In the beginning
The French Commercial Exemption (“FCE”) was first introduced into national law in 2004 as a clever piece of legislation, unique to France, designed to allow VAT exemption to the commercial activities undertaken by yachts operating within France.
The associated criteria that had to be met to qualify seemed relatively simple:
1. Hold a commercial registration;
2. Have a permanent crew; and
3. Operate under commercial charter terms.
And just like that, most items purchased under these rules would receive ‘exempt’ VAT status and critically, income from charters would not result in the charging or payment of VAT.
The turning point
But of course EU rules are controlled and monitored by the EU Commission from its headquarters in Brussels not Paris.
So in March 2010 the Commission, having reviewed the FCE rules, demanded that France change its legislation because it was deemed to contravene the meaning of the VAT Directive. Critically, the Commission hinted that arising from a recent EU court case (Bacino), despite holding a commercial registration; yachts were in fact designed and used for private pleasure purposes.
By the end of 2010, to satisfy the Commission and in attempts to save the FCE, France had amended its legislation by introducing a fourth criteria - the condition of navigating on the high seas – so that it could continue to apply the same exemption to yachts.
A shot to the foot
Ironically after making those legislative changes, at the end of 2010 France then issued an explanatory ministerial ruling in February 2011 which effectively bound the administrative authority to ignore that new fourth criteria.
No sooner had the EU Commission caught wind of this than it pounced and took France to court.
If somehow this surprised France, it came as no surprise to VAT experts when, on the 21 March 2013, the European Court of Justice delivered its decision that France had failed to fulfil obligations under the VAT Directive: the FCE was illegal and non-compliant.
So where are we now?
France has now scrambled to put together a proposal for consideration by the Commission and, with vast sums at stake, the industry now waits to see the reaction of the Commission later this month.
The proposal appears to cling to exemptions in certain respects of the yachting industry. However, there is certainly no foregone conclusion that the Commission will accept the new proposals. Indeed, in light of their previous emphasis on the Bacino case, there is a strong possibility that they will refuse it.
Given the speed at which these processes take to resolve, it is highly likely that a decision may not be received in time to be implanted before the end of the 2013 Mediterranean charter season. You could be forgiven by the way if you thought perhaps this was the intention all along.
In the meantime, what are yacht owners to do?
A good starting point is to first consider some questions:
1. Is charter revenue still exempt?
The FCE still remains as the national legislation of France. Until such time as it is amended, those rules will continue to apply. This means that charters can begin in France and, as long as they comply with the criteria, they will be exempt for VAT purposes.
2. Are purchases still exempt?
The rules regarding purchases under the FCE also remain.
However, it is still vital to ensure when purchasing that correct documents are provided and procedures followed because it is no secret that French authorities have a record of penalising yacht owners rather than suppliers when something is purchased incorrectly as exempt.
3. So, can I come to France and charter as before?
That really depends on how you have come to France previously and what you have done since.
Owners need to be conscious of the fact that the yacht (hull value) itself is NOT an exempt asset as far as VAT is concerned. If a yacht is brought into the European Union to conduct charters (a business activity), that yacht needs to be formally imported, VAT declared, and be able to evidence that fact.
There are recognised EU-wide documents specifically for such an import procedure and if the yacht does not have them, the owners are seriously at risk.
The rate of VAT in the EU can be anything up to 27% and there are perfectly legitimate ways to offset or recover this amount. However, if you ignore the first vital step of importing correctly, this is a damaging mistake.
The crystal ball
Whilst we await the Commission’s ruling on the new proposals, owners should prepare themselves for the strong possibility that if they continue to charter their yachts from France, they will need to supplement their position with a local French VAT registration. This registration in turn creates an obligation to account to local authorities for trading activity undertaken and that falls within the purview of France.
Because most yacht ownership structures are non-European, the appointment of a local representative will be required to establish this VAT registration and also to maintain the on-going administration and filing requirements.
It is vital then that owners engage with a qualified tax specialist in this area rather than employing agents who have merely adapted their traditional yacht operational services to ‘manage’ this critical aspect.
Get a good advisor on board to keep you in the loop.
Be prepared for change.
Watch this space and enjoy it while it lasts.
Grant Atchison is the director of the Moore Stephens Trust Company. He joined Moore Stephens in 2007. He provides expertise and guidance to clients on European VAT and import/export processing matters for yachts and aircrafts. He has 15 years' experience with Customs and Excise authority specialising in VAT compliance concerning European trade in goods and services. He has contributed at many worldwide industry events and conferences including; Monaco Yacht Show, Italian Superyacht Forum, International Corporate Jet Finance Conference, Posidonia and EBACE (European Business Aviation Conference and Exhibition).
Moore Stephens Isle of Man is an independent member firm of Moore Stephens International Limited. Moore Stephens International Limited is regarded as one of the world's leading accounting and consulting networks with 624 member and correspondent offices in some 101 countries.
Moore Stephens Trust Company Limited is a company incorporated in the Isle of Man No. 081489C and licensed by the Financial Supervision Commission of the Isle of Man. To learn more about our yachting and aviation services please contact me on +44 (0) 1624 662020, [email protected], skype ‘grant.atchison.msiom’ or visit our websites www.msy.im and www.msair.im.