How do you avoid paying VAT on a yacht?

Many companies selling yachts underline the absence of obligatory VAT payment as one of the main advantages for the buyer. The tax payment also becomes an important argument when the owner tries to choose the registration country for the yacht. Technically, both of these statements are true. But the new owner must clearly understand that the absence of VAT requirements at the time of the transaction does not mean the right to stay in all the waters of the European Union without restrictions. And if you consider the high VAT rates (for example, 27% in Hungary), the total cost of buying a yacht can increase significantly.

Difficulties can arise in all the key jurisdictions or supranational associations, including the European Union, Great Britain, some offshores, and even the United States, where no VAT exists. When buying a yacht from a previous owner (the term “second-hand” is not applicable here), the new owner automatically receives a flag under which the vessel can sail, and the VAT itself, if any, is part of the total transaction amount. Even if the purchase item is a new yacht, there is no VAT in the most popular jurisdictions providing such services.

More information on the topic: Choosing a flag to register your yacht

However, the owner encounters a problem the moment the yacht enters the European or British territorial waters because both the EU and the UK require VAT payment in an explicit form. And until the payment is credited, it is illegal to operate the vessel. If you do not consider using gray schemes of dubiously legal options, you must pay VAT.

Buying a yacht and paying VAT in the EU

By law, a buyer who is not a tax resident of the European Union should not pay VAT if they do not want to. Based on this, some yacht owners believe they can travel without any restrictions, including going through the territorial waters of any EU jurisdiction. But this is a mistake.

The new owner of the yacht does not have to pay VAT. However, if the vessel is permanently located within the borders of the European Union or will be operated within the EU, paying value-added tax is mandatory for non-European residents. The payable tax depends on the country where the yacht is located. The average rate is 20%.

One of the few exceptions is a vessel in commercial use. Such a vessel is on an indefinite lease, which means that the individuals operating the yacht change, but the legal owner remains the same. Such yachts are exempt from VAT. However, you can’t use such schemes to avoid paying value-added tax on a private boat.

More information on the topic: The most luxurious and expensive yachts in the world

Special taxation regimes within the European Union

Various EU jurisdictions put forward VAT requirements based on their own tax rules. A typical example is Malta, where the law provides the opportunity to legally save on VAT if the owner decides to lease out the yacht. The calculation of the value-added tax is based on leasing rates, and the payment usually lasts one year.

VAT rates in Malta (for example):

• minimum – 5.4% (if the yacht is more than 24 m long);
• maximum – 10.8% (if the vessel is under 10 m long);
• average – 7.2% (for the yacht from 20 to 24 m long).

Alternative #1 based on Allied Yachting (time-limited yacht management):

• 20,000 EUR per year (for yachts up to 24 m);
• 25,000 EUR per year (for those over 24 m).

The leasing option is perfectly legal but hardly universal. The main reason is relatively high costs. The owners of small yachts who cannot afford the significant expenses will find this option impractical, although legally it would be legally acceptable.

Alternative #2, Temporary Importation Mode:

• The maximum period during which you can legally avoid paying VAT in the European Union is 18 months;
• At the end of this period, the owner must take the yacht outside the territorial waters of the European Union or pay VAT;
• There is an option that allows the yacht to leave the EU first and then return, in which case the counter is reset to zero.

Conditions under which the payment of VAT on a yacht in the EU is not mandatory:

• The owner of the yacht is not a tax resident of the European Union;
• The individual using the yacht is not a resident of the EU;
• The yacht was transferred to the actual owner outside the territorial waters of the European Union;
• If the yacht belongs to a legal entity not registered in any EU jurisdiction.

More information on the topic here: Yacht Registration Guide (choosing a jurisdiction)

Paying VAT when buying a yacht in the EU and the UK before BREXIT

Up to the moment when the UK left the European Union (January 31-February 01, 2020), there was no particular difference in matters related to the taxation of transactions with private sea vessels. The prestigious British flag and membership in the informal high-status Red Ensign club made the United Kingdom popular and in demand for vessel registration.

