The Cypriot VAT Department has published guidelines on the VAT Treatment of yacht leasing schemes applicable to pleasure yachts, thereby allowing yacht owners to benefit from the most attractive VAT regime within the EU during the currency of the lease agreement, and, at the end of the leasing scheme when they exercise the option to acquire the craft, acquire an EU VAT paid certificate on the pleasure yacht.
Closely modeled around a similar VAT scheme in use in Malta, the Cyprus Yacht Registration Scheme, represents however, a marked improvement on the Maltese scheme. Not only does it allow for lower levels of VAT, as low as 3.80% compared to Malta’s 5.4%, but also softer lease repayments over a maximum of four (4) years in lieu of Malta’s three (3).
Furthermore, the benefits to the Cypriot yacht leasing scheme, may, through the use of Cyprus non-resident companies (which are afforded tax exempt status) - further reading below - be further extended to the lessor, thereby ensuring significant tax savings for both contractual parties to the yacht leasing agreement.What is a Yacht Leasing Agreement?
In order to avail oneself of the advantageous VAT scheme, a financial leasing agreement must be entered into by a lessor and a lessee, whereby the lessee is granted the option to purchase the sea-craft at the end of the lease.
On pain of nullity, the lessor must be a Cyprus-registered entity (Cyprus Shipping Company) and the owner of the craft being made subject to the yacht leasing agreement. The craft may be brought either directly from the owner or if the craft is new, directly from the yacht-builder. Cyprus imposes no nationality restrictions on the lessee which may be a physical or legal person.What is the Applicable Rate of VAT
The Cypriot yacht leasing scheme hinges on the assumption that pleasure yachts may sail freely outside territorial waters, and that the larger the craft, the less time, the less time the craft shall be confined to EU waters. By analogy, the same reasoning has been extended to yacht leasing.
The Cyprus VAT Department issued clear guidelines setting the deemed proportion that the craft shall be deemed to be in EU waters. For the purposes of the scheme, a distinction is made on the propulsion of the pleasure yachts – crafts divided broadly into sailing and motor-powered crafts.
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). A specific condition which applies is that the lessor must be a company registered in Cyprus.
The lessee may be an individual or legal person, irrespective of residence / place of incorporation.
The VAT rates may be summarised in the table below:
What are the Conditions of Financial Leasing Agreement?
With the expertise of our in-house shipping department, availing oneself of this exceptionally advantageous VAT regime becomes a relatively easy and streamlined process.
The financial leasing agreement is characterized by the following set of rules:
(i) (i) The financial leasing must be between a Cyprus Company (lessor) and a lessee (no nationality restrictions);
Anonymity of both parties to the agreement is possible through the use of corporate holdings structures and/ or nominee shareholding
(ii) The Lessee must pay the Lessor an initial contribution amounting to at least forty percent (40%) of the value of the craft;
(iii) The Yacht must be in Cypriot territorial waters within one (1) month from the commencement of the lease agreement. The Commissioner of VAT, enjoys discretion to allow an extension of this period, provided that, such extension shall not, exceed the currency of the yacht leasing agreement.
(iv) The lease contributions shall be payable monthly – the applicable rate of VAT on these contributionss shall also be calculated in accordance with the Tables above.;
(v) The duration of the lease agreement shall not exceed forty-eight (48) months;
(vi) The lessor is expected to derive a profit from the lease agreement in excess of the value of the craft. The profit margin shall be of not less than five percent (5%) of the value of the craft;
(vii) In addition to the profit set forth in recital (v) above, the lessee, shall as compensation of the protracted payments paid to the lessor during the currency of the agreement, pay the lessor, interest equivalent to not less than five percent (5%) of the value of the craft;
(viii) Upon exercising the option to acquire the yacht, the purchase value at the last contribution of the lease shall not be less than two point five percent (2,5%) of the original value of the craft. This final contribution shall be subject to a standard rate of VAT at 19%
Which are the steps of the registration process?
