Successful commercial yacht registration in Malta despite challenges

Over the course of the last 20 years of my career, I have been on a respectable amount of yachts. Actually, I have been on so many beautiful boats and ships, that I can identify them at a glance, just by seeing them either cruising in the Mediterranean or docked at the marinas.

The feeling of freedom merged with ultimate luxury when cruising on your own boat is a combination that is hard to replace with anything else. When you buy a boat, a yacht—a luxury yacht, to be exact—it should meet your standards and individualism perfectly.

Why commercial yacht registration does make sense (in Malta)

But as we know, buying and maintaining a yacht is a cost-intensive experience, and in some cases, the yacht owner does not use the boat the whole season—actually, that’s usually the case. This is why more and more owners decide now to register yachts commercially, not just as pure pleasure boats. For one, it makes the operation of the yacht a lot more cost-efficient and, secondly, you can give other persons the pleasure and joy of experiencing a yacht for a week or two. And lastly, you can actually make money by renting out your yacht for charter. Some owners are actually only doing this with some of the yachts—there is a fluctuating business of hiring boats out on a weekly basis.

Some countries put restrictions on commercial registrations in order to prevent the owners from using the yacht themselves too much or in a non-commercial fashion. Some countries even forbid it altogether.

In Malta this is not the case; it’s actually the opposite. Malta does not impose any restrictions on the owner using the yacht, but it does need to be done with regard to the remaining rules. The rules are usually about not using the boat at a much cheaper rate than you would normally charter out to third-party guests.

Those rules are not imposed by the Maltese law for this activity, the “Commercial Yacht Code,” but are arise from tax laws and especially from a value-added tax perspective.

Let’s discuss tax considerations later.

To start, here’s a general overview of commercial yacht registration in Malta.

This is what the Commercial Yacht Code stipulates

Obviously, there is a law regulating it; this law is called the Commercial Yacht Code. So far so boring. Very important is to note that you can’t register just any boat under the code, but only yachts over 15 m that carry a maximum of 12 passengers and boats that do not carry cargo. It’s easy to appreciate why those guidelines are in place. There is another important number: 24 m in length. With yachts over 24 m in length, there’s a number of additional requirements with which you must comply. Those include minimum manning requirements, for example—having an engineer on board at all times, a different requirement for surveying the yacht, and other regulatory rules. One could argue that if you have a boat over 24m under charter you should be making enough money to comply with those laws easily, so why charter? I can confirm that this is necessarily the case, but yachts over 24 m should fetch easily €50,000 per week and more. Worth your consideration.

The commercial yacht with a Malta Limited – what you have to consider

Depending on your individual circumstances and the tax advice that I will provide to you were you setting up a company in Malta, the company would own the yacht and that would be the counterparty of the flag registration. Depending on the activity of the yacht, there will be a requirement for minimum substance—that’s my term. Minimum substance means that you cannot operate a commercial yacht as a letterbox company. 

Substance requirements for successful commercial yacht registration

Since the operation of the yacht is of a commercial nature, it is what it is, a commercial business: there’s going to be the question of tax and in particular, there’s going to be the question of value-added tax.

Therefore appointing a local director and having something like a serviced office—somewhere to meet, where the directors can make decisions, where you can meet as shareholders, and where once in a while strategic meetings are held—is required. Again that varies from country to country, i.e. it depends on where the owner comes from/where he or she is a resident.

Substance in connection with a commercial yacht

When I say minimum substance—I probably need to explain that a little further. My clients and readers would normally say I’m very strict, and I normally never suggest having just minimal substance. However, when it comes to the operation of one yacht, I can tell you from experience it’s not that much work for a director of an operation in Malta.

Duties of a Managing Director of a Yacht with a Maltese Company

But overall there’s not a lot to do, because the company just has this one yacht and the other can only be used and rented by one client at the same time. This is why in that particular case there is no need to have a full-blown operation including your own physical office, several staff, and a lot of entrepreneurial risk. Obviously, that does not apply where a company operates a number of ships. The substance needs to be adequate, and for the small operation of operating one yacht the minimum substance as described is adequate.

The requirement for a survey of a commercial yacht operation

In order for a boat to get a license, if you want to call it this, to operate commercially, it will need to be surveyed by specifically authorized and appointed surveyors. The surveyor must board the boat at least once a day. That means that the yacht either needs to go where the surveyor is or the surveyor needs to go where the boat is.

The survey would normally take a day, and everything aboard needs to be compliant with the commercial yacht code.

Those things can be fairly easy, for example adding a fire extinguisher or adding more life vests or more markers to point to the emergency exit. But it can also be as challenging as fireproofing the whole engine room or increasing the height of the reeling.

I have to remark that in most of the cases for recently built, modern yachts, not too much needs to be done in terms of structural changes. It’s more in terms of safety measures.

However, as you can imagine, that is always done on a case-by-case basis.

The most important document of a ship’s registry in Malta

Once the survey has been concluded, there’s going to be a list of things that the surveyor would like to have changed, added, upgraded, etc. Those amendments, changes, and upgrades normally can subsequently be proven via photo and email. Therefore in most cases, it is not necessary for the Surveyor to come on board a second time.

Lastly, the company would receive the certificate of a survey which is the most important document necessary for the ship registry to provide the operating certificate, meaning the charter license.

