APPLICATION OF ITALIAN VAT ON ACQUISITION AND

APPLICATION OF ITALIAN VAT ON ACQUISITION AND CHARTER OF YACHTS 1

INDEX I. INTRODUCTION II. WHEN WILL ITALIAN VAT APPLY ON THE PURCHASE OR CHARTER OF YACHTS IN ITALY i. Payment of VAT on the acquisition of a yacht in Italy ii. Payment of VAT on charter of a yacht iii. How to pay VAT on charter fees III. HOW TO PROVE THAT THE VAT ON CHARTERS HAS BEEN CORRECTLY APPLIED FOR IV. HOW TO DECLARE VAT DUE AND CLAIM BACK THE VAT ON EXPENSES i. VAT filing obligations for owning entity directly registered with the Italian tax authorities ii. Methods of VAT quarterly payments by non-resident subjects V. CONCLUSIONS 2

This memo is aimed at providing the reader with information on the application of Italian VAT on the acquisition and charter of yachts. Particularly, this memo assumes that a company based in a jurisdiction other than Italy, (the owning entity ) purchases a yacht (new build or previously owned) in Italy or charters a yacht exclusively or partially in Italian territorial waters. In order to provide the reader with helpful information, we have structured this memo in the form of answers to frequently asked questions that cover some of the most significant issues of interest for brokers, management companies and, of course, yacht owners. I. INTRODUCTION The Italian VAT legislation applicable to the acquisition or charter of yachts is particularly complex and it has been subject to several amendments in the course of the last few years. Particularly, the Agenzia delle Entrate (the Italian Revenue Office that is, inter alia, in charge of collecting VAT) has contributed to the changes in the application of the VAT legislation through the issuing of a number of significant interpretative communications (Circolari Interpretative) that are meant to clarify the application of VAT on the acquisition, charter or financial leasing of new build or preowned yachts. In this memo we will refer to the changes introduced by Circolare Interpretativa No. 43 of 2011 issued by the Agenzia delle Entrate that has had a major impact on the application of VAT on the chartering of yachts in Italy. II. WHEN WILL ITALIAN VAT APPLY ON THE PURCHASE OR CHARTER OF YACHTS IN ITALY i. Payment of VAT on the acquisition of a yacht in Italy The buyer of a non commercially registered yacht newly built by an Italian shipyard or of a previously owned yacht, whereby VAT had not been paid at the time of its purchase, shall pay VAT in Italy at the rate of 21% unless the buyer acquires the yacht for commercial purposes or on a leasing scheme. The ordinary rate of 21% applies in both cases where the buyer is an individual or a company that does not perform as its principal activity the management and chartering of a yacht. In this latter case, in order to benefit from the VAT Exemption afforded by Italian law, the yacht shall be registered as a commercial vessel. 3

Article 8-bis of the Italian Presidential Decree No. 633/1972 (hereinafter the Italian VAT Legislation ) sets out the VAT Exemption for yachts that: a) sail on the High Seas : this implies that these must be commercial yachts registered with an International Registry (for your information, Italy has an International Registry kept by RINA). b) are used for commercial purposes: this implies the existence of the requirement of the so called commercialità that means that the prevailing activity of the owning entity shall be of a commercial nature (management and chartering of a commercial yacht to third parties). The requirement of the commercialità is checked by the Italian authorities during inspections and must be proven in the case of tax disputes. The requirement of the commercialità must subsist at all times and not just for a limited or occasional period of time. An owning entity is considered as having been established for commercial purposes when, inter alia: the articles of incorporation of the company state the commercial purposes (exercise of commercial charter), indication of the commercial purpose of the company: i) in the Registry of Ships under Construction, if it is a new build; ii) in the National Registry of enrolment of the yacht; iii) on the yacht s navigation licence and in the Certificate of Navigation on the High Seas (as defined by the Montego Bay Convention). In essence, at the time of the acquisition of the yacht, whether it is a new build or not, the entity that purchases it must be a company that genuinely performs a commercial activity and such activity shall be proven in the case of inspections on board and/or disputes with the tax authorities. With regard to the requirement of the yacht being used for genuine commercial purposes, in case of the private use of the yacht by the beneficial owner, the Circolare Interpretativa 43/E issued by the Agenzia delle Entrate in October 2011 (hereinafter Circular Letter 43/E ) clarifies that in order not to lose the exemption relevant for VAT purposes: - the charter activity should be carried out mainly in favour of a third party unrelated to the owning entity s structure; this should be the case of the majority of the charter fees paid and of the days of charter; 4

