The French Commerical Exemption

2015-01-20By John Leonida, partner, Clyde & Co.
If the Commercial Exception rule is confirmed, yacht owners could face sudden, huge tax bills.

In July 1967, having just turned five years old, I sat on the shoulders of my uncle Evagoras and along with thousands of others I watched Sir Francis Chichester to mark his round-the-world odyssey. His 16m ketch, Gipsy Moth IV, did not look safe enough to sail down the Thames let alone sail across the high seas. Having not thought about the ‘high seas’ for many years, the phrase woke me up a few weeks ago like a cold spray of ocean water when colleagues discussed whether the death of the French Commercial Exemption scheme had been prematurely announced.

The customs officials continue to apply the old law

For those of you not familiar with the scheme, until recently French law provided that if a yacht was commercially registered, had a permanent crew and was operating commercially, it would be exempt from VAT on the value of its hull. Basically, the yacht had to be a charter yacht. The European Commission (EC) was none too happy about this and forced the French government to change the law. The law was dutifully changed in line with the EC’s view that, to comply with European law, the exemption can only apply to vessels operating on the high seas in accordance with the rules set by the case law of the European Court of Justice.

Immediately, advisers, like eager children, thrust their hands up to announce that the EC had not determined what the ‘high seas’ were and therefore the attempt to shut down the French Commercial Exemption had failed. Further, the French authorities ‘overlooked’ giving their customs officials the administrative tools to manage the change in the law. So, the customs officials continue to apply the old law.

When the high seas, aren’t

This puzzled most non-French advisers because European law is clear and international law decided what ‘high seas’ were years ago. Article 86 of the 1982 United Nations Convention on The Law of the Seas (which became law in 1994) states that:

‘…the provisions of this part apply to all parts of the sea that are not included in the exclusive economic zone, in the territorial sea or in the internal waters of a state, or in the archipelagic waters of an archipelagic state’.

Therefore, according to the UN, where the territorial reach of a nation state ends, the high seas begin. The matter is settled.

In my opinion there is no commercial exemption for vessels that do not ordinarily operate outside European territorial waters. What is being said is that the French Commercial Exemption can only apply to vessels which ordinarily commercially ply their trade beyond France’s territorial waters – and, by extension, Europe’s – and that they must only pass into French waters on their way to or from the high seas.

If you are, as an owner, using the French Commercial Exemption and not sailing to or from the high seas and merely meandering along the coast from Antibes to St Tropez, or on charter for the Monaco Grand Prix or the Cannes Film Festival, the French Commercial Exemption must be beyond your scope.

If your charter yacht spends most of its time inside the territorial waters of the French Republic, I think you would struggle to argue that the yacht is operating on the high seas. The consequence of this should be close attention from the French customs authorities and a demand for the full VAT on the value of the yacht’s hull.

A (possibly) coming storm

In preparing this article I wrote to the EC to get their take on matters. In response, DG Tax and Customs Union confirmed there is an on-going infringement procedure against France and added:

‘It should be noted that, as regards yachts, the French Authorities should also take into account, like other member states, the position taken by the European Court of Justice on 22 December 2010.’

Given that the French are failing to follow EU law, where does that leave those who are advising clients to use the exemption without clear warnings about its questionable legal status? On the cusp of potential negligence suits? Possibly.

In the EC’s view, all yachts who ply their trade in French waters and use the exemption are already operating illegally. However, a taxpayer has the right to rely on a taxing authority’s assessment of a taxpayer’s tax liability. The French authorities are currently letting people get away with it.

But what happens when the music stops? When everything changes? When the illegality is confirmed, will all the yachts in French waters suddenly become liable for VAT on their hulls? I hope not, but it is a possibility.

In those circumstances, don’t think you can sail away from your tax liability. I would not want be an owner with a yacht in France under French Commercial Exemption when the illegality is confirmed. In a sense, Madame Tax Guillotine may fall and chop off the tax heads of the modern aristos.

In the likelihood that France were to be granted a stay of execution and a transitional period allowed, what could yacht owners do? If they sailed to another EU state they would still have to prove they had accounted for or paid VAT when they first entered the EU. The fleeing flotilla could end up in the choppy waters of other member states, which probably would be disinclined to be merciful. These yachts could leave European waters, never to return.

John Leonida is a partner at Clyde & Co, where he specialises in international marine transactional work and is a prominent member of the firm’s yacht group.

Original published: July 2011.

Raphael Montigneaux, Tom Issit

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