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Malta has one of the largest ship and yacht registries in the world. Over the past years and particularly since Malta’s accession to EU membership in 2004, Malta has become a hot spot for the private and super yacht industry. More recently, yacht owners and the yachting industry in general has shown additional interest in Malta thanks to special VAT rules on finance leasing of yachts. These rules, coupled with excellent yacht servicing and maintenance facilities and Malta’s strategic location in the Mediterranean have lead to a significant growth in the Maltese yachting business over the past years.

VAT treatment

Maltese VAT legislation contains special rules dealing with finance leasing of yachts – in short, these rules represent an interesting tax planning opportunity for owners and financiers and a reduction on the VAT incidence on finance leasing of vessels. These rules are particularly attractive for yacht owners who wish to use Malta as a base for the importation or purchase of a new yacht into or within the EU.

Finance leasing is a contract which provides for the lease of a yacht by the lessor to the lessee in return for a fee and also provides for an option by the lessee to purchase the yacht at the end of the lease period at a price which is typically calculated as a percentage of the value of the vessel. A service consisting in the leasing of a yacht takes place where the lessor is established for VAT purposes. Where the lessor is established in Malta and registered for VAT in Malta, the lease will be subject to Maltese VAT.

Due to Malta’s proximity to non-EU waters, many yachts that are leased in Malta are effectively used within non-EU waters and therefore Malta treats leasing services as subject to Maltese VAT to the extent that their effective use and enjoyment is within the EU. Owing to the objective difficulty in establishing the time spent by the yacht within and outside EU waters, Malta has adopted a simplified method to determine the duration of the use of the yacht within and outside EU waters. This method is based on the length of the yacht and the method of propulsion as illustrated below:

The lease payments are subject to the standard Maltese VAT rate of 18% but VAT is charged on the portion of the lease payments that is attributable to the use of the yacht in EU waters. In order to qualify for the above reductions in VAT, the rules prescribe a number of conditions, mainly:

• the lessor must be a Maltese person or a Maltese company and required to register for VAT in Malta
• the lease contract must provide for an option of the lessee to purchase the yacht at the end of the lease at a percentage of the value of the yacht - this option to purchase is taxable at the standard rate of 18%
• the finance lease agreement and the value of the yacht must be approved by the VAT Department prior to the commencement of the finance lease.

At the termination of the finance leasing arrangement, the VAT Department will issue a certificate to the lessee confirming that full Maltese VAT has been paid on the yacht provided that all VAT has been duly accounted for and paid.

Income tax issues

The chargeable profits realised by the lessor company are subject to corporate tax at 35%. Chargeable profits will typically consist in the overall mark-up realised by the lessor less expenses incurred in the production of the income. Upon a distribution of dividends by the Maltese lessor company to the shareholders, the latter qualify for a refund of part of the tax paid by the company on the distributed profits. The refund is 6/7ths (or 30%) of the tax paid by the company and therefore, the expected overall tax burden will be in the region of 5%.

Other issues

Maltese law does not provide for a possession tax on yachts nor is a transfer of a yacht subject to duty or other taxes.

This article was published in the AIJA E-Zette. the full publication (PDF).