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.
In this article, I have highlighted 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 Med.
Location, location, location
The place the yacht is purchased and the owner’s place of residence will determine what tax and duties may be due upon purchase. These are usually VAT and transfer tax or import duties. In general terms, any EU resident who buys a new build or secondhand yacht that 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 that is registered offshore and owned is exempted from VAT, providing the vessel 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 to consider, on an individual basis, the nationality and residence of the yacht’s intended users, cruising waters, and any potential chartering activity.
The owner’s tax residency
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 selected. 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 residents in such countries may be subject to this taxation, depending on the yacht’s net value. Other countries may tax the individual on his or her use of a corporate-owned yacht as a benefit-in-kind.
It is also important to verify the applicable Controlled Foreign Corporation (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 he or she controls 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 or her 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 that might lead to the public disclosure of the UBO’s yacht-owning structure.
Asset protection and estate planning
The main question regarding 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 that 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 that limit the freedom of a testator to dispose of his or her estate.
As a yacht is a very valuable asset, special precautions should be taken to choose the most suitable tools with regard to the owner’s personal and family situation and estate planning, as well as will, life insurance, pre- or post-nuptial contracts, gift, and business succession plan.
The information above 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.
Rosemont Yacht Services offers a wide spectrum of services relating to ownership and enjoyment of luxury yachts. Their comprehensive range of services allow them to advise and assist yacht owners and brokers during the whole ownership process, starting from the purchase or construction up to the sale, by considering also their financing, registration, insurance, crewing and day-to-day administration needs. For more information, contact Janet Xanthopoulos at firstname.lastname@example.org.