EU launches infringement proceedings against Isle of Man and Italy over illegal tax breaks over purchase of private jets and yachts
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The European Commission has launched infringement proceedings against the Isle of Man and Italy over what it says are illegal tax breaks given to some of the world’s wealthiest people over their purchases of private jets and yachts.

The Guardian and the BBC revealed last November how the Isle of Man, a crown dependency that officially belongs to the Queen and is answerable to the British government, had allowed billionaires and multinational companies to avoid £790m of VAT on more than 200 aircraft imported to Europe since 2011.

The avoidance came to light through the Paradise Papers, a leak of data from the offshore law firm Appleby, which was obtained by the German newspaper Süddeutsche Zeitung and shared by the Washington-based International Consortium of Investigative Journalists with media around the world, including the Guardian.

These infringements follow a first package of infringements launched against Cyprus, Malta and Greece on reduced VAT basis for the lease of yachts and for which the Commission received assurance from all these Member States that the legislation would be amended.

 

In light of its subsequent investigations into these matters and contacts with the Member States concerned, the Commission decided today to send a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts. The Commission also decided to send a reasoned opinion to Italybecause of its illegal system of exemptions for fuel used to power charted yachts in EU waters. Finally, a letter of formal notice was sent to the UK concerning the Isle of Man’sabusive VAT practices with regard to supplies and leasing of aircraft.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft. Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the Commission is taking action to clamp down on rules that try to circumvent EU law in these areas.”

In detail, the infringement procedures launched this week concern:

–      A reduced VAT base for the lease of yachts offered in the tax law of Italy. Current EU VAT rules allow Member States not to tax services when the effective use and enjoyment of the product is outside the EU. But the rules do not allow for a general flat-rate reduction without proof of where the service is actually used. Italy has established VAT guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters. As a consequence, such rule greatly reduces the applicable VAT rate.

–      Excise duty rules for fuel in motor boats in Italy. Current EU excise duty rules allow Member States not to tax fuel used by a navigation company for commercial purposes, i.e. the sale of sea navigation services. However, an exemption should only apply if the person leasing the boat sells such services to others. In breach of EU rules, Italy allows chartered pleasure crafts such as yachts to qualify as ‘commercial’ even when being enjoyed for personal use, which may allow them to benefit from excise duty exemption on fuel used to power its engines.

–      Abusive VAT practices in the Isle of Man. VAT is only deductible for business use. Supplies of aircraft, including leasing services, meant expressly for private use should not be VAT-exempt. The Commission believes that the UK has not taken sufficient action against abusive VAT practices in the Isle of Man with regard to the supplies and leasing of aircraft.

In addition to the infringement procedures launched today by the Commission, the European Parliament has recently indicated that its TAX3 committee following up on the Paradise Papers would also look at this issue. The committee is due to visit the Isle of Man in November.

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