Tax breaks for yachts. The European Commission adopts further measures against Italy and Cyprus

On 25 July 2019, the European Commission took further steps to end illegal tax breaks in the yacht industries of Italy and Cyprus.

The measures follow those adopted in November 2018and in March 2018regarding the system of exemptions for fuel used to power chartered yachts in EU waters and the levying the correct amount of VAT on the leasing of yachts.

In particular, the Commission decided to refer Italy to the Court of Justice for the EU for its failure to address an illegal system of exemptions for fuel used to power chartered yachts. The Commission noted that Italy allows chartered pleasure crafts such as yachts to qualify as ‘commercial’ even when being enjoyed for personal use, which may allow them to benefit from excise duty exemption on fuel used to power its engines, resulting in a breach of applicable EU law. Under EU excise duty rules, Member States may decide not to tax fuel used by a navigation company for commercial purposes, i.e. the sale of sea navigation services. However, an exemption should only apply if the person leasing the boat sells such services to others.

The Commission also sent reasoned opinions to Italy and Cyprus for having reduced the VAT base for the lease of yachts. Under EU VAT rules, tax exemptions are allowed for services when the effective use and enjoyment of the product is outside the EU. However, the rules do not allow for a general flat-rate reduction without proof of where the service is actually used. Cyprus and Italy have established VAT rules according to which the larger the boat is, the less the lease is estimated to take place in EU waters. Therefore, the applicable VAT base can be substantially reduced. The two States have two months to act on the reasoned opinions.

Sara Capruzzi