On 8 November 2018, the European Commission opened infringement procedures against Italy and the United Kingdom on the illegal tax breaks for yachts and aircraft.

The infringement procedures are governed by Article 258 of the Treaty on the Functioning of the European Union (TFUE) that gives the Commission the power to take legal action against a Member State that is not respecting its obligations under EU law. In March 2018, the Commission started infringements procedures against Cyprus, Greece and Malta on the levying of VAT on yachts, following the revelations by the Paradise Papers case regarding the widespread VAT evasion in the yacht and aviation sectors.

The Commission has sent a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts. The Commission has found that the Italian VAT guidelines, according to which the larger the boat is, the less the lease is estimated to take place in EU waters, greatly reduces the applicable VAT rate. The EU VAT rules allow Member States not to tax services when the effective use and enjoyment of the product is outside the EU. However, these rules do not allow for a general flat-rate reduction without proof of where the service is actually used.

The Commission has also sent a reasoned opinion to Italy relating to the exemptions for fuel used to power charted yachts in EU waters. The Commission has noted that Italy allows chartered pleasure crafts such as yachts to qualify as ‘commercial’ even when being enjoyed for personal use, which may allow them to benefit from excise duty exemption on fuel used to power its engines, resulting in a breach of applicable EU law. Under EU excise duty rules, Member States may decide not to tax fuel used by a navigation company for commercial purposes, i.e. the sale of sea navigation services. However, an exemption should only apply if the person leasing the boat sells such services to others.

The infringement procedure opened against the United Kingdom concerns the Isle of Man’s abusive VAT practices with regard to supplies and leasing of aircraft. According to the Commission, the United Kingdom has not taken sufficient action against abusive VAT practices that allowed a VAT deduction for the supplies and leasing of aircraft for private use. VAT is only deductible for business use, whereas supplies of aircraft, including leasing services, meant expressly for private use should not be VAT-exempt.

Italy and the United Kingdom have two months to reply to the arguments put forward by the Commission. Italy will also have to comply with the reasoned opinion on excise duty within two months. If it does not act on the reasoned opinion, the Commission may decide to bring the case before the Court of Justice of the EU.

Sara Capruzzi