot be entitled to tax-free fuelling and provisioning on the same basis, since such activities are incidental to their main business.
The Circolare concludes with the rather parochial question as to whether tax exemption can apply to vessels which are used commercially but are not certified for the purpose with the Italian International Registry or, in the case of smaller vessels, various regional maritime incarnations of the Italian state, in accordance with Italy’s requirements on the matter. Answer in the negative, naturally. To be eligible for any consideration for exemption, vessels must be officially certified for their stated purpose as commercial vessels.
Circolare No 43/E is the latest of several VAT policy documents to be issued specifically to the yachting sector by an EU Member State. It does not break any new ground beyond its contextual relevance in Italy itself, but that does not make it any less significant. At a time when the burning questions on yachting VAT are causing EU Member States to each nail their colours to the mast, the Circolare reveals Italy’s colours as fundamentally conservative. That will not go unnoticed by the wider industry.
For more information, please visit Moore Stephens Yachting.