EU Infringement Procedure ratchets up against Italy

Following hot on the heels of the EU Commissions infringement proceedings against Malta for its leasing programme in 2018,

Legal proceedings about duty-free fuel were opened against Italy in November 2018 and developments have now lead to a referral to the European Court of Justice. The European Commission has also sent a “reasoned opinion” to Italy about the reduced effective VAT rate applied to yacht leasing.

There are differing interpretations as to whether the Commission’s reasoned opinion is referring to short or long term contracts; however, the European Commission press release refers specifically to yacht leasing. The fact that Cyprus has also received a reasoned opinion would lead most to conclude that it does indeed relate primarily to long-term leasing. As the VAT provisions in Italy are the same for both short and long-term leases, then it would follow that both will be affected, which will include yacht charter.

Cyprus has also been caught up in relation to short-term lease contracts with a “reasoned opinion” issued to Cyprus by the Commission. The only commonly known yacht leasing jurisdiction that so far has avoided attention is France but that could either be because the EU is happy with France’s VAT rules surrounding such matters or that it hasn’t got round to looking at France yet, we will have to wait and see.

What is the challenge on fuel in Italy?

Current EU excise duty rules allow the Member States to not tax fuel used by a navigation company for commercial purposes, i.e. the sale of sea navigation services.

An exemption can apply, but only if the person leasing the boat sells such services to others. In breach of EU rules, Italy allows chartered pleasure crafts, such as yachts, to qualify as commercial even if they are for personal use. Any changes to the laws in Italy will take time to implement, so the current position for the 2019 season remains unchanged.

What is the challenge on leasing?

Current EU VAT rules allow tax exemptions for services when the effective use and enjoyment of the product is outside the EU. However, the rules do not allow for a general flat-rate reduction without proof of where the service is actually used. Cyprus and Italy have established VAT rules according to which the larger the boat is, the less the lease is estimated to take place in EU waters. As a consequence, the applicable VAT base can be substantially reduced. If Cyprus and Italy do not act within the next two months on these reasoned opinions, the Commission may decide to bring the cases before the Court of Justice of the EU.

We will keep you informed as this matter progresses.

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