There has been a lot of fuzz since June 2015 about the new French Commercial Exemption (FCE) conditions and enactment of the new French regulations governing VAT exemption (BOFIP 12.02.2015).
If the new conditions are now more precise, there are still many grey areas as to how these will work in practice and their long-term implications which need to be clarified by the French Tax Authorities.
In summary the position is as follows:
Up to 31 December 2015:
The following cumulative conditions were sufficient to qualify for the VAT exemption regime in accordance with art 262 II 2 of the French Tax Code:
In May 2015 France added two new conditions which were:
- Commercial registration;
- Commercial operation at all times; and
- Permanent crew.
From 1 January 2016 onwards the new rules are:
- Yacht over 15m in length; and
- Yacht needs to exit French Territorial waters at least for 70% of the trips carried out over a calendar year period.
To benefit from the commercial exemption in 2016, yachts should comply with the above 5 cumulative conditions and be able to provide the following documents to suppliers:
- Commercial Certificate of Registration;
- Certificate to trade;
- Crew list;
- Last charter agreement and future charter agreements if required;
- VAT registration certificate;
- Self Attestation of commercial activity signed on behalf the owning company;
- Formal proof of importation (DAU) for offshore registered yachts.
The Self Attestation must confirm that the yacht fulfils (or will fulfil for new deliveries/acquisitions) all and every condition for the application of the VAT exemption pursuant to paragraphs 2, 3, 6 and 7 of article 262 II of the French General Tax Code.
How to prove that the 70% condition is reached?
With the new 70% criteria France introduced the notion of a “trip”.
A trip is a segment of a charter carried out between two ports during which existing passengers definitively disembark or new passengers permanently embark.
For the calculation of the new 70% condition, a charter contract will therefore be considered as a trip if there is no change in the charter guests (no new embarkation/no permanent disembarkation).
A charter contract could include several trips if there are changes in the charter guests such as new permanent embarkation(s) or permanent disembarkation(s)).
Trips relating to a same Charter contract will be considered as qualifying trips valid for the 70% criteria and accounted for as such, but only if:
- part of each trip is carried out outside French Territorial waters (ie; international waters, Italy or other countries whether within the EU or not);
- each new trip is materialised by a change in the charter guests (new permanent embarkation(s) / permanent disembarkation(s)).
Trips relating to the same charter contract which do not comply with these conditions will not be taken into account for the 70% criteria.
It should be noted that sea trials, navigation towards a shipyard, boat show, delivery and redelivery voyages cannot be considered as trips as they are not considered as commercial trips.
Finally, static charters must also represent less than 50% of the charters made over a calendar year period.
Exemptions are granted on the basis of the previous year of assessment. 2015 charter contracts and trips must therefore be considered to determine whether a yacht qualifies or not for the 2016 year based on the formula below:
Number of trips during which the yacht sailed out of French Territorial waters during the calendar year preceding the year of application of the VAT exemption / (divided by) Total number of trips made during the same period = X
If X equals 0.7 or more the yacht will continue to benefit from the VAT exemption.
The computation of the percentage is calculated under the yacht operator’s responsibility and must be justified by all means in case of control by the Authorities.eg: logbooks, GPS, AIS screenshots, passenger lists etc…
Exemptions last for a single calendar year and are subject to yearly reassessment.
Does the new 70% condition required to qualify for the FCE affect the 50% allowance on the taxable basis relating to the VAT on charter fees?
VAT on charter rules remained unchanged.
The 70% relates to the yacht’s commercial exempt status, while the 50% allowance on the taxable basis concerns VAT on charters starting in French and Monaco waters. If a vessel cannot benefit from the VAT exemption on goods and services because she does not reach the 70% ratio, the yacht can still charter and apply the 50% allowance on the taxable basis for the calculation of the VAT on the charter fees, if part of the charter takes place in international waters (outside of 12 nautical miles).
What happens if the 5 cumulative conditions including the new 70% condition are not reached?
In essence, commercial yachts that fail to comply with all FCE conditions will be able to charter in 2016 but will no longer be able to enjoy VAT exemption on goods and services in France and Monaco.
Failure to comply with the 5 cumulative conditions will lead to the yacht losing its VAT commercial exempt status with the following consequences:
- Supplies of goods and services will no longer be made in exemption of VAT and will therefore be subject to VAT;
- VAT on the hull may be required.
The French Tax Authorities have not taken a firm position on how these new rules will impact the VAT on the hull nor clearly announced whether VAT paid can be claimed back, on what, and under which mechanism.
Grey areas which require urgent clarification:
The French Fiscal Administration still needs to take firm positions on the above and to clarify a few matters:
- Will VAT on the hull be required for yachts that do not comply with the 5 conditions anymore?
- If so, could this VAT be reclaimed and recovered on the basis that the owning company will continue to operate its yacht commercially?
- Can the owning company offset VAT paid by the yacht against VAT accrued?
- Can the owning company request VAT refunds? On what items? What would be the recovery mechanism?
- Can some derogations be obtained in certain situations for 2016 (eg: refit or yard period, sale, change of broker)
- Can the offshore registered yachts still be imported in exemption of VAT and if so, what extra conditions will be required, if any?
- What about yachts switching from commercial to pleasure registration and navigating in and out of EU waters? What criteria will be taken into account for the 70% ratio and the requirement to be commercially registered and operated at all times?
Some official questions have been raised with the French and Monaco Tax Authorities and replies are awaited. They will hopefully arrive before the start of the charter season. The new system is not clear and even the Authorities are not crystal clear on the way things will be operated after January 2016.
Our biggest concern relates to the VAT on the hull. We understand that the French Tax Authorities do not intend to touch that aspect for the time being. However, the risk is still there, and the amount at risk is significant.
Will these new unclear rules have the effect to continue to clean out the so-called “fake charter market” and increase the tendency for owners to “de-commercialise”? We think that they definitely could have this effect. Remember that confusion and uncertainty are absolutely not concepts that owners and captains appreciate! At present the advantages related to the commercial operation of yachts are becoming outweighed by the “hassle factor”.
Owners want to find again their freedom or their “liberté d’esprit”!
So we will have to wait and see what Bercy reserves for the Yachting Industry this year, whether other countries will follow the same path and if owners can find again their piece of mind.
In the meantime it is more than ever crucial that owners seek proper advice.
Rosemont Yacht Services will continue to keep a close eye on the latest developments and update you as soon as clear rules are announced.
In the meantime, feel free to contact Janet Xanthopoulos
should you require any further clarification or assistance.