Malta is currently the holder of the largest maritime flag in Europe and the seventh largest in the world. Its sound yet constantly evolving legislative and regulatory framework in this sector coupled with EU Membership, the strategic location in the Mediterranean Sea and other factors have all contributed to this success. The various benefits of Malta’s fiscal regime and the different forms of corporate structures that may be adopted under Malta’s Companies Act and Civil Code continue to enhance Malta’s attractiveness in this sector.
Malta’s maritime flag is considered as a reputable and reliable flag of choice on an international scale. Today all types of sea vessels, ranging from pleasure boats to large cruise liners and super tankers can be registered under the Maltese flag.
Yacht registration is one of the main sectors of Malta’s maritime industry which has been flourishing recently. In this respect, over the past years Malta’s Value Added Tax Department issued guidelines to provide more clarity regarding the treatment of leases and short-term chartering of yachts in relation to Value Added Tax (“VAT”).
1. Yacht Leasing
The Guidelines
The Value Added Tax Department issued specific guidelines relating to leasing of pleasure boats or yachts in 2005. In terms of such guidelines a leasing agreement of a pleasure boat is an agreement whereby the lessor (being the owner of the boat) contracts the use of the boat to the lessee (the person who will use the boat by way of the lease) in return for a consideration. At the end of the lease period the lessee may also opt to purchase the boat at a percentage of the original price – with such purchase being subject to a separate consideration to be paid.
The treatment of a lease of a pleasure boat under the Value Added Tax Act
The lease of a boat is considered as a supply of services under the Value Added Tax Act (Cap.406 of the Laws of Malta) (the “Act”). In terms of the Act, the lessor would be able to deduct the input VAT paid in the course of his activity as a lessor.
Such a supply of services is taxable according to the use of the boat attributed within the territorial waters of the European Union (“EU”) on the basis that the lessor is a Maltese company which is leasing the boat to any Maltese or non-Maltese person or company. In terms of the Act, the Commissioner for Revenue may consider the place of supply of any or all of such services (being situated within Malta) as being situated outside the Community if the effective use and enjoyment of the services takes place outside the Community.
The Guidelines and the attribution of the use of boat within EU territorial waters
The Guidelines’ main benefit lies in the fact that they provide specific criteria to establish the time that the pleasure boats (being leased as aforesaid) spend within the territorial waters of the EU and the time that such boats spend outside the EU’s territorial waters. This is possible thanks to a simple formula which is used to determine such proportion – an exercise which would otherwise be considerably more complex.
The formula establishes the percentage of the lease which is deemed to take place on the EU on the basis of the size of the boat. The larger the boat, the longer the distances it can travel, hence the formula bases its calculation in such a way as to consider leases of the larger boats as having spent less time in the EU. On the other hand, smaller boats are considered to have spent a smaller percentage of their time outside the EU’s waters.
The formula is illustrated in further detail in the table below:
Type of boat |
% of lease taking place in the EU |
VAT Computation |
| Sailing boats/motor boats of over 24 metres in length | 30% | 30% of consideration X 18% |
| Sailing boats of between 20.01 and 24 metres in length | 40% | 40% of consideration X 18% |
| Motor boats of between 16.01 and 24 metres in length | 40% | 40% of consideration X 18% |
| Sailing boats of between 10.01 and 20 metres in length | 50% | 50% of consideration X 18% |
| Motor boats of between 12.01 and 16 metres in length | 50% | 50% of consideration X 18% |
| Sailing boats of up to 10 metres in length | 60% | 60% of consideration X 18% |
| Motor boats of between 7.51 and 12 metres in length (if registered in the commercial register) | 60% | 60% of consideration X 18% |
| Motor boats of up to 7.5 metres in length (if registered in the commercial register) | 90% | 90% of consideration X 18% |
| Boat permitted to sail in protected waters only | 100% | 100% of consideration X 18% |
The above formula may be applied subject to the satisfaction of the following conditions:
- The leasing agreement has to be entered into by and between a Maltese company and any Maltese or foreign person or company;
- The lease instalments are to be payable on a monthly basis – for a period not exceeding 36 months;
- Prior approval is to be sought in writing from the VAT Authorities – with each application to be considered on its own merits and certain conditions may be applicable.
