It is often said that the Mediterranean is the crown of the world yachting industry and Monaco is the jewel in that crown. But to enjoy the Mediterranean to the full, it is essential to navigate what can appear to be a minefield of legal and tax legislation and regulations.
Discover some of the general legal and tax considerations that need to be considered by anyone buying a yacht that will be sailed/ used fully or partially in the Mediterranean.
Where the yacht will be bought and where is the owner’s residence?
The place of purchase and the owner’s residence will determine what tax and duties may be due upon purchase, these are usually VAT and any transfer tax or import duties. In general terms, any EU resident who buys a new build or second hand yacht which is not VAT paid, will be required to pay VAT on the hull at the VAT rate applicable at the place of delivery, unless the yacht is acquired for commercial purposes or through a leasing scheme.
The rules are different for non-EU residents, who are permitted to use private yachts in the Mediterranean under Temporary Admission for up to 18 months without being liable to pay VAT on the hull. Alternatively, a commercial yacht which is offshore registered and owned is exempted from VAT, providing it has been imported in accordance with the applicable regulations.
To determine the exact legal and tax status, it is necessary to complete an analysis of the operational tax and flagging issues and consider, on an individual basis, the nationality and residence of the yacht’s intended users, the cruising waters and any potential chartering activity.
Tax residency of the yacht owner
The tax residency of the yacht owner is paramount, especially for issues related to the taxation of income generated by the yacht or potential capital gains on its sale. Indeed, the tax to be paid will vary depending on the legal structure that was chosen. In addition, consideration must be given to the provisions of any applicable double tax treaties, as some include special rules for the taxation of profits arising from the operation of ships and yachts.
Some countries, for example France, have introduced a special wealth tax that is a levy on the total net value of an individual’s personal assets, which includes yachts. Yacht owners who are tax resident in such countries may be subject to this taxation, depending on yacht’s net value. Other countries may tax the individual on their use of a corporate owned yacht as a benefit-in-kind.
It is also important to verify the applicable CFC rules in the country of residence of the Ultimate Beneficial Owner (UBO) who owns the yacht through a company which could result in various tax constraints. For example, under new Russian CFC legislation a Russian tax resident may be subject to tax on the undistributed profits of any foreign entity that they control at the rate of 13% (if an individual), 20% (if a corporate entity) or both (20% at the level of the foreign entity and 13% at the level of the individual after profit distribution).
CRS and disclosure of beneficial ownership
The effect of the recently introduced Common Reporting Standard (CRS), for the exchange of tax information also needs to be borne in mind. As a result of the lack of clarity that continues to surround the implementation of this legislation, there is uncertainty about the nature and quality of the information that will be reported to the tax office of the UBO in his home jurisdiction on any yacht owning structures. The UBO should determine what information is held on file by any relevant Financial Institution, how they have identified and classified the relevant reportable persons and Controlling Persons, and what account balances will be reported, prior to the reporting taking place.
UBOs need to be aware of transparency developments in other jurisdictions which might lead to the public disclosure of the UBO’s yacht owning structure.
Asset protection and estate planning
The main question for a yacht, in common with other assets, is the determination of the law that is applicable to the individual’s estate. The material inheritance law is determined by the application of the conflict of law rules which determine the applicable jurisdiction for the settlement of the Estate.
The conflict of law rules may designate a sole inheritance law to the whole estate, including both movable and immovable assets wherever situated, or two different laws, one applicable to movable assets and the other to immovable assets.
If different laws are applicable, the yacht or the yacht owning entity, will be considered as either movable or immovable assets by the jurisdiction charged with the settlement of the Estate.
In general terms, common law jurisdictions allow complete freedom of disposition, while others and, in particular civil law jurisdictions, impose forced heirship rules which limit the freedom of a testator to dispose of their estate.
As a yacht is a very valuable asset, special precautions should be taken to choose the most suitable tools having regard to the owner’s personal and family situation and their estate planning, as well as Will, life insurance, pre- or post-nuptial contracts, gift, and business succession plan.
This information is for general purposes only and should not be relied upon as a legal or tax advice. Specific guidance should always be obtained on ownership structuring, registration and operation of a yacht.
For more information contact Janet Xanthopoulos, Yacht Ownership & Administration Dpt Manager, Rosemont Yacht Services at firstname.lastname@example.org