Tuesday, 16 October 2012 18:54

Yacht registration in EU / Cyprus: Updated tax incentives - October 2012

The Inland Revenue department of Cyprus has recently concluded that it will accept the VAT Department’s already approved scheme for yachts registration in the Republic of Cyprus. The scheme provides for a lease based solution resulting in an overall minimum profit of 10% of the yacht’s value, which effectively results in 1% income tax liability. The scheme is deemed to be the most attractive yacht registration scheme within E.U. and it is an incentive that yacht owners now have to avoid registering their yachts in targeted offshore jurisdictions and tax heavens.

The plan

  • VAT percentage charge depends on the type of boat (motor vs. sailing) and expected usage within E.U. See the tables that follow.
  •  The yacht cannot be used for generating income.
  •  The lease period cannot exceed 48 months.
  •  The overall profit of the lessor cannot be below 10% of the value of the yacht. The value needs to be approved by the VAT Department.
  •  Half of the expected profit (5%) needs to be allocated to the initial and 48 monthly lease payments.
  •  The option to buy is exercised with a final lease payment representing 5% of the yacht’s value, which is the remaining expected profit. There is full VAT charged on the final lease payment.
  •  Initial lease payment cannot be lower than 40% of the yacht’s value.

Tables: Usage percentage within E.U. per type and length of boat

TABLE 1: MOTOR BOATS

  Boat Length                                    Deemed usage within EU       
              VAT charge                                            
>24  meters             20%     17% on 20% of the lease pmts
Between 14 and 24 meters             30%     17% on 30% of the lease pmts
Between 8 and 14 meters             50%     17% on 50% of the lease pmts
<8 meters             60%     17% on 60% of the lease pmts
Boats not allowed to sail in open waters                  100%     17% on 100% of the lease pmts

 

TABLE 2: SAILING BOATS 

   Boat Length                                                Deemed usage within EU                 VAT charge                                  
 >24 meters                       20%                               17% on 20% of the lease pmts
 Between 20 and 24 meters                       30%     17% on 30% of the lease pmts
 Between 10 and 20 meters                       50%     17% on 50% of the lease pmts
 <10 meters                       60%     17% on 60% of the lease pmts


Case study

  •  Register in Cyprus a motor yacht longer than 24 meters with approved value of Euro10m.
  •  Lessor and lessee are Cyprus companies, SPVs of the beneficial owner.
  • 10% minimum profit (Euro1m) from lease results in total lease payments Euro11m.
  •  Total Income Tax is Euro100k (10% corporate income tax rate in Cyprus) allocated over the lease life.
  • Initial lease payment of Euro4.2m (40% of value plus half – 5% - of expected profit)
  • 48 monthly lease payments of Euro131.250 each (total Euro6.3m)
  •  Final lease payment (option to buy) Euro500k (remaining 5% profit)
  •  VAT payable on initial lease payment is Euro142.800 (Euro4.2m * 20% EU usage * 17% VAT).
  •  VAT payable on 48 monthly installments is Euro214.200 (Euro6.3m * 20% EU usage * 17% VAT). The VAT payments are allocated over the life of the lease.
  •  VAT payable on final installment (option to buy) is Euro85.000.
  •  Total VAT over the life of the lease is Euro442k.
  •  With total taxes of around Euro542k it is possible to register a Euro10m motor yacht longer than 24 meters under a Cyprus/EU flag. Effective overall tax/VAT liability in this case is 5.42%