Yacht charter in Spain: taxation of income

The chartering of boats for private purposes by non-residents may be subject, among others, to Spanish Non-Resident Income Tax (Impuesto sobre la Renta de No Residentes, IRNR) when carried out in Spanish waters. This tax raises a number of practical questions, in particular related to the existence of a permanent establishment in Spain and to the calculation of the tax in cases depending on the classification of the income and whether a Double Taxation Agreement is applicable.

When is a charter considered to be carried out through a permanent establishment in Spain?

The chartering of a boat by a non-resident shipowner may give rise to the appearance of a permanent establishment in Spain depending on the way in which the charter is organised and the residence of the lessor. The fact that the charter is considered to be carried out through a permanent establishment will mean, as a main effect, that all the charter income obtained inside or outside Spanish waters will be subject to Spanish IRNR.

If a Double Taxation Agreement is applicable, the shipowner will only have a permanent establishment if he carries out the charter activity through a “fixed place of business” located in Spain or through a “dependent agent”.

Binding ruling V1722-14 of the Directorate General for Taxation has examined whether these circumstances are met in a typical charter case, where the owner does not have premises or employees in Spain, or even a fixed mooring, but markets the charter through agencies that do not contract on behalf of the shipowner. The ruling argues that there is no fixed place of business (neither premises nor permanent mooring), and that the boat itself cannot be considered as such (it is the object of the business and not the place where it is carried out). Nor does the owner rely on a “dependent agent”, since for this to occur it is necessary that the agent has the power to enter into the charter contracts on behalf of the lessor, which is not the case here.

However, the ruling warns that a permanent establishment would appear if the vessel had its home port (i.e. a permanent mooring) in Spanish territory, and were leased from Spain to sail in Spanish waters, and the charter contracts were signed from Spain. In that case, the mooring, as the base of the taxpayer’s business structure in Spain, would become a fixed place of business and, therefore, a permanent establishment.

If a Double Taxation Agreement is not applicable (e.g. where the owner is a Cayman Islands or British Virgin Islands company), the applicable definition of permanent establishment, provided for in the Spanish IRNR Law itself, is broader than that of the Agreement, as it does not require the place of business to be fixed. Consequently, the leased vessel itself could constitute, on its own, a permanent establishment.

The Spanish Tax Agency (AEAT), in a non-binding reply to a query raised by Lozano Schindhelm, considers the same criterion as in ruling V1722-14 to be applicable to these cases. However, it mentions in particular that, for this to be the case, it will be necessary for the non-resident shipowner, in addition to not having a permanent mooring, office or dependent agent in Spanish territory, to also lack employees in Spain. Therefore, in these cases, the crew must be hired by an entity other than the lessor.

When is charter income subject to Spanish IRNR and to what extent?

If the charter is carried out through a permanent establishment, all income attributable to it, i.e. all income obtained through the organisation of material and personal means existing in Spain, will be subject to Spanish IRNR at a tax rate of 25%.

If, as will be usual, the owner of the vessel does not have a permanent establishment in Spain, charter income will have to be classified first. This question is particularly relevant if the owner assigns the use of the boat to another company, which is responsible for concluding the nautical charter contracts in its own name. The owner’s income will qualify as business profits if it assumes the risk of the operation, i.e. if its income from the use assignment to the chartering company depends on the income the chartering company earns from the charter of the boat. On the other hand, if the owner receives a fixed amount irrespective of the revenue the chartering company earns from subleasing to end-users, the payments made by the chartering company to the owner will qualify as royalties.

Secondly, the country of residence of the shipowner must be taken into account. If there is a Double Taxation Agreement between this country and Spain, charter income that qualifies as business profits will not be subject to Spanish IRNR, but will only be taxed in the country of residence of the taxpayer. On the other hand, in the case of royalties, the applicable Double Taxation Agreement may provide that they may be subject to taxation in Spain, normally with a maximum limit.

If the shipowner is a tax resident in a territory with which Spain does not have a Double Taxation Agreement, charter income that qualifies as business profits will be subject to IRNR when the charter takes place in Spanish territory, at the rate of 24% (19% for taxpayers resident in another Member State of the European Union or of the European Economic Area with which there is an effective exchange of tax information). “Spanish territory” includes, for these purposes, internal waters, the territorial sea and the contiguous zone (i.e. up to 24 nautical miles from the coast), but not the exclusive economic zone, according to a non-binding reply from the AEAT. This same reply has specified that, if the charter runs partly through “Spanish territory” and partly through other maritime areas, only the proportional part of the income corresponding to the time the vessel sailed through “Spanish territory” will be subject to IRNR, which must be registered and proved by the shipowner. This rule may pose problems if the client makes advance payments, since at that time it is not known in what proportion the charter will pass through Spanish waters. The AEAT has clarified in its non-binding reply that such advance payments will not be subject to IRNR when they are paid, but when the charter takes place, in accordance with the proportionality rule set out above.

If no Double Taxation Agreement is applicable and the income is to be classified as royalties, it will be subject to IRNR (at the rate of 24% or 19%, see above) when paid by a person resident in Spain, or when “used” in Spanish territory, the latter concept being difficult to interpret, but which could coincide with that set out in respect of business profits.

The taxation of business profits derived from charters carried out in Spain by non-residents without a permanent establishment (which is the general case) is very inefficient from a tax point of view. On the one hand, the IRNR Law only allows the deduction of expenses for supplies consumed in Spain that cannot be stored (which excludes the deduction of fuel expenses); on the other hand, it does not allow the offsetting of positive income with negative income from different charters. Therefore, when the owner of the boat resides in a territory without a Double Taxation Agreement with Spain, it is advisable to examine other structures, such as indirect chartering or the creation of a permanent establishment, which could allow optimising taxation in the Spanish IRNR.