Association between Flag/Registration and VAT status confusion

The high profile arrest of superyachts in Italy last summer has raised serious concerns. The arrest of a Cayman Islands flagged vessel for alleged violation of EU regulations caused great concern in many quarters. It appears that one of the main reasons for the arrest was that the yacht was flying a non EU flag but operating commercially within the EU. We understand that despite a non EU registration the vessel’s owning company was in fact registered and accounted for EU VAT on its activity where required. Italy’s Supreme Court has now ruled that the arrest of the said yacht was indeed unlawful and that the yacht has been released to continue its charter trade. In many EU countries (including Italy, Ireland, Portugal, Spain) vessel registration is not possible without a proof of VAT payment on the vessel. The contrary of this concept was being applied in Italy and the assumption that a vessel without EU registration could not have an EU paid status was being made. The landmark ruling states that the flag of a yacht chartering in Italy has no relevance to its operation and that it is possible for a non-EU flagged vessel, no matter how it is owned, to legitimately operate a charter business in European waters. The key stipulation is that the owning company must have a business establishment in the EU and must account for tax on the yacht and its transactions in accordance with the VAT rules. It is the owning company that is obliged to pay tax, subject to the EU territory it is based in, and not the State of the vessel’s flag.