March 2013
Yachting VAT Note
Moore Stephens Isle of Man
French Commercial Exemption – Le Dénouement
Not that the final verdict came as any surprise. Experts have for years recognised the fatal weaknesses inherent in the French VAT exemption regime for commercial vessels (FCE) introduced in 2005. So when the European Commission followed through with its threat and brought action against France on 26 April 2012 in Case C-197/12 European Commission v France it was clear that the die was cast.
On 21 March 2013 the European Court of Justice (ECJ) delivered its decision against France that “by not making the exemption from VAT of transactions…conditional on the requirement of use for navigation on the high seas, in respect of vessels carrying passengers for reward and those used for the purpose of commercial activities, the French Republic has failed to fulfil its obligations under the VAT Directive”.
Navigation en haute mer
And yet it should never have come to this. The EU VAT Directive provides for exemption from VAT in respect of vessels carrying passengers for reward and those used for the purpose of commercial activities. That exemption is conditional on the requirement of these vessels being used for navigation on the high seas. The exemption covers supplies of goods for fuelling and provisioning such vessels as well as their supply, modification, repair, maintenance, chartering and hiring. Other services provided to meet the direct needs of such vessels or their cargoes are also exempt from VAT.
EU Member States are required to faithfully transpose these provisions into the national law regulating VAT and indeed the current French law does refer to these exempt transactions in Article 262, Part II(2), (3), (6) and (7), of the Code général des impôts (French General Tax Code) (CGI). The problem however is that France, in recognition of the reality of commercial yachting which was clearly strengthening as a tangible sector of activity in and around the Mediterranean, had unilaterally decided to discard the “navigation on the high seas” condition from its legislative provisions which she modified back in 2005. That placed the CGI out of line with the VAT Directive.
To emphasise the change, France further issued interpretive administrative circulars introducing and explaining its now famous doctrine that all vessels meeting the three “cumulative conditions” of holding a commercial registration certificate from any Flag State, having a permanent crew and being disposed to charter were eligible for tax exemption. There was no disguising the fact that the liberalisation was a sup to yachting and the breathtaking boldness and simplicity of the measure had the intended effect of attracting yachting to France in the past decade.
The unravelling
Predictably the measure did not go unnoticed by the European Commission, whose role it is as enforcer (along with the ECJ in this instance) to ensure that EU law is applied properly throughout all Member States. The Commission took the firm view that French legislation and administrative practice went beyond what was laid down in the VAT Directive because it meant that France offered VAT exemption to commercial vessels, including commercial yachts, without requiring them to be used for navigation on the high seas. Therefore in March 2010, during the early phase of the pre-litigation procedure, the Commission demanded that France change its legislation to bring it back into line with the VAT directive. At stake in the main was the condition that the vessels qualifying for VAT exemption must be ones used on the high seas. France resisted that demand, arguing that the Commission’s interpretation of the relevant provisions was too narrow and overly restrictive.
Continued pressure from the Commission led France to amend its legislation at the end of 2010 to include the “navigation on the seas” condition. However, despite the legislative provision, France proceeded to render that change ineffective by issuing an explanatory ministerial ruling in February 2011, binding on the administrative authorities, which did not mention the condition that vessels must be used for navigation on the high seas at all. Instead, it reiterated the old trio of conditions for exemption applicable prior to the legislative change.
Moore Stephens Isle of Man
It was at this stage that the Commission resolved to prosecute France, unravelling the falling action which has culminated in the ECJ decision.
What now?
Without doubt it is the end of an era for the FCE as we have known it. But it is a measure of France’s determination and innovative approach to yachting taxation that she has already put an alternative VAT exemption proposal to the Commission. It is being dubbed “FCE-lite” and seeks to keep some of the old criteria while enforcing the specific condition that vessels must largely navigate on the high seas in order to qualify for VAT exemption.
The yachting industry would breathe a sigh of relief if the proposal passes, but the Commission’s approval is by no means a foregone conclusion. For one thing the proposal is radical and lacks an approved legal precedent insofar as it concerns yachts. To that extent it is bound to cause quite a bit of head-scratching in Brussels. Also, the history of the Commission’s reasoned opinions to the national authorities on the subject of VAT exemption, and of the ECJ’s decisions against Member States on the same, shows that those powerful institutions have been consistent in demanding very strict and narrow application of VAT rules relating to exemption. This is because the exemptions themselves only constitute exceptions to the default general rule that VAT must be charged on any supply of goods and services for consideration within the territory of a Member State by a taxable person acting as such.
It is also of some significance that the European Commission is the EU’s executive body and represents the interests of Europe as a whole (as opposed to the interests of individual countries). What is good for France would be weighed not only in terms of how it fits the overall context of the VAT Directive itself but also the common interests of the other Member States.
Other questions would relate to how France would ensure that the vessels that qualify in such a regime, as opposed to those that do not, would effectively be used for navigation on the high seas while preventing any possible evasion, avoidance or abuse. In its judgment against France the ECJ has already agreed with the Commission that the issue cannot be docked simply because of a perceived difficulty of defining what constitutes effective operation on the high seas.
Finally, in what looks like a shot across the bow of Member States with special VAT schemes for vessels, the judgment against France highlights the Commission’s and ECJ’s position that Member States cannot necessarily rely on the provisions allowing them discretion to lay down conditions for the application of certain VAT rules where they come up with schemes that prejudice the imposition of the tax or compromise the principles requiring VAT to be charged in full where it is due.
So it is that the falling action of the FCE may contain a moment of final suspense in France’s alternative proposal awaiting approval or not by the Commission. But the final outcome of this drama is no longer in doubt – prepare to register for VAT in order to carry out charters in the EU.
Ayuk Ntuiabane – Director S ayuk.ntuiabane.msiom
Grant Atchison – VAT Manager S grant.atchison.msiom
Clive Dixon – Director S clive.dixon.msiom
Moore Stephens Consulting Limited
PO Box 25, 26-28 Athol Street
Douglas, Isle of Man, IM99 1BD British Isles T +44 (0)1624 662020