The Cyprus Tax Department released on 23 December 2019 the Interpretative Circular 240 (VAT Tax), referring to the registration, in the VAT Registry, of Cypriot companies which operate in the business sector of leasing pleasure yachts (recreational boats) in Cyprus.
The aforementioned Circular applies to leases commencing from 23 December 2019 and after, introducing new procedures, which are in compliance with the European and Cypriot Law and most importantly are approved by the European Commission.
According to the said Circular:
- The legal entities (companies) which operate in the business sector of leasing pleasure yachts in Cyprus shall be registered in the Cyprus Tax Department (possessing a valid Cyprus VAT identification number), only in case there is appropriate evidence which justifies such business activity.
- All the leasing agreements which will be provided for the aforementioned reason, shall be scrutinized on whether they, in fact, provide leasing services (supply of service) for each of the leisure yachts. The final decision for the classification of leasing leisure yachts as providing such services will depend on the terms of the agreement between the lessor and lessee, as decided by the Court of Justice of the European Union (CJEU) in the case C-146/16 Mercedes-Benz Financial Services UK Ltd .
In accordance with the CJEU decision in the aforesaid case, agreements on purchase/lease of goods (including transportation means and leisure yachts), which:
- provide to the lessee with the option to purchase the good, and
- under the financial terms of the agreement, the exercise of the right to purchase seems to be the only economically rational choice,
they concern delivery of goods for taxation purposes and not supply of services.
In all the other instances where the aforementioned do not apply, the leasing will be considered as supply of services.
- For the determining of the place of supply of those services and specifically that the supply of the said services is taking place outside the European Union, the provisions of paragraph 3 (short-term leasing) and paragraph 14A (long-term leasing) of the Thirteenth Schedule of the Cypriot Value Added Tax ('VAT') Law of 2000 (Law 95(I)/2000), as amended, shall be applied. The aforementioned provisions correspond to article 59a of the VAT Directive 2006/112/EC. For this purpose, the lessor shall maintain detailed and sufficient evidence on the basis of which the percentage of use and enjoyment of the yacht within or outside the European Union will be calculated. The evidences shall be confirmed by the yacht's geotracking system (if existent on board) and/or the Bridge/Dock book. In such circumstances, it should be emphasized that in any case where the yacht has a geotracking system in operation, this will take precedence over any handwritten logbook.
- It is also pointed out that the application of the rule regarding substantial use and enjoyment found in paragraph 3, will be used only if its application is within the context of fiscal neutrality and proportionality, that is to avoid double taxation, non-taxation or distortions of competition. In cases where this rule is justifiably applied, it should be clarified that "use and enjoyment" of the yacht does not entail only the actual time of navigation, but also the time spent on board.
- Given that the legal entity (company) which operates in the business sector of leasing pleasure yachts in Cyprus is registered in the Cyprus Tax Department, the Commissioner of Cyprus Tax Department taking into account all relevant evidence provided by the lessor, may, for the purposes of protection the public revenue, request the payment of the whole amount of VAT, which is based on the market value of the pleasure yacht on the date of its acquisition or its importation in the Republic. Once the relevant evidence is placed before the Commissioner of the Cyprus Tax Department, explicitly confirming the use and enjoyment of the pleasure yacht outside the European Union, the Commissioner shall proceed, at a subsequent stage, to the appropriate adjustments derived from the provisions of the VAT Law.
- However, in order to proceed to such appropriate adjustments, the Commissioner must firstly confirm that the yacht is effectively used for the purposes of commercial activity. Furthermore, apart from the relevant log books and files which have to be kept, it is also compulsory for the lessor to keep a Bridge/Dock book (if kept by hand), otherwise there must be an ongoing geotracking system of the yacht, tracking her movement.
- Under no circumstances may a company be registered in the VAT Registry of Cypriot companies which operate in the business sector of leasing pleasure yachts, on the basis of pre-determined fixed percentages of the use and enjoyment of a pleasure yacht, within or outside the EU.
The Mercedes- Benz Financial Services UK Ltd (Case C-164/16)
(Request for a preliminary ruling from the Court of Appeal (England & Wales)
This case before the Court of Justice of the European Union (CJEU) clarifies what can be considered and characterised as "supply of goods" and what a "supply of services" in the context of Article 14 of the Council Directive 2006/112/EC ("VAT Directive").
Regarding the facts of the case under analysis, the dispute revolved around the classification of the handing over of vehicles pursuant to standard agreements subject to VAT. Mercedes offered three types of standard contracts for financing the use of motor vehicles. Concerning the first category, it was common ground between the parties that the standard hire agreement "Leasing" falls withing the category of "supply of services" and was subject to tax on each monthly instalment pursuant to Article 64 of the VAT Directive. That was also the case with the second category, the "Hire Purchase" agreement, which was agreed to constitute "supply of goods" within the meaning of Article 14(2)(b) of the same Directive and was chargeable upon the handing over of the vehicle. The disagreement concerned the third and last category, a leasing agreement with an option to purchase called "Agility". Total instalments of the "Agility" agreement represented only 60% of the vehicle sale price and if the user desired to exercise the option of purchase, he must pay the remaining 40% of the sale price.
While Mercedes claimed that the "Agility" agreement was a "supply of services" since it did not necessarily provide for a transfer of ownership, according to Her Majesty's Revenue & Customs ("HMRC") the agreement constituted a "supply of goods" and claimed full payment of VAT upon the handing over of vehicles. The Court of Appeal referred the matter to CJEU.
According to the Court the "Agility" agreement could be referred to as a "finance lease" or "hire purchase" and in order for such a contract to be considered a 'supply of goods' it should fall withing the meaning of Article 14(2)(b) of the VAT Directive and contain a clause expressly relating to transfer of ownership of the goods from the lessor to the lessee. In the present case the lessee was able to exercise an option to purchase by paying a substantial additional sum and therefore the goods are not acquired automatically if performance of the contract proceeds normally.
Following the aforementioned analysis the CJEU ruled that "the words 'contract for hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment', used in Article 14(2)(b) of the VAT Directive, must be interpreted as applying to a leasing contract with an option to purchase if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term, which it is for the national court to ascertain".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.