French Tax Exemption forCommercial Vessels Illegal, ECJHolds

by Sophie Borenstein

Reprinted from Tax Notes Int’l, April 1, 2013, p. 22

Volume 70, Number 1 April 1, 2013

(C)

TaxA

nalysts2013.A

llrightsreserved.

TaxA

nalystsdoes

notclaim

copyrightin

anypublic

domain

orthird

partycontent.

French Tax Exemption forCommercial Vessels Illegal, ECJ Holds

The European Court of Justice on March 21 in Eu-ropean Commission v. France (C-197/12) held that Frenchlegislation providing a VAT exemption for some com-mercial vessels used for navigation on the high seasthat carry passengers for remuneration or are used forcommercial activities does not comply with Directive2006/112/EC (the VAT directive), specifically with ar-ticle 148(a), (c), and (d). The ECJ held that Francefailed to adequately apply the high seas condition. (Thejudgment has not been published in English.)

BackgroundIn addition to the temporary importation exemption

regime,1 the VAT directive allows, under specified con-ditions, a tax exemption for the supply of goods for thefueling and provisioning of vessels used for navigationon the high seas, as well as the supply, modification,repairs, and locations of these vessels. However, in al-most all EU jurisdictions — France being a notableexception — commercial yachts do not benefit fromthe VAT exemption.

In 2004, with an amendment to article 262-II-2° ofthe Tax Code, France extended the VAT exemptionregime to all yachts used for commercial purposes. Un-der French law, any yacht, irrespective of its flag stateor its VAT registration status, may benefit from aFrench VAT exemption if it is situated in French wa-ters and fulfills all the following conditions:

• it holds a commercial registration certificate fromany flag state;

• it has a permanent crew; and

• it is exclusively disposed to charter — that is, itmust always be used for commercial activities.

The European Commission’s action began onMarch 8, 2010 (IP/10/296), when it officially called onFrance to amend its legislation within two months.

Further, the ECJ stated in Etat du Grand Duché deLuxembourg v. Feltgen (C-116/10, Dec. 22, 2010) thatarticle 15(5) of the Sixth VAT Directive must be inter-preted as meaning that the VAT exemption allowed bythat provision does not apply to services consisting ofmaking a vessel available for remuneration, with acrew, to natural persons for purposes of leisure travelon the high seas.

Because of pressure from the European Commissionand the ECJ, France amended the above-mentionedTax Code provision in December 2010 to include thehigh seas criteria contained in article 148 of the VATdirective.

But on April 26, 2012, the commission commencedan infringement proceeding against France for breachof the VAT directive, arguing that the French legisla-tion and administrative doctrine unduly extended thescope of the VAT exemption by allowing it to be ap-plied without requiring that vessels be used for navigat-ing on the high seas — that is, in international waters.As evidence that the high seas condition was not ap-plied, the commission cited an administrative interpre-tation published by France on February 22, 2011,which authorized that the rules previously applied bemaintained, despite the legislative amendment. (ECJreference.)

On November 21, 2012, the European Commissionpublished Memo 12/876, covering the legal actionstaken against member states for failing to comply withEU law and, particularly, the VAT directive. The com-mission stated in a reasoned opinion that the VAT ex-emption on chartering yachts in France did not complywith EU VAT rules. The notice required France to takesteps to remove the exemption from its tax legislationwithin two months, failing which the commissionwould refer the matter to the ECJ. (Related coverage:Tax Notes Int’l, Dec. 3, 2012, p. 892.)

ECJ DecisionIn its March 21 decision, the ECJ held that the

French rules exempting from VAT those transactions

1Under this regime, yachts owned by non-EU residents regis-tered outside the EU and sailed by a person not resident in thecustoms territory of the EU are entitled to tax-free importationinto the EU for 18 months (the relief being invalidated if theyacht is hired, sold, or put at the disposal of an EU resident).

COUNTRYDIGEST

Reprinted from Tax Notes Int’l, April 1, 2013, p. 22

(C)

TaxA

nalysts2013.A

llrightsreserved.

TaxA

nalystsdoes

notclaim

copyrightin

anypublic

domain

orthird

partycontent.

TAX NOTES INTERNATIONAL April 1, 2013 • 1

related to ships carrying passengers or exercising acommercial activity are not compatible with EU legis-lation and that France had failed to fulfill its obliga-tions under the VAT directive by not explicitly makingthe VAT exemption conditional on the vessels’ use fornavigation on the high seas.

France argued that it was difficult to define the con-cept of use for navigation on the high seas because allvessels have to cross the territorial waters before reach-ing a port, but the ECJ found nothing to suggest thatimposing the condition would make the practical appli-cation of the VAT directive provisions excessively diffi-cult or uncertain.

The ECJ held that the VAT exemptions must be in-terpreted strictly because they constitute exceptions to

the general principle that any service rendered againstpayment by a taxable person for VAT purposes is sub-ject to the tax.

The ECJ also noted that although it was not neces-sary in this case to rule on the specific criteria requiredfor a ship to be considered as being used for navigationon the high seas, the fact remained that French legisla-tion failed to provide sufficient guarantees to preventthe VAT exemption from being implemented in situa-tions for which it is not prescribed. ◆

♦ Sophie Borenstein, partner, Reed Smith, Paris

COUNTRY DIGEST Reprinted from Tax Notes Int’l, April 1, 2013, p. 22

(C)

TaxA

nalysts2013.A

llrightsreserved.

TaxA

nalystsdoes

notclaim

copyrightin

anypublic

domain

orthird

partycontent.

2 • April 1, 2013 TAX NOTES INTERNATIONAL