One small issue: income tax for a yacht company

Let’s go over the question of income tax before we tackle the trickiest topic (value-added tax). When the company is set up, the bank account opened, and the company registered for VAT, one of the following two things normally happens:

1. The owner lends the company money and the company buys the yacht
2. The owner contributes the yacht to the company as a contribution in kind

Since the yacht will be taken as assets into the accounts of the company, there needs to be an annual depreciation. The minimum depreciation for a yacht like this would be 10% per year. That means, in the context of tax, the yacht is written off in 10 years at minimum. This gives an indication of how much profit the company will have to make by commercial chartering. Since you cannot operate a company commercially just for fun, for your own benefit, you can only deduct expenses when you have a certain amount of income. I think this can be best explained with an example.

The medium issue: depreciation vs profit making for yacht businesses

You bought a yacht for €1 million net of tax. Contribute the yacht to the business. Since the yacht is a capital expense you cannot deduct it from the Income of the company straight away, but you deduct €100,000 every year from the turnover period to calculate your profit. That means to break even, you need to charter out the yacht for at least  €100,000 in charter fees per year

Income:                                  100.000 EUR

Expenses (depreciation)       -100.000 EUR

Profit                                             0.00 EUR

However, as we know, there are more expenses than depreciation. There is fuel, there is the crew, there are repairs, there are jet skis, there are entertainment costs, there is the bareboat, there’s the security equipment, there’s the surveyor, there are the lawyers, there are any maintenance and a lot more expenses going into the operation of the yacht, naturally. Those obviously will have to be included in the calculation above.

This is important because you need to actually create more income in order to cover those expenses and you still have to make a profit. Even if it’s just a small one. Let’s do the calculation again.

Income:                                  100.000 EUR

Operational expenses            – 25.000 EUR

Expenses (depreciation)       -100.000 EUR

Loss                                      – 25.000 EUR

And that generally is not good. The company cannot be loss-making, at least not continuously. Therefore the calculation needs to include more profit. That means you should aim to charter out the yacht more frequently per year, even if that means that you have to use it one week more, for example. Let’s plug these numbers into another calculation.

Income:                                  150.000 EUR

Operational expenses            – 25.000 EUR

Expenses (depreciation)       -100.000 EUR

Profit                                         25.000 EUR

I believe this is pretty straightforward and has a lot of affinity with other “normal” businesses. Bottom line is that you need to make sure that the company remains profitable and cannot be used as your own little adventure.

I will be able to guide you through income tax matters in regards to that.

The very big issue: VAT for a commercial yacht business

For the next topic of VAT, I probably want to share my own interpretation of why the topic of value-added tax for operating a commercial yacht is so important, not just from an administrative perspective but particularly for countries in Europe, where VAT is charged. To be more specific, for the governments and inland revenues of the EU countries. The simple fact is, no matter how professionally and genuinely you try to operate a yachting company, you will never make a really big profit. Because the expenses are huge, the risks are huge, and the profit margins are okay, but not great.

That might be okay for you and your charter guests, but it certainly is not great for the inland revenue services across Europe. They obviously also would like to participate in today’s business, because they know there are huge values in being moved, and they are not participating properly—especially given the fact that it is mainly wealthy people who lend and rent the boats.

And this is where VAT, a value-added tax enters the scene.

At which place is the VAT of a yacht calculated

Let’s just analyze the very basic fact first: in 99% of cases, the renting out of the yacht, of a luxury yacht, a  pleasure boat, is done for private purposes, for the use and enjoyment of private individuals. It’s like a holiday home. You don’t rent a holiday home commercially, or only in very, very rare cases. That means that in the vast majority of cases value-added tax is applicable, just as you pay VAT on most goods and services, like shopping in the supermarket.

And normally you also don’t charter out a boat for more than 90 days—actually I would say in 99% of cases you would do it for only one or two weeks. 90 days is important because for so-called short-term charters under 90 days, the place where VAT has to be charged, that is called the place of supply, where the customers go aboard the yacht.

This is where the issue starts, because you would normally not have the boat just in one place, because charter guests board from all different places, or at least they want to board from all kinds of different places.

• Italy
• France
• Spain
• Portugal
• Greece
• Croatia
• Germany
• Netherlands
• Malta

…You name it.

If the yacht company is going to have charter guests in each and every country as written above, then it will need to register for VAT in each and every country consecutively.

The real challenge of commercially operating a yacht

…And where the countries get their taxes. 

And that is also, and I can’t emphasize this enough, where no exception must be made for the owner of the company chartering his own boat.

The company must charge the owner at the same rate as it would normally charge any normal customer chartering the yacht—nd also charge VAT. 

Yes, as the owner, you can get beneficial chartering rates. But you cannot travel for free, and you cannot travel at ridiculously reduced chartering rates. Maybe reduce 20%, maybe 30%, but that’s it.

Since the whole VAT game can be quite administratively burdensome, running and operating for example 6 different VAT numbers with six accountants in six countries, some yachting companies decide to appoint agents in every country where they operate. That means that the agents will front the customer and the agents will charge the customer VAT, and then a normal reverse charge invoice, net of tax and without VAT chargeable, would be transferred once per month from the agent to the company. This works well, but obviously, the agent does not do it for free and will charge between 10% and 20% for services on the chartering fees.

In summarize

Operating a pleasure yacht consists of four administrative main challenges, sorted by increasing level of importance.

1. Substance
2. Registration and survey
3. Income tax / depreciation / profit
4. VAT

It is definitely possible to handle all of the above in a seamless and professional manner, so that no problem arises for the company, operation, yacht or the owner.

But it is important to understand the challenges and appreciate that, when it comes to those values, mistakes can be very expensive.

Give us a call, send us an email; we will make the complex a little easier for you.