EU challenges Italy and Cyprus for their VAT rules on chartering

The European Union is a frequent host of yachting events and holiday destinations for yacht sailing. Chartering activities are very popular with boating activities, particularly in the Mediterranean.

Back in 2012, Italy and Cyprus, both two popular destinations for chartering, issued national guidelines to determine the proportion of VAT taxable chartering services. These guidelines set a flat rate assumption to determine the portion of a yacht charter that took place outside EU waters (and therefore not subject to EU VAT). However, according to the EU, these flat rate assumptions are not in line with the EU VAT Directive. For more information about chartering, check our article on Spanish chartering.

The Infringement Procedure Against Italy

The Commission has challenged Italy's national guidelines on chartering, which established a presumption that only a portion of the charter service (depending on the length of the boat) was taxable in Italy.

According to the EU the Italian guidelines are incompatible with the EU VAT Directive because, despite the actual use of the yacht, they reduce the taxable base of chartering transactions. The Commission decided in July 2019 to refer Italy to the Court of Justice.

The Infringement Procedure Against Cyprus

Similarly, Cyprus had established a fixed rate of 50% of the chartering service as subject to VAT. The Commission considered that this approach is not in line with the EU VAT rules either.

While Italy's case has been referred to the Court of Justice, Cyprus received a reasoned opinion in July 2020, which is the step prior to referral to the Court.

Implications for VAT Compliance

These cases highlight the importance of correctly determining the place of supply and the taxable amount for chartering services. Companies operating in the chartering industry should review their VAT treatment in Italy, Cyprus, and other EU Member States to ensure compliance with the EU VAT Directive.