Appeared in Times of Malta, 9 January 19, 2012. By Alison Vassallo
Every once in a while a judgment is handed down by the European Court of Justice which, by reason of the ripples it causes in a particular sector of the industry it touches upon, comes to be referred to simply by one word – one such case is that which has come to be referred to as the “Bacino”.
The Bacino has attracted significant criticism directed from all angles of the yachting community. The full name of the case is “Etat du Grand-Duche de Luxembourg, Administration de l’enregistrement et des demains v. Pierre Feltgen, Bacino Charter Company SA (C- 116/10)”, December 22, 2010 and consisted of a reference for a preliminary ruling made by the Luxembourg Cour de Cassation to the ECJ concerning the interpretation of Article 15(5) of the Sixth Council Directive 77/338.
The article of law which formed the object of this referral provided that: “Member States shall exempt.. 4. The supply of goods for the fuelling and provisioning of vessels: a) used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities; b) used for rescue or assistance at sea, or for inshore fishing, with the exception, for the latter, of ship’s provisions; 5. The supply, modification, repair, maintenance, chartering and hiring of the seagoing vessels referred to in paragraph 4(a) and (b) and the supply, hiring, repair and maintenance of equipment – including fishing equipment – incorporated or used therein”.
Bacino Chartering Company SA (“Bacino”) made available on a regular basis a vessel which it owned, together with a crew, to natural persons for the purpose of leisure activities on the high seas. Bacino did not charge the charterers VAT on the hire and therefore did not pass any VAT payments calculated on such hire to the Luxembourg tax authorities.
The Luxembourg tax authorities were however of a different view and they notified Bacino of the tax assessments for the financial years 1998 and 1999 which set out the amounts of VAT owed by the company for charters carried out during such period.
Bacino challenged that assessment before the District Court of Luxembourg which dismissed its action, subsequent to which Bacino was successful in arguing before the Court of Appeal that since the vessel was engaged in navigation on the high seas and carrying passengers for reward, the said activity did in fact fall within the parameters of the exemption outlined above.
In assessing whether VAT is due on a particular service, the ECJ adjusted the collective focus of the industry to the use being made of the yacht by the person availing himself of the particular service. Therefore in case where service consists of making a yacht available for charter and the lessee is a private person using the yacht for leisure purposes the Court held that VAT is due by him to the owner on the hire.
By analogy, in case where the person ordering the supply of fuel, provisions or commissioning the refit of a yacht is the owner of the yacht who is using the yacht for commercial activities on the high seas, then no VAT is due on the said services by the owner to the particular supplier or service provider.
While the question put to the ECJ related solely to whether VAT is due on the hire paid by a private person to the owner of a yacht where the owner is in the business of operating the yacht for commercial purposes on the high seas, the findings of this judgment may be said cover other services besides hire, namely those of supply, modification, repairs and maintenance.
Perhaps much of the alarm that has trickled down throughout the industry arises as a result of reading more into the judgment than there is. The ECJ in this case has not come up with new law. The court, when faced with the facts of the Bacino Case, was merely provided with a perfect opportunity of stating in black and white what the real spirit and meaning of the cited exemption is – placed simply being that where the lessee of a yacht uses the yacht for private (leisure) purposes, then the lessee is required to pay VAT on the service to the owner who in turn uses the yacht for commercial activities on the high seas.
The Bacino has attracted significant criticism directed from all angles of the international yachting community. The main concern for owners is whether they can retain competitive charter rates and whether the prevailing economic climate can support a proportionate hike in rates. It very much remains to be seen whether all of this will in fact translate into a tangible threat to the attractiveness of chartering a yacht, or whether this is effectively a storm in a teacup.
Dr Vassallo is a senior associate within the Yachting Department and the Marine Litigation Department at Fenech and Fenech Advocates.