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19 January 2017

Commercial yachts in Italy

News on requirements for VAT and excise exemption

On January 12, 2017, the Italian tax agency published Resolution 2/E which provides some clarification regarding the definition of “ships used for navigation on high seas”.  

Resolution 2/E follows the same rationale as the regulations currently in place in France known as the 70% Rule (BOFIP 12.05.2015) for yachts wishing to benefit from VAT and excise exemption on supplies. (See the complete text of Resolution 2/E below). 

The requirements commercial yachts must meet to benefit from VAT and excise exemption have been a matter of debate up to the EU Court of Justice level.
Resolution 2/E complies with the EU Court’s position. It states that class, length and tonnage are in themselves insufficient to meet the current requirements and that a yacht must be effectively used for navigation on high seas to benefit from an exemption. The use, not merely the structural capacity of the yacht, is crucial. Accordingly, navigation must include high seas defined as waters beyond 12nautical miles from any coastline.

The Resolution also states that navigation in high seas must make up over 70% of the trips a yacht performs in each calendar year. If a yacht complies with this condition, substantiated by appropriate documentation, it will be eligible for exemption. The number of trips on the high seas completed in each year provides the basis for exemption during the following calendar year.

Resolution 2E also mentions new yacht constructions and yachts that have just been launched and have not yet started cruising. Yachts that fall into either category might apply the exemption ‘by anticipation’ and submit a declaration stating the yacht will be used on the high seas. Navigation will be logged and checked for compliance with the 70% Rule at the end of the year.

However, a few questions remain regarding the Italian resolution.

  1. What constitutes a trip on high seas and how are trips computed?
The French regulations define two kinds of trips, international trips and domestic trips. The first includes navigation in high seas and/or navigation and arrival in another EU country. These trips count towards qualifying for the 70% Rule. Domestic trips, which include only French waters, do not.
  1. What “official documentation” must be produced as proof of the trip in high seas?
  2. What documents will owning companies have to produce to prove they are entitled to purchase VAT and excise exempt supplies?
We await clarification from Italy on the three questions above.
Stay tuned. We will follow developments as they relate to the new Italian position and keep you posted.
Resolution N. 2/E
 Rome, 12 January 2017

SUBJECT: Tax exemption schemes for ships used to navigate on the high seas pursuant to article 8-bis of Presidential Decree n.633 of 1972. Clarification.

We have received a number of queries concerning the correct interpretation of the wording “ships used to navigate in high seas” with regards to the application of tax exemption schemes under article 8-bis of Presidential Decree n.633 of 1972.

Said schemes implement article 148 letters a), c) and d) of Directive 112/2006/CE and provide tax exemption for the supplies of goods and services relating to “ships used for navigation on high seas for the transport of paying passenger or used for commercial, industrial and fishing activities”.

To this purpose, and considering the applicable jurisprudence of the Court of Justice, the following is observed.
In order to benefit from tax exemption schemes, the prerequisite that ships must be “used for navigation on high seas” applies to ships transporting paying passengers or employed in commercial, industrial and fishing activities, but does not apply to ships used for rescue operations or assistance at sea or ships equipped for coastal fishing (CGUE, Elmeka, joined cases C-181/04 and C-183/04).

With regards to VAT, ‘high seas’ is the portion of seas exceeding the maximum limit of 12 nautical miles from the base line as established in the international law of the sea (article 3 of the convention on the rights of the sea signed at Montego Bay on 10th December 1982 and ratified into Law. n. 689, 2nd December 1994).

In order to guarantee that the tax exemption schemes pursuant to the said article 8-bis are applied only in the appropriate cases, i.e. to ships that genuinely and for the majority of time navigate on high seas, Member States may no longer take only objective criteria - like the length of the tonnage of a ship- into account (CGUE, French Commission, C-197/12).

Accordingly, a ship complies with the wording “used for navigation on high seas” if, with reference to the previous year, it carried out over 70% of trips in high seas (i.e. beyond 12 nautical miles). Such requirement must be complied with annually and supported with official documentation.

With reference to purchases for ships under construction – i.e. ships that have not yet performed any navigation at sea – tax exemption scheme may be applied in advance. The owning company must submit a declaration stating that the ship has been “designed to navigate in high seas”.  With regards to said purchases, compliance with the rule requiring over 70% of trips to be on high seas shall be fulfilled in the year following the ship’s launch, unless amended pursuant to art. 26 of Presidential Decree 633/72.

The regional headquarters shall ensure that the principles and instructions included herein shall be complied with by provincial and local administrations.
The Central Administration