The procedure for the approval of the aforesaid VAT scheme is subject to the following procedure:-
(i) Prior Approval from Cypriot VAT Commissioner;
The applicant should, on submission of relevant details of the craft, including inter alia certification and survey of the vessel, bill of sale, and such other documentary evidence as may be requested, submit an application in writing to the Cypriot VAT Department, for a prior confirmation of the applicable rate of VAT.
(ii) Register Cypriot Company;
Following the approval of the Cypriot VAT commissioner, the applicant must incorporate a Cyprus company, which company must have as its main trading objects, the power to operate, charter and manage yachts. The drafting of the Memorandum and Articles of Association shall be entrusted to our in-house legal counsel, to ensure compliance with the aforesaid requirements.
(iii) Cypriot company applies for VAT;
Following incorporation of the Cyprus holding company, a process that is typically expedited in five (5) working days, the Cypriot Company would apply for registration of a VAT number with the Cyprus VAT Department - this is a swift procedure, normally carried out in two (2) working days.
(iv) Cypriot company enter into lease agreement;
Having obtained its VAT number, the Cypriot Company shall execute the lease agreement with the lessee.
(v) Submission of Lease agreement and supporting documentation to VAT Department;
The Cypriot company shall then submit a copy of the lease agreement, together with the details of the yacht (certification, specification list, surveyor’s valuation, bill of sale if bought new etc;) to the Cyprus VAT Department, which shall issue a written issuance of the applicable rate of VAT.
(vi) VAT Department issues letter of approval
Following the comprehensive and satisfactory submission of the supporting documentation set forth in paragraph (v) above, the Cyprus VAT Department shall issue a letter of approval, confirming the applicable rate of VAT.
The advantages of the Yacht Leasing Scheme can provide very attractive VAT savings for even the smallest craft, provided this such craft is not confined, by means of its class or designation, to sailing within territorial waters. The VAT savings become even more significant if the craft is a sizeable vessel, as shall be illustrated in this textbook example:
(i) A motor propelled super-yacht worth twenty million Euro (€ 20,000,000);
(ii) The yacht has a length of thirty (30) metres;
(iii) The currency of the lease agreement shall be of 48 months; and
As of the commencement date of the contract, the lessee pays 40% of the value of the craft (i.e. 40% of € 20,000,000 = € 8,000,000, with the balance (€ 12,000,000) shall be re-payable over forty-eight (48) months.
The applicable rate of VAT, based on a vessel of this size, is 20% of standard rate (i.e 20% of 19% = 4.37%)
VAT Implications and Savings
The illustration shows how the VAT scheme has allowed the lessee of a VAT saving of over EUR 3.1 million!
VAT Paid Certificate
After the lessee exercises the option to acquire the craft after the end of the lease, and furnishes evidence thereof (i.e. invoice in relation to the aforesaid 5% and the applicable bill of sale), the Cypriot VAT Department shall issue a VAT paid certificate attesting that all VAT due has been paid on the craft.
Taxation of the Cyprus Company (lessor)
As set forth above, the lessor must be a Cypriot company. As a general principle, the corporate tax rate of Cypriot companies is 12.5% of taxable income. However in order to further extend the tax efficiency of the scheme, it is possible for the lessor to be registered as a Cyprus non-tax resident company, whereby the effective management and control of the company would be exercised outside Cyprus. Whilst the Cypriot company would still be registered for an EU VAT number (indispensible for the success of the scheme), the effective income tax rate would be 0%, as summarized in the following table:
The Cyprus Yacht Registration Scheme represents a truly important milestone in tax planning – providing the most effective, low-cost solution in the EU, allowing our clients to minimize their VAT and income tax leakages, whilst obtaining an EU VAT-paid certificate on the craft.
Our firm has a proven-track record in assisting clients reap full advantage of this highly advantageous scheme. By deploying the expertise of our international tax, legal and maritime counsel, we can structure the most beneficial tax structure for you.
Contact one of our officers for bespoke advice and start reaping the full benefits of this highly advantage Cyprus Yacht Registration Scheme. Send us an email on firstname.lastname@example.org