The EU Is Getting Tough on Isle of Man’s Tax Loophole for Private Yachts and Jets
The European Commission recently launched proceedings against the Isle of Man over the tax breaks it gives to some of the world’s high-net-worth individuals when purchasing private yachts and jets. In the proceedings, the European Commission refers to these tax breaks as illegal.
The Problem
In the eyes of the European Commission, the problem is the avoidance of taxes that the Isle of Man and Italy allow for these high-net-worth individuals. It began a full a year ago when the BBC and the Guardian revealed that the Isle of Man had let multinational companies and billionaires avoid the payment of VAT on over 200 aircraft that were imported into Europe since 2011. In total, the avoided VAT amounted to £790m. This avoidance first became known due to the Paradise Papers, the famous data leak that showed that numerous high-net-wealth individuals around the world, including many celebrities, had offshore holdings as a way to pay low taxes.
The Commission brought up some specific examples of the tax loophole being used. Lewis Hamilton, the Formula One driver, did not pay any VAT when he imported his £16.5m Bombardier jet. According to Hamilton, his senior lawyer had confirmed his arrangements were lawful at the time, so this came as a shock. The use of the schemes has also led to the blacklisting of Russian oligarchs under European or US sanctions.
What It Means
This decision by the European Commission is particularly problematic for EY, a big-four accountancy firm which had advised many private jet refunds that the Isle of Man approved and now faces scrutiny. The Commission shut down the tax loophole soon after announcing its proceedings, referring to the problem as “abusive VAT practices.”
Legalities
According to the commissioner for economic and financial affairs, Pierre Moscovici, the Commission does not feel that it is fair when certain companies and individuals get away without paying VAT on aircraft and yachts. They feel that this goes against the agreed tax rules, distorting competition for those sectors.
Since the Isle of Man has a customs union with the United Kingdom, boats and aircraft that are imported there can travel throughout the European Economic Area without customs checks. The Isle of Man allowed the tax avoidance by letting owners of the vehicles use convoluted arrangements that made it appear as if the vehicles were being leased and were part of a leasing business. Since VAT only applies for aircraft that will be used privately, this allowed the exception. Considering the VAT on the Isle of Man in the UK is 20% of the purchase price, the amount of avoided taxes quickly ads up.
Other Locations
Italy is also facing similar proceedings due to allowing yacht owners to reduce VAT on larger boats. Additionally, Greece, Malta, and Cyprus have made promises to change legislation on VAT related to yacht leasing after infringement proceedings that have already occurred.
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