Red Ensign Group Jurisdictions, category I (no restrictions on tonnage, length, or type of yacht):

• Bermuda;
• British Virgin Islands;
• Great Britain;
• Gibraltar;
• The Cayman Islands;
• The Isle of Man.

Red Ensign Group Jurisdictions, category II (yacht capacity – up to 150 tons, and up to 400 tons for non-commercial vessels):

• Anguilla;
• Guernsey;
• Jersey;
• Montserrat;
• Saint Helena;
• Turks and Caicos Islands;
• The Falkland Islands.

Brexit disrupted traditional ties between the UK and Europe, which has affected yacht owners. Now VAT paid in the EU is no longer considered in the UK (and vice versa). Therefore, yacht owners faced a difficult choice. If they wanted to keep their membership in the prestigious Red Ensign Group without losing the opportunity to sail in EU waters, they had to face additional tax liabilities, and the actual value of their yachts increased significantly.

More information on the topic here: World’s best shipyards building superyachts.

When must the owner of a private pleasure yacht pay VAT for the vessel?

The general rule is that the tax is paid when a taxable event (in the UK, it is termed a chargeable event) occurs. In the absence of such an event, the Internal Revenue Service is not authorized to accept the payment. Be sure to keep the documents confirming VAT payment close at hand.

Taxable events:

• A legal entity that is a VAT payer signs a purchase/sale deal for a yacht;
• A yacht is imported from a non-EU jurisdiction (if the importer is not entitled to tax exemptions and benefits);
• A resident of an EU country purchases a new yacht without paying VAT in any other EU country within the framework of the agreement on purchasing new means of transport.

Can the owner pay VAT before the yacht crosses the UK maritime border?

The owner (individual) does not have the opportunity to choose where to pay VAT. The UK tax office HMRC (His Majesty’s Revenue and Customs) can only assess VAT after the vessel crosses the UK water border. Today, similar conditions apply in any EU country. 

What about yachts built or sold before the introduction of VAT in a particular EU country? In the UK, this happened on 1 April, 1973.

Yachts receive VAT paid status in the following situations:

• The vessel was used as a pleasure boat before January 1, 1985;
• It was already sailing in the European Union on December 31, 1992.

What are the conditions for maintaining the VAT paid status?

The qualification condition is the absence of a chargeable event.

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What documents can confirm the age of the yacht and its actual location?

• marine survey;
• registration document;
• insurance documents;
• builder’s certificate;
• receipt for mooring;
• receipt for harbor dues;
• dry dock records.

The yacht had previously had the VAT paid status but then was sold outside the borders of the European Union (for example, in the Channel Islands). Will the VAT still be considered to have been paid?

No, the vessel will lose the VAT paid status. If the new owner of the yacht wants to travel through the territorial waters of the European Union, he will have to pay VAT again.

What if the vessel was built before 1973?

The situation is similar to the one above. If the transfer of ownership of the yacht took place outside the borders of the European Union, VAT is considered unpaid.

If a new country joins the EU, what is the right way to deal with VAT obligations?

There are a lot of subtleties here. The general rule is described below. (It is important to note that it does not work in several situations). VAT for a vessel is deemed as paid in the following cases:

• The yacht belongs to a citizen of the jurisdiction, which has become a new member of the European Union, and is operated by him;
• VAT was paid upon the initial purchase of the yacht (in order to be confident that you do not encounter any legal problems, it is best to discuss this point with the experts of the Offshore Pro Group).

Does the VAT paid status transfer to the new yacht owner if the transfer of ownership is carried out within the European Union?

It does if the buyer is a legal entity not registered as a VAT payer. Otherwise, the transaction is classified as an event payable, and the value-added tax status changes. To prove the VAT paid status a new owner has to provide a package of supporting documents.

If the seller of the yacht is a legal entity registered in the European Union, and the new owner is an individual, is the company obliged to add VAT to the price of the vessel?

Usually, it is, but occasionally there may be other options.

Are the requirements for paying VAT when buying a yacht (vessel) the same in the countries of the European Union and the UK?

