The European Commission has announced its cracking down on VAT evasion in the yachting sector.

The move follows revelations contained in the Paradise Papers of widespread tax dodging in the purchase of private boats. The EU believes this evasion is facilitated by national rules which do not comply with EU VAT law.

The Commission has started formal action against on three EU state members – Cyprus, Greece and Malta – for not charging the correct amount of VAT on the provision of yachts.

The infringement procedures announced are specifically related to:

• The reduced VAT base for the lease of yachts – a general VAT scheme provided by Cyprus, Greece and Malta. While current EU VAT rules allow Member States not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use. Malta, Cyprus and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate.
• The incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as ‘lease-purchase’. The Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. This results in VAT only being levied at the standard rate on a minor amount of the real cost price of the craft once the yacht has finally been bought, the rest being taxed as the supply of a service and at a greatly reduced rate.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion. We cannot allow this type of favourable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end.”

Cyprus, Greece and Malta received letters by the European Commissions on Thursday 8 March and have been given two months to respond to the tax evasion claims.