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Cyprus and Italy in hot water over tax breaks for yachts

The European Commission on Thursday said it was taking further steps to end illegal tax breaks in the yacht industries in Cyprus and Italy first brought to light in the Paradise Papers leaks.

The legal proceedings also form part of the Commission’s ongoing efforts to stamp out unfair tax avoidance practices in the EU, it said.

As part of the infringement package, 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.

At the same time, the Commission has decided to send reasoned opinions to both Italy and Cyprus for not levying the correct amount of VAT on the leasing of yachts.

“Tax breaks of this type can lead to major distortions of competition,” said.

Current EU VAT rules allow tax exemptions for services when the effective use and enjoyment of the product is outside the EU.

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, the Commission said.

As a consequence, the applicable VAT base can be substantially reduced. If Cyprus and Italy do not act within the next two months on these reasoned opinions, the Commission may decide to bring the cases before the Court of Justice of the EU.

“Due to the size of this sector, these illegal and favourable tax regimes also run counter to the fiscal consolidation processes of these Member States,” the Commission added.

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. “The issue of VAT fraud transcends national borders and can only be solved effectively by a concerted, joint effort of Member States,” said the Commission.

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