2. Short-term yacht chartering
The VAT Guidelines
The Maltese VAT Department adopted a similar approach with respect to short-term yacht chartering and issued VAT Guidelines for the treatment to be adopted. The guidelines seek to establish the portion of time during which the yacht is chartered for use in the territorial waters of the EU. In terms of the guidelines an agreement is considered to be a short term charter of a yacht if the yacht owner/operator contracts the use of the yacht for a consideration with a crew or on a bare boat basis. The yacht must be chartered as aforesaid for a period not longer than 90 days.
The VAT treatment of a short term yacht charter agreement
For VAT purposes a short-term charter of a yacht is considered to be a supply of a service and taxable accordingly. On such basis the place of supply would be considered to be the place where the yacht was actually put at the customer’s disposal. Accordingly a Maltese company chartering a yacht to an individual and providing the customer with such yacht in Malta should be considered to be a supply of a service that takes place in Malta. Similar to the position for yacht leasing, the VAT to be paid on such supply is limited to the VAT chargeable on the portion of time that the yacht is actually used in the territorial waters of the EU.
The attribution of the use of the yacht in the territorial waters of the EU
For the same reasons outlined in section 1 above and due to the complexities involved, it is not practical to attempt to determine the period that the yacht actually spent in EU territorial waters. The Maltese VAT Department adopted a similar approach to the formula used for the determination of such period for yacht leases. Accordingly the percentage of the time deemed to be spent in EU territorial waters is determined on the basis of the size of the yacht involved and its system of propulsion, as outlined in the following table:
Type of yacht |
% of charter taking place in the EU |
VAT Computation |
| Sailing boats/motor boats of over 24 metres in length |
30% |
30% of taxable value X 18% |
| Sailing boats of between 20.01 and 24 metres in length |
40% |
40% of taxable value X 18% |
| Motor boats of between 16.01 and 24 metres in length |
40% |
40% of taxable value X 18% |
| Sailing boats of between 10.01 and 20 metres in length |
50% |
50% of taxable value X 18% |
| Motor boats of between 12.01 and 16 metres in length |
50% |
50% of taxable value X 18% |
| All other boats |
100% |
100% of taxable value X 18% |
Accordingly in terms of the percentage rates of the above table a yacht having a length that exceeds 24 metres would be considered to have spent 30% of the total charter period in EU territorial waters, resulting in a Maltese VAT charge to be applied only on such portion. Any short-term charter would be able to apply the deemed percentage rates provided in the table above subject to the satisfaction of the following conditions:
- The supplier of the yacht charter must be a person that is registered in Malta for VAT purposes;
- The yacht charter contract must clearly indicate that the place where the charter commences shall be Malta. The charter price must also be included in the contract, together with a statement that the yacht will sail outside EU waters. Evidence of payment of the charter fees is also required by the VAT Department;
- An application must be submitted to the Department whereby all the relevant details required to identify the yacht (hull number, port of registry, registration number, and the size and type of yacht) are provided. Such application form is required for the approval of the deemed percentage to be used in terms of the table above;
- The VAT Department will verify and confirm whether all the required conditions are met and will inform the applicant in writing of the deemed percentage of use in EU territorial waters that the yacht charter is to apply;
- The VAT Department shall consider each case on its merits and accordingly specific conditions may be imposed on a case by case basis. The VAT Department reserves the right to perform any necessary checks and demand any information that may be required even after the completion of the charter.
The right to claim input tax on fuel and other costs
The supplier of the yacht charter would be entitled to claim input VAT on the cost of fuel and any other provisions that were purchased – subject to such goods being sold to the client of the yacht charter under a separate contract or subject to being invoiced separately from the charter service. Such supplies would be charged to the client at the full standard rate of VAT.
Subject to the satisfaction of certain conditions the supplier of the yacht charter would also be entitled to claim any input VAT incurred on the fuel purchased for the outward journey of the yacht to its next port of destination after the charter’s completion.