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May 2017

To charter or not to charter that is the question

The pros and cons of the transport contract

The yacht charter market has been growing since the Nineties. Sea lovers can spend time on a yacht without the cost of ownership. Owners can offset a percentage of their yearly operating costs - as well as benefiting from VAT exempt supplies and services and, if the yacht is non-EU, importation into the EU under VAT relief schemes.

It was a win-win situation and essential to the market which depends on owners’ willingness to make their yachts available. And that willingness might be wearing thin.

Starting in 2012, charterers (including owners using their own yachts) were charged VAT on charter fees ‘in the place of supply’, i.e. the EU country where the yacht was made available.

Meanwhile, the EU had taken issue with the commercial status of the vessel. In most cases, a yacht is chartered for pleasure not business and does not operate like a conventional commercial ship. To navigate this barrier, yachts had to meet a set of operational and administrative requirements. (In France, the requirements are summed up by the so-called French Commercial Exemption, FCE). Failure to comply entailed losing the benefits of VAT exemption schemes. Non FCE complaint yachts could continue to charter but another layer of red tape was added.

In 2016, on account of the charterer using the yacht for pleasure not business, the French tax agency determined that FCE compliant commercial yachts could take on VAT exempt fuel but would have to pay excise duty (approx. 50% of the cost of fuel).

Many owners felt that the situation was becoming a no-win.
External forces had radically transformed the charter market. Driven by the need to adapt to the new status quo and keep yacht owners in the market, industry associations pondered alternatives. In essence, the ‘one contract fits all’ approach had limitations in the new, more stringent market conditions. An option emerged in the shape of the transportation contract.

Yachts have almost always been rented under ‘time charter agreements’ which vest the charterer with employment of the yacht. The charterer hires the yacht for a specific period of time and pays a daily hire, port charges and the yacht’s fuel consumption for the charter period. The yacht owning company remains responsible for the yacht’s technical operation.

Under a transportation contract, a yacht is operated by the owning company (the carrier) for business purposes. The client (no longer the “charterer”) becomes a passenger undertaking a cruise delivered by the carrier. Likewise, the carrier is responsible for the voyage, the itinerary and compliance with maritime and labor regulations.
The pricing is inclusive and covers transport, accommodation, fuel and delivery/redelivery, port charges, and use of watercraft. Meals and beverages, and excursions on land are excluded.  
10% VAT is due on the cruise package if the yacht stays in French national waters. International voyages including a foreign port are VAT exempt and fuel is VAT and excise duty exempt. Itineraries can be amended in agreement with the Captain.
Key EU legislative instruments* govern the carrier’s liability – accidents at sea and consumer rights - and define the carrier and operators’ scope of service and obligations.

Compliance will require carriers and operators to implement new business practices. Cruise packages must be precisely structured and provide specific information. Contracts must contain minimum requirements and be in writing or such other form as is comprehensible and accessible to the consumer.
While solving a set of problems (mainly VAT related), the transport contract introduces fresh issues and obligations. Does it provide an interesting option for owners and clients? The proof is in the pudding. Time will tell….
 
* EU Regulation 392/2009 on the liability of carriers of passengers by sea in the event of accidents and EU Regulation 1177/2010 concerning the rights of passengers when travelling by sea and amending EU Regulation 2006/2004.