The European Commission today decide to send letters of formal notice to Malta, Cyprus and Greece for not levying the correct amount of Value-Added Tax on the provision of yachts.

This issue can generate major distortions of competition and ids one that had featured heavily in the coverage of last year's Paradise Papers leaks.

Specifically, the infringement procedures launched today concern the reduced VAT base for the lease of yachts – a general VAT scheme provided by Cyprus, Greece and Malta. While current EU VAT rules allow Member States not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use. Malta, Cyprus and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate.

The also deal with the incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as 'lease-purchase'. The Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. This results in VAT only being levied at the standard rate on a minor amount of the real cost price of the craft once the yacht has finally been bought, the rest being taxed as the supply of a service and at a greatly reduced rate.

The Paradise Papers revealed widespread VAT evasion in the yacht sector, facilitated by national rules which do not comply with EU law. As well as the infringement procedures launched today by the Commission, the European Parliament has recently indicated that its new committee to follow up on the Paradise Papers would also look at this issue.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion. We cannot allow this type of favourable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end."

The three member states now have two months to respond to the arguments put forward by the Commission. If they do not act within those two months, the Commission may send a reasoned opinion to their authorities.

David Casa reaction

"The manner in which Malta charges VAT on the provision of yachts is in complete conformity with EU law. After liaising on this matter with Dr Alison Vassallo, who chairs the Yachting Section within the Malta Chamber of Commerce, I have submitted parliamentary questions to European Commissioner Pierre Moscovici and will continue to monitor developments very closely to ensure that the interests of the yachting industry within the wider context of the EU Maritime dimension are protected."