Croatia, sailing magnet now, but what after she joins the EU in July?

web Croatia sailing aerial SW

Croatia sailing © SW

Here Ayuk Ntuiabane from the Isle of Man financial services firm Moore Stephens, writes of the ramifications that will affect all visiting leisure sailors.

Why is the country so popular with sailors? First is the country’s natural assets. With its long coastline, myriad coves, islands and exceptional water, Croatia has been a magnet for yachting in the periphery of the EU. Second, the island archipelago has made much of these natural assets, which it promotes vigorously to the yachting industry.

Third, lying just on the other side of Italy where EU VAT was never an issue, Croatia provided the nearest foreign shore for yachts to touch on that side of the Adriatic or the Med in order to evidence tax-free export from the EU or tax suspended temporary admission from outside the EU. Thus, despite being outside the EU’s fiscal fence, Croatia seemed to pick up the rebound benefits of EU yachting.

Fourth, Croatia’s own yachting taxation regime will remain largely intact, on top of the EU VAT regime it must adopt.

Fifth, Croatia introduced in November a new reduced VAT rate on yachts which, while turning heads, has created a bit of a stir that has landed the country in a tricky place.

But who goes there after July 1 has to learn to cope with a fairly peculiar administrative environment characterized by officialdom, special permits, lengthy procedures and numerous non-tax fees. There are arrival and departure reporting obligations and a ubiquitous vignette system that is charged per passenger or crew and for any change of same.

Sailing the Adriatic Coast of Croatia © Sunsail www.sunsail.com.au

There are fees associated with permits and renewed permits for foreign vessels to navigate in internal waters and fees to navigate in the territorial sea, safety-of-navigation fees, light dues, information chart fees and government administration fees. With relatively few mooring and related facilities, daily mooring rates can also be steep.

These aspects are not new, but the advent of traffic tracking systems -- thanks to the requirement for EU accession states to have radio-navigation systems and a Vessel Traffic Monitoring and Information System (VTMIS) -- will give Croatia the capacity now to enforce these fees and costs on even transiting yachts.

And it came as no surprise, too, that a tax reform in February 2012 included an increase in the general VAT rate from 23 percent to 25 percent.

Then amidst all this, Croatia slipped in a 5 percent VAT rate for importing pleasure yachts. Until May 31, any EU or non-EU vessels that were temporarily admitted into Croatia could file a customs declaration and pay customs duty and VAT. Customs duty would be payable at the rate of 1.7 percent or 2.7 percent on the customs value of the yacht, unless the yacht could prove that it was built in an EU, CEFTA, EFTA country or Turkey. VAT would be charged at 5 percent of the customs value inclusive of the customs duty rate.

At first glance, the interim offer to pay VAT at only 5 percent stretched credibility. However, in a context where the status of all goods in the country must be regularized in short order by the time they merge into the enlarged EU VAT system, it was not out of place.

Croatia’s Accession Treaty signed Dec. 9, 2011, includes stop-gap measures concerning goods in storage or in other national customs regimes. If these goods are deemed VAT paid by Croatia before her joining then they fall to be treated as being validly VAT paid throughout the EU after Croatia joins. There are precedents in the EU concerning vessels in similar situations.

Yachts sailing in front of the old city walls Dubrovnik Croatia - © Maggie Joyce - Mariner Boating Holidays http://www.marinerboating.com.au

The real surprise though is that not so many pleasure yachts have winged it to Croatia to avail themselves of the opportunity. Is it unfortunate timing? Or is it the aforementioned reputation for petty officialdom?

Perhaps the likeliest explanation is the cold comfort poured over the measure by the European Commission. Commenting on the matter in its final Monitoring Report on March 26, the commission is admonishing at best: 'Croatia introduced in November 2012 a new reduced VAT rate on yachts (sport and pleasure boats), which is contrary to the EU acquis but which will be aligned by accession. This may encourage releasing boats for free circulation in Croatia before accession. Croatia should without delay reverse this situation.'

Croatia will, of course, 'reverse this situation' by the date it integrates itself fully into the EU machine – after all, that 5 percent VAT rate for pleasure yachts was always designed to be short-lived.