Behind the recent VAT-related yacht arrests in Italy, says John Leonida, a lawyer with Clyde & Co., is the question of flag – of whether yachts flying non-EU flags can legally charter in EU waters. Leonida was retained by the owner of one of the superyachts arrested in Italy.
In the article he wrote for Dockwalk magazine’s July 2010 issue, VAT Rules Inconsistencies Plague Med Charter Yachts, he stated that:
"The [Italian] tax authorities are disputing whether EU VAT-registered yachts flying, for example, UK overseas territories’ flags can continue to provide services in EU waters, contrary to what is permitted as a consequence of any associated VAT registration. They are arguing that if you have a non-EU flag you cannot operate legally in the EU and all the tax breaks don’t apply.
These national proceedings expose inconsistency between the rules set out in several regulations. The question is whether yacht chartering services fall outside the scope of the Maritime Cabotage Regulation; if so, then EU VAT-registered commercial yachts (such as yachts owned by an Isle of Man-based company flying a Cayman Islands flag) should be free to trade within the EU waters provided that they are carrying out a legitimate chartering business and VAT chargeable on acquisition, importation or earnings is duly accounted for in the Isle of Man.
Instead, the national proceedings appear to be applying the rules of Maritime EU cabotage regime to chartering yachts and as a consequence, Italian tax authorities submit that Cayman Islands and Isle of Man fall outside cabotage freedom and cannot provide chartering services in the EU."
Since then, the Supreme Court of Cassation – Criminal Section, Rome has handed down a decision in favor of the rights of yacht, no matter what the flag, to charter in the EU.
Clyde & Co. issued this statement following the July 15 verdict:
"In a landmark decision issued on 15 July 2010 by the Supreme Court of Cassation - Criminal Section in Rome, a legal team led by John Leonida at Clyde & Co LLP and supported by Avv. Giovanna Cabbia of Clyde & Co LLP , Professor Francesco Caroleo Grimaldi and Avv. Paolo Stern, quashed as unlawful, the five month long arrest of a Cayman flagged superyacht seized by the Italian Custom Authorities (Guardia di Finanza) last February. John Leonida's team, which also included James Lawson of Hill Dickinson, established that the flag of a yacht chartering in Italy is of no relevance and that it is perfectly possible for a non-EU flagged vessel, no matter how it is owned, but provided the owning company has a business established in the EU, to legitimately operate a charter business in European waters. Tax liability arises upon the subject which has the obligation to pay and declare duties hence where a smuggling offence is alleged tax liability must refer to the laws applied by the State of incorporation of the owning company and not to the State of the flag. We await the full reasoning of the court, which should be available in by the middle of August."