New VAT Rules on Yacht Charters in France

The French Tax Authorities surprised the whole yachting industry in France by publishing a new tax bulletin last Friday, with retroactive effect from 1 November, which affects the way VAT on short and long term charters/leases is calculated.
 
Compared to Italy, France was very quiet on this topic these last months, so even though some changes were expected no one was expecting changes now and certainly not with retroactive effect.
 
Local Yachting Associations have already asked French Government “to show discernment and to measure the risk to which these new rules expose the entire nautical sector” mainly referring to the French Leasing Scheme as these new rules will certainly affect the French leasing and yachting industry.
 
With reference to the long term lease, the VAT rate applicable on lease instalments has always been 20%. 
 
However, French and Monegasque Authorities were accepting that Lessees who experience difficulties in making a real assessment of the proportion of time spent outside EU waters and regardless of the type of vessel, apply a flat base reduction of 50% on the taxable basis. (Article A-25 of the Monaco Tax Code / transposition of Article 172 of Annex II to the CGI both based on the provisions referred to in the Bulletin Officiel des Impôts, BOl n°15 of January 24, 2005). 
 
"The brutality and retroactive effect of this provision are unacceptable. This measure comes at a time when our companies are struggling to withstand the crisis and to safeguard jobs and know-how in the French boating industry" said the FIN.
 
Even though no infringement procedure has been made against Monaco and France with regards to long term leases and the way they assess the time spent outside of EU waters, we are not sure that local associations could obtain much if we consider the willingness of the EU Commission to put an end to all flat lump sum reduction regimes starting from 2020 as well as the technology available today.
 
So for now and as we speak, France has decided to align its position on Italy on the way they apply the reduction of the taxable basis in relation to the calculation of the VAT applicable on charter revenues and long term leases and abolish its flat lump sum reduction regime.
 
New rules can briefly be summarized as follows:

• All charters/long term leases starting in France are subject to the ordinary VAT rate of 20%;

• Same as in Italy, time and not distance shall be taken into account to evaluate the reduction of the taxable basis on the charter hire/lease during the course of a charter/long term lease, based on the time spent outside of EU waters;

• The effective use of a vessel under charter/long term lease agreement outside of EU waters is not subject to VAT;

• Evaluation of the time spent outside EU Waters will have to be proven by all possible means. For those vessels equipped with AIS, AIS data shall be the main mean of proof accepted by the Administration.  For vessels not equipped with AIS and vessels with an LOA <15 Meters, the calculation will be based on any technical data the vessel can provide in addition to the contract and log book entries;

• The new measures apply to all charters/leases signed after 1 November 2020.

If the new rules affect charters and long term leases, they will also undoubtedly impact commercial yachts operating under the French Commercial Exemption (FCE).
 
Quick refresher on the FCE rules:
 
To be able to operate under the FCE regime a yacht needs to comply with the 6 following cumulative conditions:

1. Commercial registration;
2. Commercial operation at all times;
3. Permanent crew.
4. Be over 15m in length;
5. Need to exit French Territorial waters at least for 70% of the trips carried out over a calendar year period; (A trip is a segment of a charter carried out between two ports during which existing passengers definitively disembark or new passengers permanently embark.)
6. Do less than 50% of static charters. 

The exemptions are granted on the basis of the previous year of assessment. 2020 shall therefore, in theory, be considered to assess whether a yacht can operate under FCE in 2021. 
  
For the yachts to be imported under FCE and for the ones already operating under FCE starting from 2022, the problem will be that the 70 % compliance also depends on the itinerary of the yacht during charters when the yacht is not controlled by the Ultimate Beneficial Owner.
 
If the fixed lump sum reduction of 50% of the taxable basis on the charter fees is not applicable anymore, and for let’s say local or not long distance charters, charterers will have no more interest in reaching out the high seas during the course of a charter, as the cost of the fuel to reach such waters will be higher than the VAT saved.
 
This means that in the future the vast majority of the yacht (at least small yachts and yachts not having a winter season outside of the EU) will not be able to comply with the FCE anymore which will lead to the yacht losing its VAT commercial exempt status with the following consequences:

• Supplies of goods and services will  no longer be made in exemption of VAT and will therefore be subject to VAT;

• VAT on the hull shall be required. 

These yachts will therefore have to be fully imported, meaning VAT would have to be paid and reclaimed or exported and reimported under the Reverse Charge Mechanism depending upon their specific situation.  In any event these yachts could not be operated under an exemption regime anymore but under the normal VAT regime meaning paying VAT and reclaiming and or deducting the same on the owning company’s VAT returns.
 
The requirements about carrying out a commercial activity will be remaining though to be able to reclaim or deduct VAT.
 
The above points would need to be clarified by French Customs and Tax Authorities now that the lump sum reduction regime is over.

As first published on Rosemont Yacht Services.