On 8 March 2018, the European Commission (EC) decided to send letter of formal notice to Cyprus. The EC held the view that the Cyprus VAT rules for the provision of yachts is incompatible with the EU VAT Directive (2006/112)
The Cyprus VAT legislation treated the leasing of yachts as follows:
1. Regarding the place of supply of lease services of such yachts, it includes guidelines according to which the larger the boat is, the less likely the lease, i.e. the use and enjoyment, is deemed to take place in EU waters. This rule greatly reduces the applicable VAT rate; and
2. It treats the hire-purchase of yachts (lease-purchase) as a supply of a service that means that the standard VAT rate is only charged on a minor amount of the real cost price at the time the yacht is finally bought. The rest of that cost price is subject to a greatly reduced rate.
According to the EC, these rules generate major distortions of competition and are featured heavily in the coverage of the "Panama Papers".
Actions taken by the Cyprus Tax Department:
The Tax Department of the Republic of Cyprus has announced on 25 April 2018, that Circular No. 198 issued on 25 November 2015, regarding the Yacht Leasing Scheme has been withdrawn. In this respect, the Tax Department will not examine new applications related to this scheme, for the time being.
Marios Hadjihannas, Tax Partner
Chrysanthos Fotiadis, Tax Manager