In March 2012, the Cypriot VAT authorities issued new guidelines on Yacht Leasing Scheme making Cyprus as one of the most attractive jurisdictions for yacht registration in the EU. Based on this scheme, the effective VAT rate for yacht registration in the EU can be reduced to as low as 3.4%. In particular, the VAT rate depends on the type and size of the yacht and most importantly is imposed only on a percentage of the lease value and not on the overall value of the yacht.
A Yacht Leasing Agreement is an agreement by which the lessor (the owner of the yacht) enters into a contract with the lessee (the person who leases the yacht) for the use of the yacht in return for a consideration. At the end of the lease period, the lessee may have the option to purchase the yacht at a fraction of the original price. Such option must be exercised by the lessee, at the end of the lease period, for a separate consideration.
For VAT purposes, the leasing of the yacht is considered to be a supply of services with the right of deduction of input VAT by the lessor. The supply of these services by the lessor, is taxable at the basic VAT rate of 17% but only to the extent that the leased yacht is used within the territorial waters of the European Union. A specific condition is that the lessor must be a company registered under the Registrar of Companies in Cyprus whereas the lessee may be any individual or legal person, irrespective of residence or place of incorporation.
For the purpose of calculating the usage of the yacht within the EU Territory, there is no need for keeping log books of the movements of the yacht. Taking into consideration the difficulty in determining the time each yacht is used within and outside the territorial waters of EU, the Yacht Leasing Guidelines provide that Cyprus VAT will only be applied on a percentage of the lease consideration. The applicable percentages have been determined by the VAT authorities and depend on the length and type of the yacht (motor or sailing yachts) and indicate the presumed length of use of the yacht in EU waters.
Tables determining the percentage of usage of yachts within the EU territory.
Table A: Motor Boats
Length of yacht | Percentage of use within EU waters | Effective VAT rate |
Length over 24 meters | 20% | 20% of consideration X 17% =3,4% |
Length between 14,01 and 24 meters | 30% | 30% of consideration X 17% =5,1% |
Length between 8,01 and 14 meters | 50% | 50% of consideration X 17% =8,5% |
Length up to 8 meters | 60% | 60% of consideration X 17% =10.2% |
100% | 100% of consideration X 17% =17% |
Table B: Sailing Boats
Length of yacht | Percentage of use within EU waters | Effective VAT rate |
Length over 24 meters | 20% | 20% of consideration X 17% =3,4% |
Length between 20,01 and 24 meters | 30% | 30% of consideration X 17% =5,1% |
Length between 10,01 and 20 meters | 50% | 50% of consideration X 17% =8,5% |
Length up to 10 meters | 60% | 60% of consideration X 17% =10.2% |
The VAT treatment prescribed in the Yacht Leasing guidelines issued will apply only if all of the following conditions are met:
- A lease agreement is concluded between a Cyprus company and any individual or legal person (irrespective of residence or place of incorporation).
- The yacht must sale in Cyprus within 1 month from the date of commencement of the lease agreement. Any extension of the above mentioned time limit may only be given by the VAT Commissioner. Such extension shall not exceed under any circumstances the time at which the option to purchase the yacht is exercised.
- On the inception of the lease agreement, the lessee must pay to the lessor the initial payment amounting to at least 40% of the value of the yacht.
- The lease payments are payable on a monthly basis, and the lease period must under no circumstances exceed the period of 48 months.
- The lessee may purchase the yacht at the end of the lease period for a final consideration of not less than 5% of the value of the yacht.
- The lessor is expected to make a total profit from the leasing agreement of at least 10% on the initial value of the yacht.
- It is required to obtain a prior written approval of the VAT Commissioner by which he will calculate the value of the yacht and the applicable percentage of VAT rate according to the usage of the yacht within the EU territory. The application must be accompanied with a certificate determining the value of the yacht and the leasing agreement between the lessor and the lessee.
In the case where the lessee exercises the option to buy the yacht at the end of the lease period, the VAT authorities will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that all the VAT liability has been paid.