The Cyprus VAT Authorities have recently announced the implementation of a new Yacht Leasing scheme though the issue of Circular 163 which describes the VAT treatment to be followed. The new Yacht scheme makes Cyprus an attractive destination in the EU for the registration of Yachts.

The application of the scheme is very simple and offers substantial advantages for the registration of Yachts within the EU. On the basis of the new guidelines, the effective VAT rate for yacht registration can be as low as 4.42% through the use of the Yacht Leasing scheme.

General

This special regime applies to yachts owned by a Cypriot company which are leased to physical or legal persons.
The purpose of this scheme is to simplify the way the use of the yacht is determined (i.e. whether it is used within or outside EU) by setting predetermined criteria with regards to the boat size and type.

Interpretation of the term“ leasing a yacht” and VAT treatment

For the purpose of this scheme a yacht lease agreement is an agreement under which the owner of a yacht contributes with the lessee for the use of a yacht for
consideration.
For Cypriot VAT purposes the lease of a yacht is subject to the standard VAT Rate (17%) provided that the leased yacht is used within EU waters.
In order to calculate under this scheme the percentage of use of the yacht within EU waters there is no longer the need to keep records (log books). Instead, the required percentage will be calculated based on the yacht’s size and type (i.e. engine or sails) based on the following tables.

Table A: Motor boats
Boat length                              Percentage(%) of use within EU                             VAT calculation
Longer than 24 metres                                 20%                                               20% of consideration x 17%
Between 14,01 and 24 metres                     30%                                               30% of consideration x 17%
Between 8,01 and 14 metres                       50%                                               50% of consideration x 17%
Up to 8 metres                                              60%                                               60% of consideration x 17%
Yachts only allowed to be used
within protected waters                              100%                                             100% of consideration x 17%

Example:
An 8 metre long motor boat is considered to be used for 60% of the time within EU waters, thus the lessor will charge the lessee with VAT on the 60% of the total lease consideration, whereas no VAT will be charged on the remaining 40%.

Table B: Sailing boats
Boat Length                                Percentage (%) of use within EU                                     VAT calculation
Longer than 24 metres                                   20%                                               20% of consideration x 17%
Between 20,01 and 24 metres                       30%                                               30% of consideration x 17%
Between 10,01 and 20 metres                       50%                                               50% of consideration x 17%
Smaller than 10 metres                                  60%                                               60% of consideration x 17%

Example:
A 15 metre long sailboat is considered to be used 50% within EU waters and 50% outside EU waters. Consequently, the lessor should account for VAT on the 50% of the lease consideration, whereas no VAT should be charged for the remaining 50%.

Conditions
In order for the Yacht scheme to apply ALL of the following conditions need to be met:
a. The lease agreement must exist between a Cypriot company and any legal or natural person, irrespective of origin.
b. The yacht should sail in Cyprus waters within one month of the commencement of the lease agreement.
c. The initial contribution from the lessee to the lessor must be at least 40% of the yacht’s value.
d. Lease payments are required to be monthly and the lease period cannot exceed 48 months.
e. The lessor is expected to earn a minimum profit from the lease agreement amounting to 10% of the yacht’s total value. In the year the lease agreement commences the total amount of lease payments on which VAT is calculated is increased by half of the calculated profit.
f. The final payment (which is the payment that actually transfers the ownership of the yacht to the lessee) cannot be less than 5% of the yacht’s value and is subject to the standard VAT rate (17%).
g. In order for the above percentages to apply a prior written approval from the VAT Commissioner is required. Thus, an application must be filed to the VAT Authorities accompanied by the lease agreement and the value certificate of the boat.

Deloitte comments:
The introduction of the above scheme will undoubtedly encourage the registration of yachts in Cyprus by high net worth individuals. This new scheme combines perfectly with Cyprus’ low corporate and personal tax rates and should be viewed favourably amongst jurisdictions with friendly and low taxes.

For additional information please contact Deloitte’s Indirect Tax Department in Cyprus.

Christos Papamarkides
cpapamarkides@deloitte.com
Tel: +357 22 360 420

Chrystalla Micheal
chmichael@deloitte.com
Tel: +357 22 360 821

Christakis Economou
ceconomou@deloitte.com
Tel: +357 25 868 891