- the majority of the time requirement of the charter to the third parties should be related to the current year and to the previous two-year period (if the owning entity was in existence); - the amount of the charter fees should be equal to at least the present market value, especially in the case it is the beneficial owner, or persons affiliated to him/her, chartering the yacht; - the yacht shall be assigned to an independent broker for charter or leasing to third parties at market value; - evidence of the negotiations carried out with charterers shall be provided to prove that the yacht was genuinely put up for charter. ii. Payment of VAT on charter of a yacht Before going into detail about VAT application to charters, it may be useful to point out that the recent interpretation on the application of VAT on charters, as clarified by the Circular Letter 43/E, shall be seen in the framework of the so-called VAT Package of 2010 that sets out, inter alia, the rules on the application of VAT on yacht charters. For the purposes of this memorandum, short term hires (or charters) of a yacht shall have a duration not exceeding 90 days. Also, reference shall be made to Article 7-quarter of the Italian VAT legislation, that states as follows:. Are considered as performed within the territory of the State: [.] the supply of services [ ] (including) short term hire of means of transportation when these are made available for use in the territory of the State and provided that they are used within the territory of the European Community. The same supply of services is considered as performed within the territory of the State when the means of transportation are made available to the user outside of the territory of the European Community and are used within the territory of the State. As such for the purposes of the application of VAT on charters, two essential elements shall be taken into consideration being: a) the port of embarkation (ie. the place where the charterer takes possession of the yacht); b) the territorial waters where the cruise takes place. VAT is to be applied and then paid to the Italian Tax Authorities (Agenzia delle Entrate) pursuant to the rates set forth in the Circular Letter 43/E that makes further reference to Circolare No. 49/E of 2002 (see table below). Circular Letter 43/E clarifies that charter fees are subject to Italian VAT when the cruise starts: 5

in the Italian territory and the yacht is used within EU maritime territorial waters (irrespective of the owner s nationality and flag) outside the EU territory and the yacht (irrespective of the owner s nationality and flag) is used within Italian maritime territorial waters (only on charter fees related to cruise time in Italian waters) Circular Letter 43/E further clarifies that charter fees are not subject to Italian VAT when the cruise starts: in Italian territorial waters and the commercially registered yacht, (irrespective of the owner s nationality and flag) is used outside EU maritime territorial waters; in a EU country that is not Italy outside the EU territory and the commercially registered yacht is not used within Italian maritime territorial waters Where the charter fees are subject to Italian VAT, the owning entity shall be registered for VAT in Italy (or appoint a tax representative if the owning entity is not based in a EU member state or in a state that is part of the European Economic Area) and account for the relevant VAT rate accordingly on the total charter fees (charter fees + Advance Provisioning Allowance or APA ). The charter fee generally covers only the hire of the yacht and crew, all other expenses are in addition to the charter fee. The APA is usually 30% of the charter fee (sometimes 35%). The APA covers the cost of fuel, food, wines and liquors, dockage, communications, etc. Any APA not used will be returned to the charterer at the end of the charter. It is common practice at the time of the execution of the charter agreement, that the charterer and the owning entity, through the broker, sign an ad hoc statement or contract that regulates the application of VAT on APA. The Italian Revenue Office stated that a reduced VAT rate shall apply to charter fees provided that the port of embarkation is in Italy and that the cruise takes place in EU territorial waters (Italy and other EU waters). The reduced VAT rates are: i) set out in Circolare No. 49/E of 2002, which sets out the reduced VAT rates for the acquisition of yachts under a financial leasing scheme (Leasing Italiano); and ii) based on the yacht s technical specifications and ability to sail in international waters. 6

