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Cyprus: Indirect tax update: Vessels

Cyprus: Indirect tax update: Vessels

This notification circular aims at summarizing and explaining Circular 209 issued by the Tax Department on 2 February 2017, in connection with the transactions falling under the provisions of paragraph 3 (a) of the Sixth Schedule of the VAT Act.

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A. Content of paragraph 3 (a) of Schedule Six of the VAT Act

According to paragraph 3(a) of Schedule Six the VAT Act, the supply, modification, repair, maintenance, chartering and hiring of the vessels
falling under the below categories is subject to the zero VAT rate:

  • Ships used for high sea navigation and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activity.
  • Salvage and other maritime assistance vessels and coastal fishing vessels.

 The zero VAT rate does not apply in the following cases for ships* of any displacement:

  • Vessels or boats used for sporting activities
  • Warships:The zero rate may apply if a certificate is issued by the Cyprus authorities or relevant authorities of other Member State
  • Ships which are not built for high seas navigation
  • Ships which can be used only within the territorial waters of the Republic

 *We understand that the above categories are indicated on the vessel’s registration certificate. 

In summary, for the zero rate to apply, the vessel must be used for high sea navigation and either carry passengers or goods at a reward or used for the purpose of commercial, industrial or fishing activity.

In the case of salvage and coastal fishing vessels the ‘high seas navigation’ condition does not apply.

B. Interpretation of certain keywords contained in paragraph 3 (a)

Offshore navigation 

The offshore navigation concept includes ships which, according to the logbook which is kept on the bridge or to declarations issued by port authorities, show that voyages taking place outside territorial waters
of the Republic of Cyprus are more than those taking place in the Republic over a period of one calendar year. The Republic’s territorial waters are limited to the twelve nautical miles (based on (a) the Territorial Sea Act of 1984 as amended by N.95 (I) 2014 and (b) the United Nations Convention on the Law of the Sea (Ratification) law 1988 (N.203 / 88)).

Therefore, to establish whether a vessel is used in high sea navigation the following cumulative conditions must be met:

  1. To be in possession of a registration certificate indicating that the vessel can be used for high sea navigation; and
  2. To keep a captain’s log book showing the vessel’s sails; or
  3. To keep a certificate issued by the port authorities, confirming the vessel’s sails that have taken place outside the territorial waters of the Republic.

Question: If the vessel sails to an offshore platform which is located
outside the territorial waters but within the EEZ, does the sail count as a
high sea sail?

Possible answer:  The vessel’s sails must end at a foreign port or have destination an offshore platform outside the territorial waters (12 nautical miles) but within the Cyprus EEZ and not just to exit the territorial waters and reenter a Cyprus port.

The circular does not clarify whether the conditions laid down concern each vessel separately or the entire fleet of vessels that a taxable person operates.

Question: If the sails within territorial waters of a particular vessel override those outside territorial waters but the total sails of the fleet outside territorial waters override those within, does the zero rate apply to all sails or should each vessel be considered separately and be subject to a taxation treatment according to its own sails?

Answer: Each vessel is treated separately.

Question: Does the expression "the sails within the Republic override those outside" have the meaning that even a single sail difference satisfies the inclusion of the vessel under the zero rate?

Answer: Even one sail outside the Republic more than a sail within is
enough to satisfy the requirement.

Chartering and hiring

Hiring is considered as the ship concession without crew, while ship chartering is considered concession together with the crew. A prerequisite
for strengthening the charter definition is the existence of a charter party
agreement. In case of partial ship chartering without party charter agreement, the transaction is not considered ship chartering but passenger or freight transport services which are subject to the applicable VAT rate based on the basic place of supply rules as well as on the specific rules of effective use and enjoyment (use and enjoyment rules).

Question: If there is a written charter party agreement for partial boat chartering, then do the chartering rules apply instead of those of passenger or cargo transfers?

Answer: According to the circular NO but as per ECJ YES.

Maintenance and repair

Maintenance is considered the maintaining of the ship’s original condition, and repairs is the restoration of the ship to its original condition.

The circular makes reference to two different circumstances of acquiring equipment:

  • Equipment which is necessary for the operation, navigation and safety of the vessel and delivered together with the vessel under the same purchase agreement;
  • Other equipment such as spare parts which are kept off board (onshore warehouse) thus not considered as being part of the vessel.

The circular also states that the maintenance and repairs of a vessel falling under the zero VAT rate are also subject to the zero VAT rate even if the services are supplied by a subcontractor. By this statement we understand that when the said services are supplied by the sub-contractor

  • directly to the vessel operator or
  • through a main contractor 

the supply is subject to the zero VAT rate. What is not clear is what kind of evidence the sub-contractor must produce to prove that his services are subject to the zero VAT rate.

Example

A Ship Manager (SM) contracts with an engineering firm to repair one of the ship’s turbines. The engineering firm carries out the requested repair and invoices the SM. As per the circular, the services of the engineering firm, being a sub-contractor, is subject to the zero VAT rate.

Question: What kind of evidence should the engineering firm have in its possession to substantiate the zero Vat rate? Is the captain’s certification enough?

The circular also clarifies that the spare parts which the repairer acquires in order to provide repair and maintenance services are subject to the standard VAT rate. However, it does not say anything about the case where parts are purchased directly by the vessel owner and delivered directly on board the ship by the supplier and the repairer will just provide his services without including parts.

Question: Where the vessel operator acquires spare parts which are delivered directly onboard and the repairer just supplies repair services without spare parts, is the supply of the spare parts subject to the zero VAT rate?

Possible answer:  Yes

Question: What if the spare parts are invoiced to the operator and kept on ships stores in case something goes wrong during the sail? Would it make any difference if the spare parts are kept in a warehouse onshore?

Answer: According to ECJ there should be no difference

C. Pleasure yachts

The purchase, import or delivery of yachts which are used for commercial operations, are subject to the above provisions when the taxable person who acquires the yacht is registered for VAT purposes in Cyprus. At the time of acquiring such yachts from another Member State, the taxable person shall submit a certificate of registration for VAT and verification of the VAT registration number (through the VIMA sector of the Tax Department or through the relevant website of the European Union (http://ec.europa.eu/taxation_customs/vies)).

Question: If a vessel, either imported from outside the EU or acquired from another MS by a person who is registered on the VAT register, can it go under the zero rate even though there is no diary kept by the captain or certificate from customs confirming the sails performed by that vessel?

Answer: The Commissioner may at his discretion ask for a bank guarantee.

D. Vessel building services

The services of subcontractors to ship manufacturers (shipyards) for the construction of new ships will be subject to the normal VAT rate.

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