Yacht Registration
Yacht Registration: Cyprus the Preferred Location
YACHT LEASING SCHEME
On 13 March 2012, the Cyprus VAT Authorities announced the implementation of a new yacht leasing scheme though the issue of Circular 163 (updated under Circular 198 issued on 25th November 2015) (the “Yacht Leasing Scheme”) making Cyprus one of the most attractive EU jurisdictions for yacht registration.
As a result of the Yacht Leasing Scheme, the VAT on the purchase of a yacht can be reduced to as low as 2.42% on the initial value of the yacht, a rate that compares favorably to the 5.4% applicable in Malta under their corresponding yacht leasing scheme.
Under the Yacht Leasing Scheme a Cyprus company can enter into a lease-sale agreement of a yacht with a third-party paying only a percentage of VAT compared to the standard VAT rate of 19%. Such percentage is based on the time the yacht is deemed to sail within EU waters and, as analytically set below, this percentage has been predefined by the Cyprus VAT authorities based on the length and the type of yacht (motor or sailing).
GUIDANCE TO THE YACHT LEASING SCHEME
Interpretation
The yacht leasing agreement is an agreement whereby the lessor (the owner of the yacht) contracts the use of the yacht to the lessee (the person who leases the yacht) in return for a consideration.
Such an agreement can, at the end of the lease period, provide the option to the lessee to purchase the yacht at a fraction of the original price. Such final purchase is strictly an option which may be exercised by the lessee, at the end of the lease period, for a separate consideration.
Vat Treatment
For VAT purposes, the leasing of the yacht is considered as a supply of services with the right of deduction of input VAT by the lessor. This supply of services by the lessor is taxable at the basic VAT rate of 19% but only to the extent that the leased yacht is used within the territorial waters of the European Union (“EU”) (refer to Table A and Table B below).
A strict condition which applies is that the lessor must be a company registered in Cyprus, whereas the lessee can be any natural or legal person, irrespective of country of incorporation or residency[1].
From 1st January 2013 the place of supply of pleasure yachts (except short-term leases) is the country where the yacht is made available to the recipient-lessee.
Calculation of Use in EU Territorial Waters
For the purpose of calculating the use of a yacht within EU territorial waters and due to the inherent difficulty of tracing the movements of each yacht in order to determine the time that the yacht is used within the territorial waters of the EU and the time it is used outside the EU, the Yacht Leasing Scheme provides that Cyprus VAT will only be applied on a percentage of the lease depending on the length and type of the yacht (motor or sailing yachts), without the need to maintain for VAT purposes, any detailed record or log books of the movements of the yacht.
VAT RATES APPLICABLE
Tables by the Cyprus VAT authorities setting the applicable presumed percentage of use of the yacht in EU territorial waters and the effective VAT rate:
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* The effective VAT rate takes also into account that the final installment for the purchase of the yacht should not be less than 2.5% of the initial value of the yacht and that such final payment will be subject to the standard VAT rate applicable (i.e. 19% without any discount on presumed percentage of use within EU territorial waters ).
CONDITIONS
ALL of the following conditions must be met in order for the VAT treatment prescribed in the Yacht Leasing Scheme to apply:
- A lease agreement is concluded between a Cyprus company registered for VAT in Cyprus, and be any natural or legal person, irrespective of country of incorporation or residency[2].
- The yacht arrives in Cyprus within 1 month from the date of inception of the lease agreement. Any extension of aforementioned time limit may only be given by the VAT Commissioner. Such extension shall not exceed, under any circumstances, the time at which the option to purchase the yacht is exercised.
- At the inception of the lease agreement an initial payment amounting to at least 40% of the value of the yacht must be paid by the lessee to the lessor.
- Lease payments should be payable on a monthly basis and the agreement for the leasing of the yacht must not be less than 3 months (91 days) and in no circumstances more than 48 months.
- The lessor is expected to have a profit from the lease agreement of at least 5% of the total value of the yacht. At the inception of the lease agreement, the total amount of the lease payments on which the VAT is accounted, is increased by the half of the profit i.e. 2.5%.
