Italy and Cyprus charter operators targeted by EU over ‘illegal tax breaks’

The European Union Commission said it is taking “further steps to end illegal tax breaks” for yacht charters in Italy and Cyprus. The body said that the two countries have been allowing charter operators to avoid paying duties on diesel used for charter yachts in EU waters.

The legislative body said in a statement that it also plans notify the countries that they are not collecting enough tax on yacht charters. “Tax breaks of this type can lead to major distortions of competition,” said the Commission.

“The Commission has decided to refer Italy to the Court of Justice for the EU for its failure to address an illegal system of exemptions for fuel used to power chartered yachts in EU waters,” said the statement. “In breach of EU rules, Italy allows chartered pleasure crafts, such as yachts, to qualify as ‘commercial’ even if they are for personal use. This situation may allow them to benefit from excise duty exemption on fuel used to power their engines.”

Laws in Italy and Cyprus also allow charter operators to offer a reduced tax for chartered yachts. “Current EU VAT rules allow tax exemptions for services when the effective use and enjoyment of the product is outside the EU,” said the statement. “However, the rules do not allow for a general flat-rate reduction without proof of where the service is actually used. Cyprus and Italy have established VAT rules according to which the larger the boat is, the less the lease is estimated to take place in EU waters. As a consequence, the applicable VAT base can be substantially reduced.”

The Commissioned warned the two countries that if they did not change the tax system, they would also be referred to the Court of Justice.

“Since the beginning of its mandate, the Juncker Commission has been at the forefront of European and international efforts to combat tax avoidance and tax evasion,” said the statement. “When it comes to VAT, recent Commission initiatives seek to put in place a single EU VAT area which is less prone to fraud and would enhance cooperation between Member States.”