Before BREXIT, they practically coincided, as they were based on the corresponding EU Council Directive (2006/112/EC). Some differences remained. However, those were regarded as insignificant details and subtleties that did not affect the principal regulations. However, after the UK left the EU, the situation changed. Some common points remain, but we can expect their number to decrease over time.

The requirements no longer coincide in the most significant aspect concerning the universal character of VAT paid status. That means that tax already paid in the UK is not accepted in the EU, and vice versa. Therefore, the vessel owner must determine which is more crucial for him – the right to freely navigate the waters of the European Union or the UK.

Is it possible to have a zero VAT rate on a yacht and save it upon resale?

The only conditionally universal option is open to commercial ships or yachts with a tonnage exceeding a set threshold value (different for each jurisdiction), and houseboats.

How is the value of a yacht or vessel determined for VAT calculation?

The best option is if the importer and the tax office of a particular EU country agree on the fair value of the yacht (the calculation of VAT is based on this parameter). Also, the tax administrations include the cost of accessories and equipment, shipping costs, and contingencies of the supplier. If an agreement cannot be reached, the situation requires the services of an independent yacht broker. These questions fall under the European Union Council Regulation 2913/92.

How does the owner pay the VAT when buying a yacht?

In this matter, a lot depends on the jurisdiction. Below you can find the description of the general procedure for the UK. In other countries, the actions will be approximately the same, but the vessel owner should always clarify the specific requirements with the tax office of a particular country.

The easiest option is for the new owner to buy the yacht directly from a shipyard or company registered in the UK. In this case, the supplier automatically includes VAT in the price of the vessel, and the buyer only needs to receive an invoice, which will indicate the amount of the value-added tax.

If the yacht is imported from a third-party jurisdiction and physically enters the UK under its own power, the importer (supplier company or new owner) reports this event to HMRC, which will give instructions on how to proceed. Next, you must fill out two forms, C384V and C1331, and mail them to HMRC (always with an invoice). The tax office calculates the VAT amount and indicates the recommended payment channels. Only after the money is credited to the account can the yacht enter the territorial waters of the UK.

More information on the topic here: The most popular countries for registering yachts and cruise ships

What can I do if the shipyard that built the yacht is not a registered VAT payer?

If the yacht manufacturer is a foreign company, the VAT payment remains an issue. If the ship sails in the waters of the European Union, the owner still has to pay value-added tax. Some shipyards located in the EU may still not be VAT payers. In this case, the owner must pay the tax for the materials used in the yacht construction. It should be kept in mind that a shipyard not registered as a VAT payer is not required by law to store the papers confirming the VAT paid status and to transfer them to the client. Therefore, the new owner must ask the manufacturer for copies of all documents.

Can the vessel owner pay VAT before an overseas cruise if they have received no VAT invoice?

No, they cannot because the taxable event has not formally occurred. If the owner does not want to pay VAT twice, he should contact the tax office of the country that he is going to visit on the yacht.

If the current owner built the yacht, what documents or receipts should they keep?

At the very least, the owner should keep the invoices for the main units of the vessel (the hull, the engine, etc.). They will confirm that VAT has been paid.

What documents are required to sell a homemade yacht legally?

This point should be clarified in the specific jurisdiction where the transaction happens. To maintain the VAT paid status, the owner will need documents for the main units and components of the yacht.

And if the transaction is not made directly, but through a broker (intermediary, import agent)?

The document package is the same.

For an imported yacht, what documents can confirm VAT payment?

In the UK, it is form C102A, and in the European Union – form C88 SAD (the Single Administrative Document of the European Union). But a lot depends on how exactly the vessel was imported into the EU.

More information on the topic here: Best countries for legal yacht registration and mooring in 2023

To confirm that VAT is paid, do I only need original invoices, or can I use copies?

Before BREXIT, the UK tax office could accept copies of documents from the owner, but only if the person paying VAT was a resident of an EU member state. Now this rule no longer applies. Therefore, you need the original documents.

Can the owner request documents to confirm the VAT paid status from the customs and/or tax service?

