The VAT yacht leasing scheme has recently been a bone of contention for the EU and Malta has sought to appease the EU by amending the Guidelines Regarding VAT Treatment of Yacht Leasing.
These Guidelines state that should a lessee be provided with an option to purchase a vessel, being the subject matter of the agreement between said lessee and counter party lessor, at the end of the lease, then such lease will no longer be considered a supply of services, but a supply of goods and shall be taxed accordingly. Additionally, a VAT clearance certificate shall not be issued.
The stance undertaken by the EU was crystallized in Case C-164/16 Commissioners for Her Majesty’s Revenue & Customs v Mercedez-Benz Financial Services UK Ltd, 31st May, 2017 and by the opinion dispensed by Advocate General Szpunar. Click here for the case.
The case dealt with whether leasing agreements should be classified as a supply of goods or services, particularly in relation to lease agreements providing for an option to purchase the subject matter of the lease pursuant to the expiration of such lease. It was maintained that a predominant characteristic of lease agreements is that they substitute acquisition of ownership and that lease installments would normally cover the cost of acquisition, depreciation and financing of the subject matter.
The Court maintained that existence of a clause catering for a transfer of ownership at the end of the lease coupled with the lease installments being equal to the market value of the asset leased could lead to the lease agreement being classified as a finance lease, wherein the lessee is considered to be in a situation akin to that of an owner and that this agreement is a form of investment.
The EU Directive 2006/112/EC defines supply of goods as the transfer of the right to dispose of tangible property as owner whilst a supply of services is simply defined as one which is not considered as a supply of goods. Run of the mill lease agreements pertaining to assets that are not consumed, purport that the asset is, subsequent to the lease agreement, returned to the lessor. The Court surmised that the transfer of ownership at the end of the lease changes the very nature of the agreement from a supply of service to a supply of goods from its inception.
Hence, the Court asserted that if the sum of the installments corresponds to the full price of the leased asset and if exercising that option requires no further payments then it is presumed that, allowing the option to purchase is equivalent to effecting a transfer of ownership and hence to be considered supply of a good and VAT is to be levied accordingly.