This brush-up will elaborate about the Maltese VAT treatment of yacht leasing arrangements which may reduce the VAT rate on the lease and possible acquisition of a yacht to 5.4% of the original price of the yachts.

Guidelines of 24 November 2005
On 24 November 2005, the Maltese VAT Department published a set of Guidelines on the VAT treatment of yacht leasing arrangements entered into by Maltese companies to third parties.

The Guidelines relate to a leasing agreement with respect to a yacht, entered into between a Maltese company and a lessee, which may be either a company or an individual, whether resident in Malta or not.

Leasing agreement of a yacht
A leasing agreement of a yacht is an agreement whereby the owner of a boat, the lessor, contracts the use of the boat to the person who leases the boat, the lessee, in return for a consideration.

In addition, at the end of the lease period, the lessee may opt to purchase the boat at a percentage of the original price. The final purchase is strictly an option which may be exercised at the end of the lease for a separate consideration.

Treatment of the leasing agreement for VAT purposes in Malta
Since the leasing activities are considered to be business activities for VAT purposes in Malta, i.e. a supply of services deemed to be rendered in Malta, the Maltese lessor company has the right to deduct any input VAT incurred on the purchase of the yacht. However, in a typical VAT leasing arrangement a Maltese
company purchases a yacht from a European Union (EU) supplier, which, due to EU VAT laws, has a zero VAT impact.

The monthly lease payments are in principle subject to the standard 18% VAT rate in Malta. But VAT is payable only on that portion of the lease during which the yacht is in EU territorial waters.

Due to Malta’s proximity to non-EU territorial waters, it is deemed that the yacht will be used partly in EU territorial waters and partly outside EU territorial waters. Since it is very difficult to determine with precision the time the yacht has spent in EU territorial waters, the Maltese VAT Department has issued its own “deemed” length of stay in EU territorial waters.

The Guidelines indicate that this percentage will be determined according to the length of the yacht and its means of propulsion (power or sailing).

Conditions for the VAT treatment to apply

  • In order for the VAT treatment to apply the following conditions should be met:
  • The boat must come to Malta at the beginning and the end of the lease agreement.
  • A leasing agreement shall be entered into between a Maltese company and any Maltese or foreign person or company.
  • The leasing agreement must provide that an upfront payment shall be made by the lessee to the lessor amounting to 50% of the value of the yacht.
  • The remaining lease payments shall be payable every month and the lease agreement shall not exceed a maximum of 36 months.
  • The lessor would be expected to make a profit from the leasing agreement over and above the value of the boat of at least 5%.
  • If the lessee opts to purchase the vessel at the end of the lease, the purchase price should not be less than 1% of the original value of the vessel.
  • Prior approval shall be sought in writing from the Commissioner of VAT who must confirm the value of the yacht as well as the applicable percentage on which VAT is charged.

Please note that it is not required for the yacht to be registered under the Maltese flag.

VAT paid certificate
If the lessee opts to purchase the yacht and the end of the lease and all VAT is paid to the Maltese VAT authorities, an official VAT Paid Certificate would be issued. This certificate is essential for the free circulation of the vessel in EU waters, particularly given the noticeable tightening by VAT authorities in EU ports in recent months.

Income tax issues
The profits realised by the Maltese lessor company are subject to corporate tax in Malta at 35%. Upon a distribution of dividends by the Maltese lessor company
to its shareholder(s), the latter qualify for a refund of 6/7th (or 30%) of the tax paid by the company on the distributed profits, resulting in an effective tax burden of 5%.

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