In the European Union, such administrative bodies do not keep records of the tax status of individual yachts. The vessel owner is responsible for safekeeping the necessary documents and making them available upon request.

If a used yacht is moving from one EU country to another, is it necessary to provide documents for VAT payment?

The customs service may request VAT payment confirmation in specific cases (transportation by rail, cargo ship). Therefore, it is better to prepare documents in advance.

What should I do if the company from which the yacht was bought no longer exists?

If a legal entity is registered in the European Union, VAT documents can be kept by the liquidator for 12 months.

If there are claims against the yacht owner from the tax service regarding the payment of VAT, can the competent authorities of the European Union help?

The tax authorities of the EU countries will not intervene in a dispute between the owner and the fiscal services of another jurisdiction. But in some cases, if the proceedings are limited to the European Union, it is possible to send a special request. Such cases fall under the EU Regulation on Administrative Cooperation on VAT (Council Regulation No. 1798/2003).

Why do customs services not issue certificates or official letters on VAT payments for yachts?

There is no need for that. The law provides that an invoice is the primary document confirming the VAT paid status for a yacht. Alternative documents would have no legal force.

Is it true that in the absence of documentary evidence of the VAT status of the yacht, the tax authorities may take into account the sale contract?

That is true, but only if the parties to the transaction are individuals.

I do not know the VAT status of my yacht. What can I do?

If the yacht was purchased directly from the manufacturer, you can request VAT documents from the company. If the owner bought the vessel from another individual, it is worth trying to contact them. But if the yacht requires VAT payment, in most cases, the owner has to accept that and make the payment.

More information on the topic here: Detailed guide for yacht registration in Malta

Yacht VAT tax status in the UK

BREXIT affected not only the political and economic situation in Europe. The de facto exit of the UK from the European Union has become a source of difficulties for numerous yacht owners. Over the past three years, the most acute problems have been resolved, but it is too early to say that the situation has normalized.

During the transitional two-year period, such vessels could be legally operated in the European Union in the import regime (if the owner has the necessary documents). Now that rule no longer works. Therefore, if formally VAT was paid, the main factor taken into account by the tax authorities is the jurisdiction of the actual (physical) location of the yacht or vessel at 11:00 p.m. on December 31, 2020.

Several options are possible:

• The yacht is in the waters of any EU country, and the value-added tax was paid in the UK. VAT is regarded as paid in the current jurisdiction but not in the United Kingdom. The VAT-paid status in the EU is terminated as soon as the yacht leaves EU waters.
• The yacht is located in the UK, and VAT was paid in the EU. VAT status will be lost in the EU, but retained in the UK.
• The yacht is located in jurisdictions with a special legal status – Northern Ireland and the countries of the British Commonwealth (Jersey, Isle of Man, etc.). The special calculation procedure remains in place.

More information on the topic here: Why are so many yachts registered in the Cayman Islands?

Legal regime for the yachts flying the British flag:

• No right to be in the territorial waters of the European Union in the import mode;
• In the EU, such yachts will be considered foreign;
• It remains possible to issue a temporary import regime (up to 18 months, if the owner has all the necessary documents);
• The legal status of pleasure yachts de facto operated in the EU under the temporary admission regime remains controversial; the best option for the owner is to leave EU waters and update the tax regime of the yacht;
• The possibility of re-importing the yacht under the RGR scheme (Returned Goods Relief) remains.

Conditions for applying the RGR scheme, which allows you to keep the paid VAT for the yacht:

• The yacht has domestic good status (before export from the European Union and the UK);
• The re-import procedure is performed before the end of the period of three years (the starting point is the day of actual export from the EU / UK);
• The same person performs re-import;
• The yacht/vessel has the same technical condition as when exported (current repairs and normal wear and tear are not factored in).

Until December 31, 2021, a special exemption was provided for the cancellation of accounting conditions for a 3-year deadline. But we have to admit that the law enforcement practice regarding the re-import procedure is still poorly developed. In any case, the owner of a yacht or vessel has to decide in which jurisdiction it is more profitable for him to maintain the status of VAT paid.

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