When the port of embarkation is in Italy and the cruise takes place in EU waters (Italy and other EU waters), the following reduced VAT rates apply: Length of yacht Rate Reduction Rate Applicable Over 24m LOA 30% 6.3% From 16.01m to 24m LOA From 12.01m to 16m LOA From 7.51m to 12m LOA 40% 8.4% 50% 10.5% 60% 12.6% Up to 7.50m LOA 90% 18.9% If the vessel is made available in Italy and the charter takes place effectively in Italian territorial waters and in the waters of other EU member states, the charter fees, including APA, are subject to Italian VAT and it is possible to apply the reduced VAT rate on the basis of the length of the vessel (ie. 6.3%). 2. Charter commences in Italian Port - Cruising area exclusively within Italian waters - Is Italian VAT chargeable on charter fee and APA and if so at what rate? The charter fees and APA shall be subject to Italian VAT at the ordinary rate of 21%. The current VAT rate in Italy, to be applied also on charter fees, is of 21% For further clarification, the following scenarios assume a yacht over 24m and short-term charter and are as follows: 1. Charter commences in Italian Port - Cruising area EU waters sailing within and outside 12NM Is Italian VAT chargeable on charter fee and APA and if so at what rate? 7 3. Charter commences in another EU port (not Italy) - Cruising in EU waters including Italian waters - is there an Italian VAT liability and if so at what rate and on what element of the charter? The charter fees should not be subject to VAT in Italy but in the country where the vessel is made available to the client.

4. Charter commences in Italy - Cruising immediately to non EU waters and remaining in non EU waters (eg Croatia) - Is there an Italian VAT liability and if so at what rate and on what element of the charter? The charter fees shall not be subject to VAT in Italy nor in another EU member state. 5. Charter commences in non EU port Cruising in Italian waters within and outside 12NM Is there an Italian VAT liability and if so at what rate? The charter fees are subject to VAT in Italy and, in our opinion, the applicable rate is 21%. iii. How to pay VAT on charter fees In order to be able to pay the VAT on charters, depending on whether the owning entity is based in the EU or outside of the EU, two different procedures apply: 1. The direct identification of VAT for non-residents in Italy (residents in other EU member states) Owning entities established in other EU member states, including for example, the Isle of Man and in general those European countries that are part of the European free customs zone, can apply for the direct identification relevant for VAT purposes in Italy in order to obtain the Italian VAT registration number (partita IVA) and to issue invoices with Italian VAT. Generally, the timing for the assignment of the Italian VAT number to non Italian companies is of approximately 20 days from the date of the filing of the formal application. The reason for such a considerable delay is due to the fact that only one office of the Agenzia delle Entrate processes all applications coming from non Italian companies. 2. Need to appoint a tax representative for non-european (off shore) based owning entities Non EU based owning entities cannot apply for the direct identification process to obtain an Italian VAT position. In order to do so and to be able to issue invoices with an Italian VAT number, the non-eu based entities shall appoint a tax representative in Italy (essentially, an individual resident of Italy) who will be liable towards the Italian tax authorities for the performance of all obligations provided by law for the owning entities. Generally, the role and function of the tax representative 8

is performed by accountants, tax advisers or lawyers who are specialised in tax issues and, given the specific nature of the charters, should have an extensive knowledge of tax issues concerning the yachting industry. The appointment of a tax representative is generally made by way of a proxy or resolution of the owning entity. III. HOW TO PROVE THAT THE VAT ON CHARTERS HAS BEEN CORRECTLY APPLIED FOR A yacht sailing in Italian waters, anchored in a bay or moored in an Italian port may be subject to controls and inspections of the Italian authorities, mainly the Guardia Costiera (Coast Guard) or Guardia di Finanza (a special military division specialising in financial and tax matters and crimes). The representatives of these authorities may request the owner or the captain to go on board a yacht without any specific reason or unannounced and ask questions in relation to the operations of the vessel. This entails that the owner or the captain of a yacht shall cooperate during the inspections and provide, if requested, documents that may be relevant to the questions asked. With regard to the application of VAT on charters, in order to prove that VAT has been correctly applied, it is advisable that the captain shall carefully keep the logbook of the yacht. The logbook is a record of operational data relating to a ship (under the Italian navigation code, a vessel whose overall length exceeds 24 meters is a ship) such as weather conditions, times of routine events and significant incidents, crew complement or what ports were docked at and when. The logbook, which can also be in electronic format, is essential to traditional navigation, and must be filled in at least daily. The captain of a yacht is required by international maritime conventions and national legislation to keep accurate records of the cruise. As such, in the case of inspections on board carried out by Italian Coast Guard or by Guardia di Finanza, the captain shall immediately provide evidence of the cruise and of the route taken with an indication of the actual time spent in international waters. This should be sufficient evidence to prove the correctness of the application of the reduced rate or of the non application of VAT on the invoice. 9

