The new guidelines issued by the Cypriot VAT authorities make Cyprus one of the most attractive jurisdictions for yacht registration in the EU.
On the basis of the new guidelines issued by the Cypriot VAT authorities the effective VAT rate for yacht registration in the EU can be reduced to as low as 4.46% through the use of the Yacht Leasing Scheme.
The effective VAT rate on the lease payments is reduced to as low as 3.74%
What is a Yacht Leasing Agreement?
A Yacht Leasing Agreement is an agreement whereby the lessor (the owner of the yacht) contracts the use of the yacht to the lessee (the person who leases the yacht) in return for a consideration.
At the end of the lease period, the lessee may opt to purchase the yacht at a fraction of the original price. Such final purchase is strictly an option which may be exercised by the lessee, at the end of the lease period, for a separate consideration.
What is the VAT treatment of the Yacht Leasing Agreement?
For VAT purposes, the leasing of the yacht is considered as a supply of services with the right of deduction of input VAT by the lessor. This supply of services by the lessor is taxable at the basic VAT rate of 19% but only to the extent that the leased yacht is used within the territorial waters of the European Union (EU).
A specific condition which applies is that the lessor must be a company registered in Cyprus. The lessee may be an individual or legal person, irrespective of residence / place of incorporation.
How is the use of the yacht within EU territorial waters calculated?
Taking into consideration the inherent difficulty of trailing the movements of each yacht in order to determine the time that the yacht is used within the territorial waters of the EU and the time it is used outside the EU, the Yacht Leasing Guidelines provide that Cyprus VAT will only be applied on a percentage of the lease consideration.
The applicable percentages have been determined by the VAT Service and depend on the length and type of the yacht (motor or sailing yachts) and indicate the presumed length of use of the yacht in EU waters.
There is therefore, no need to maintain for VAT purposes, any detailed record or log books of the movements of the yacht.
Applicable VAT rates
The tables below indicate the applicable presumed percentage of use of the yacht in EU waters and the effective VAT rate:
| Table A: Motor Boats | ||
|
Length of yacht |
Percentage of use within EU waters |
Effective VAT rate on lease payments |
| Length over 24 meters | 20% | 4,46% |
| Length between 14,01 and 24 meters | 30% | 6,34% |
| Length between 8,01 and 14 meters | 50% | 10,08% |
| Length up to 8 meters | 60% | 11,95% |
| Boats allowed to sail only within protected waters | 100% | 18% |
| Table B: Sailing Boats | ||
| Length of yacht | Percentage of use within EU waters | Effective VAT rate on lease payments |
| Length over 24 meters | 20% | 4,46% |
| Length between 20,1 and 24 meters | 30% | 6,34% |
| Length between 10,1 and 20 meters | 50% | 10,08% |
| Length up to 10 meters | 60% | 11,95% |
Certificate confirming VAT payment
On entering into the scheme, the VAT Authorities will issue a Provisional VAT paid Certificate. In the case where the lessee exercises the option to buy the yacht at the end of the lease period, the VAT authorities will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that all the VAT liability has been paid.
Conditions
The VAT treatment prescribed in the Yacht Leasing Guidelines will apply if all the following conditions are met:
- A lease agreement is concluded between two Cyprus companies.
- The yacht arrives in Cyprus within 1 month from the date of inception of the lease agreement. Any extension of the above mentioned time limit may only be given by the VAT Commissioner. Such extension shall not exceed under any circumstances the time at which the option to purchase the yacht is exercised.
- An initial payment amounting to at least 40% of the value of the yacht must be paid by the lessee to the lessor at the inception of the lease agreement.
- The lease payments are payable on a monthly basis, and the lease period must under no circumstances exceed the period of 48 months.
- The lessee may purchase the yacht at the end of the lease period, for a final consideration of not less than 4% of the value of the yacht.
- The lessor is expected to make a total profit from the leasing agreement of at least 8% on the initial value of the yacht.
- The prior approval of the VAT Commissioner needs to be obtained for the application of the Yacht Leasing Guidelines in each case. Such approval will cover the acceptability of the initial value of the yacht and the applicable percentage of use within EU waters on the basis of which VAT will be applied. The application to the VAT Commissioner must be accompanied by documentation supporting the purchase price/value of the yacht and a copy of the lease agreement concluded between the two parties.
Income Tax Treatment
The total profit from the leasing agreement which amounts to 8% on the initial value of the yacht, will be subject to Income Tax at the rate of 12,5%.