- The yacht may be purchased outright by the lessee at the end of the lease period. The final payment should not be less than 2.5% of the initial value of the yacht. Such final payment will be subject to the standard VAT rate in effect at the date of payment (i.e. 19%).
- A written approval must be received in advance by the Commissioner of VAT, who will calculate the presumed percentages of use within the EU territorial waters. The application should be accompanied by the certificate indicating the price of the yacht (surveyors valuation and bill of sale) along with the lease agreement between the lessor and the lessee.
VAT CERTIFICATE
On entering into the scheme, the VAT Authorities will issue a provisional VAT paid certificate. In the case where the lessee exercises the option to buy the yacht at the end of the lease period, the VAT authorities will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that all the VAT liability has been paid.
OTHER TAXES
Stamp duty:
Cyprus stamp duty is levied on ‘documents’ (i.e. written agreements/contracts) relating to assets located in Cyprus and/or matters or things taking place in Cyprus.
Stamp duty is calculated on the value of the agreement at 0% for the first €5,000, 0.15% between €5,001 and €170,000 and at 0.2% thereafter. As of March 2014 onwards, stamp duty due on agreements effected is capped to a maximum of €20,000 per stampable agreement. The person legally liable to pay such stamp duty (unless otherwise stated on the agreement) is the purchaser. The due date for such stamp duty payment is within 30 days from the day of the ‘signing’ of a document which is considered to be subject to stamp duty.
In order to be able to obtain the approval of the Cyprus VAT Authorities to use the Yacht Leasing Scheme, the lease agreement must be duly stamped.
Income tax:
In addition to the VAT liability on the Yacht Leasing scheme there are also income tax implications resulting from the acquisition, leasing and usage of a pleasure boat under the scheme. These are set below:
- The lessor company is subject to 12.5% Corporation tax on 5% of the value of the vessel (section 33 of Income Tax Act
- Any expenses such as accounting, audit e.t.c. will be disallowed in reaching the net margin of 5%
- No capital allowance is allowed to the lessor
PRACTICAL EXAMPLE
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| VAT and Tax liability calculation | |||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Total | |||
| € | € | € | € | € | |||
| VAT Impact | Effective VAT rate | ||||||
| Balloon payment | 8,400,000 | 3.8% | 319,200 | 319,200 | |||
| Monthly lease payments | 273,438 | 3.8% | 124,688 | 124,688 | 124,687 | 124,687 | 498,750 |
| Residual value | 525,000 | 19% | 99,750 | 99,750 | |||
| Total VAT | 917,700 | ||||||
| Tax impact | Effective Income tax rate | ||||||
| Taxable profit for the year | 1,050,000 | 262,500 | 262,500 | 262,500 | 262,500 | 1,050,000 | |
| Income tax per year | 12.5% | 32,813 | 32,813 | 32,812 | 32,812 | 131,250 | |
| Total VAT and Income Tax | 1,048,950 | ||||||
| Effective tax rate | 5.00% | ||||||
From the above table it is concluded that the effective rate of tax for the particular yacht is 5.00% (€1,048,950/€21,000,000).
PROPOSED STRUCTURE
HOW CAN LSTS ASSIST YOU
- Set up the required legal entities to hold the yacht
- Draft the required lease agreement
- File all necessary documents for participating in the scheme
- Comply with all subsequent requirements after joining the scheme
[1] Even though the lessee can be any natural of legal person, irrespective of country of incorporation or residency, we recommend that a Cyprus company is also used.
[2] Even though the lessee can be any natural of legal person, irrespective of country of incorporation or residency, we recommend that a Cyprus company is also used.
[3] The effective rate is calculated as the presumed percentage of use within EU territorial waters (i.e. 20%) on the standard VAT rate (i.e. 19%)
[4]The final payment should not be less than 2.5% of the initial value of the yacht. Such final payment will be subject to the standard VAT rate in effect at the date of payment (i.e. 19% from 2014)