IV. HOW TO DECLARE VAT DUE AND CLAIM BACK THE VAT ON EXPENSES The VAT number obtained in Italy through the direct identification (see paragraph I.iii.1) can be used only to comply with the requirements of the VAT legislation concerning the charter fees when these are subject to Italian VAT and therefore to issue invoices with the Italian VAT number as well as to pay the VAT to the Italian Tax Authorities. As such, for the purchase of goods and services required for the charter activities, the owning entity directly identified in Italy for VAT purposes shall notify its suppliers of the VAT number of the country of origin (ie. the owning entity shall issue an invoice with the VAT number of the place where it is established for example, Luxemburg, Isle of Man etc) and shall receive from the Italian suppliers of goods and services invoices without the application of Italian VAT in compliance with the general principle of non application of VAT in B2B transactions for subjects resident in the EU area. This shall always be considered on a case by case basis with respect to the purchase of any service or good. In any case, the general rule is that for the purchase of the goods and services in Italy (please see list below), Article 8-bis of the Italian VAT Legislation continues to apply provided that the owning company performs a genuine commercial activity (see paragraph II.i above). 10 Goods and Services: PG Legal Yachting Team Transfers of equipment, engines and their components and spare parts of the same Supply of goods to their on-board equipment and supplies intended for their refueling and provisioning, including the administration of food and drinks on board Provision of services, including the use of dry docks for the construction, maintenance, repair, modification, processing, assembly, equipment, fixtures, apparatus, engines and their components and spare parts and equipment on board, including the supply of services related to ship dismantling The provision of services other than those referred to in the previous point to meet the direct needs of the vessels i. VAT filings obligations for owning entity directly registered with the Italian tax authorities After direct registration and assignment of a VAT number, the owning entity shall, inter alia, be subject to the following reporting and filing obligations as set out in the Italian VAT legislation: 1. Invoicing and recording of active operations. Invoice must be issued at date of payment of each installment

2. Periodic liquidations and VAT quarterly payments (art. 1 and 2 of Presidential Decree 100/98 as modified by Presidential Decree 435/2001). Depending on issue date invoices: 1 st quarter: by 16 May 2 nd quarter by 20 August 3 rd quarter by 16 November 4 th quarter by 16 March following year 3. Annual communication of VAT data (art. 8-bis inserted in the Presidential Decree no. 322/1998 by art. 9 of Presidential Decree no. 435/2001). By 28 February of each year for data of previous fiscal year 4. Annual VAT return (art. 8 of Presidential Decree no. 322/1998, as modified by art. 8 of Presidential Decree no. 435/2001) and related method of presentation (art. 37 of VAT Decree). By 30 September of each year for data of previous fiscal year 5. Annual payment on account of VAT (art. 6, Law no. 405/1990). By 28 December if there are invoices issued in 4 th quarter 6. Adjustment payment. If any, by 28 February of each year 11 7. Keeping and storage of registers and documents. For 10 years 8. Presentation of INTRASTAT forms. If charterer is a EU registered company By month following of issue date of invoice ii. Methods of VAT quarterly payments by non-resident subjects Owning entities registered in the countries of the Monetary and Economic Union of European Union can perform the payment of VAT by a transfer by using the MT103 form as follows: Ø BIC code: BITA IT RR ENT Ø IBAN: IT 64W 01000 03245 348 0 08 1203 01 IVA SCAMBI INTERNI Ø Description of payment: Taxpayer s VAT registration number assigned subsequently to direct registration - Period to which the VAT payment refers Tax code identifying VAT payment. As an alternative to that but only as a second choice, the payment may be made by a wire transfer, using the procedure of cross

