We recently shared an article by JTC Director, Joel Chinn, on some of the things clients should consider when buying a yacht. But what about taxes?
We asked Nic Arnold, Private Client Director at PwC in London, about some of the main tax considerations when owning a yacht.
What should a yacht owner or potential yacht owner ask themselves?
There are a number of questions that the well-advised owner of a yacht should be asking themselves when it comes to taxation, the fundamental of which is simply to consider how much they are being told about the taxes relating to what they are doing.
If they’re being told they won’t have to pay tax on a yacht purchase, build or even charter, do they really understand why?
It is so important to ensure that their personal circumstances are being taken into account, and that they are not simply being told what is ‘standard practice’ or ‘what everyone else does’.
To ensure that the tax advice is robust, one should check the relevant laws or regulations that mean they don’t have to pay tax, and ask whose rules they are. What does the owner need to do when enjoying their yacht to keep within these rules, and do they know the tax impact of not doing this? Do they have the right documentation to prove the tax status of the yacht to the right authorities? Documentation is key when evidencing the tax status of a yacht, and taking a little extra time to get the tax documentation in order to ensure tax questions at the dockside can be dealt with smoothly will be time well spent.
When should a client start thinking about tax?
Tax should ideally be considered before a yacht is even bought or built. When buying a yacht, the due diligence should include its tax background.
If the vendor is saying that the yacht is ‘VAT paid’, what evidence is there of this? More importantly, if the yacht was once VAT paid and there is documentation to prove it, what might have happened since resulting in the yacht losing her VAT paid status? It is a common misunderstanding that paying VAT on a yacht means that it is ‘VAT paid’ forever. This is not the case, and is being brought into focus in the event of Brexit as we now have two customs unions in which a yacht’s history will indicate whether she has ‘free circulation status’. The movement between these two unions, and the basis on which she retains free circulation in each, is not straight forward post Brexit. This needs to be considered when negotiating the purchase price to prevent paying a VAT inclusive price and then paying VAT again!
For new builds, EU shipyards will often build yachts for export, affording a zero rate of VAT to the stage payments. This is appropriate where a yacht is being exported from the EU on completion and is common practice. However, it does mean that up front tax advice is needed to understand the basis on which the yacht will return to the Mediterranean. One should also consider, up front, what the yacht build contract says about kitting the yacht out with ‘owner’s supplies’ in the final stages of the build. Items such as furnishings and art will all have their own tax considerations, and it needs to be decided up front who will be responsible for the identification, purchase and shipping of these items so that the right taxation is paid, or indeed not paid, when appropriate.
What impact does country of registration have?
With either a yacht-build or a purchase, attention needs to be given to the yacht’s registration with a flag state. For the most part this is a non-tax related decision, but where an owner is seeking a VAT exemption in either the UK or EU, the location of the yacht’s flag is important. Interestingly, while the Marshall Islands, BVI and Cayman Islands flags have been popular non-EU jurisdictions for yachts seeking VAT relief when sailing in the EU, the UK and Isle of Man may see a rise in popularity now that they are outside the EU for VAT and Customs purposes.
How should clients own their yachts?
In addition to the yacht’s registration, owners need to consider the ownership structure for the yacht. In most cases the legal team would advise against direct ownership of any moderately sized yacht and this brings into question whether there is a ‘go to’ structure for yacht ownership.
In short, no. Owners from different global jurisdictions will be motivated in their structuring choices by different tax systems, and what might be right for one owner, will not be for another. Exposure to taxation and limited liability for asset protection need to be considered and balanced for the right solution to be found. For example, ownership through a company may cause benefit in kind taxation for UK owners, and while the use of a partnership may be an appropriate alternative, the type of partnership is relevant depending on the use of the yacht. By contrast, a company may work fine for an owner who is tax resident in a jurisdiction that would not seek to tax them on their use of the company asset.
Suffice to say, there are numerous tax considerations to take into account based on where the yacht will be sailed, whether it will be privately or commercially operated, its historic tax status and where the ultimate owner is tax resident. And there is no one size fits all solution.
For structuring your assets please get in touch with Joel Chinn and always seek appropriate tax advice.