border transfers named TARGET. The bank details to be used are the following: Ø BANCA D ITALIA Tesoreria centrale dello Stato Ø Bic/Swift code: BITA IT RR XXX Ø IBAN code: IT87 N010 0003 2040 0000 0000 350 Ø Description of payment: Taxpayer s VAT registration number assigned subsequently to direct registration - Period to which the VAT payment refers Tax code identifying VAT payment. As regards the method of payment of VAT due, the taxpayer must communicate to his bank that the transfer must be made through TARGET procedure. TARGET is the method chosen by the European Central Bank to make a payment in Euro currency and ensure the transactions are treated in real time. It also allows wire transfer of funds in Euro among all Member States of the European Union, including those not belonging to the Euro area. All banks located within the European Union can operate using TARGET method by means of respective Central National Banks. V. CONCLUSIONS As indicated in the introduction, this memo covers general aspects of Italian VAT Legislation concerning the acquisition or the charter of a yacht in Italy. It has been drafted on the assumption that the owning entity is based in a EU member state or in a state of the European Economic Area that owns (or it intends to buy) yachts that are built in Italy or that will be chartered also in Italy. This memorandum is solely intended to provide preliminary and generic information on the current status of the Italian VAT legislation applicable to the acquisition and charter of yachts in Italy. This memorandum, which is provided free of charge, shall not be intended as legal advice and shall not constitute the basis for concluding any transaction or making any evaluation on whether to buy or charter a yacht. The information contained in this memorandum is accurate only at the date it was issued, which is December 2012. Italian tax legislation is subject to frequent changes and it is highly recommended to review the accuracy of the information herein contained from time to time and in any case before entering into any contract. PG Legal accepts no liability concerning the information and commentary herein that is not intended to amount to legal advice to any person on a specific matter. Every reasonable effort is made to make the information and commentary accurate and up to date but no responsibility for 12

its accuracy or correctness, nor for any consequences of reliance on it, is assumed by the firm. About PG Legal PG Legal is a dynamic, entrepreneurial-minded Italian law firm that provides legal and consulting services to Italian and international corporations in a wide range of sectors, including the steel industry, commodities trading, insurance, banking, finance, renewable energy and gas, shipping and yachting. PG Legal Yachting team of specialists lawyers and accountants provide qualified and comprehensive assistance in all aspects relating to the following: Mortgages, security and collateral arrangements and documentation Guarantees and indemnities Joint venture projects Acquisition of shipyards and investment in shipping companies Research and advice on public funds and grants for the establishment or acquisition of shipyards Advice on Customs formalities for the export or import of yachts. Our Yachting Team has significant experience in domestic and international maritime litigation matters, including disputes regarding the construction, purchase and sale of mega yachts, marine insurance and maritime industry labour law cases. Advice on tax, accounting strategies and VAT implications Accounting, bookkeeping and acting as tax representatives Mega Yacht building contracts and preparation of sale and purchase documentation Financing agreements with leading banks and financial institutions Lease agreements and charter of mega yachts 13

For any queries you may have, please find below our contact details: Gianfranco Puopolo E: g.puopolo@pglegal.it Fabio Ruosi E: ruosi@pglegal.it Offices: Milan Office 3, Via Sant Andrea 20121 Milan T.: +39 02 760 13359 Rome Office 11, Via Lisbona 00198 Rome T.: +39 06 884 1535 Gianfranco Puopolo is also a partner of Tempest Legal Services, a newly established law practice based in the Principality of Monaco, providing legal assistance to yacht brokers, managers, owners, shipyards and general contractors on new build contracts, charter agreements, financing of yacht acquisitions, tax and compliance issues. Contact: TEMPEST LEGAL SERVICES MONACO SARL Gianfranco Puopolo E: puopolo.gianfranco@tempestlegal.com Monte Carlo Palace 5th floor 7, Boulevard des Moulins Monte Carlo MC98000 MONACO T.: + 377 97981255 Also in Naples and Genoa 14