Tax monitoring obligation for yachts flying foreign flags

Moores Rowland Partners Tax Column

Contribution by Dr. Ezio Vannucci and Dr. Andrea Barabino

Recent inspections conducted by the Italian Financial Police (Guardia di Finanza) have highlighted how relevant the issue of so-called “tax monitoring” remains, even for the yachting sector. This refers to the obligation for individuals, non-commercial entities, and general partnerships to declare to the tax authorities any assets and activities held abroad. Specifically, the obligation applies to individuals, non-commercial entities, and unincorporated partnerships that, during the tax period—even for just a single day—hold or are beneficial owners (for the purposes of anti-money laundering regulations under Legislative Decree 231 of 2007) of foreign investments or foreign financial assets.

The reporting obligation for monitoring purposes also extends to cases where foreign investments—including yachts—are formally registered in the name of a resident commercial company (a case of fictitious interposition) or other legal entities other than the company, but are made with the intent to hide the actual ownership of the assets abroad and are therefore attributable to individuals.

Persons subject to tax monitoring obligations must complete Section RW of the income tax return*, listing the investments and assets held abroad and indicating their value. By way of example, financial instruments held abroad are subject to reporting, as are real estate properties located abroad or shares therein (e.g., co-ownership or timeshares), precious objects, and works of art located outside the territory of the State (including those held in safety deposit boxes).

For several years now, the tax authorities have clarified (see in this regard Revenue Agency Circular No. 38 of December 23, 2013) that assets subject to monitoring obligations also include boats, yachts, or other movable property held abroad and registered in foreign public registries.

This means that an owner residing in Italy who owns a yacht flying a foreign flag—for example, Malta—even through a simple partnership, will be required to report the ownership of the yacht in the RW section (for both the simple partnership and the partner) for tax monitoring purposes, also indicating its value.

Although this has not been expressly clarified by the Office, it is prudently assumed that the monitoring obligations described above apply even if the vessel is held under a financial lease (nautical lease) in which the owner acts as the “user” in the context of a nautical lease of a yacht flying a foreign flag.

Regarding the value to be reported on the tax return, the instructions for Section RW specify that for other assets held abroad, other than real estate, one must “indicate the purchase cost, or the market value at the beginning of each tax period (or on the first day of ownership) and at the end of the same (or at the end of the period of ownership)”.

In the event of a violation of tax monitoring obligations, the law provides for the imposition of administrative penalties ranging from a minimum of 3% to a maximum of 15% of the value of the undeclared investments or assets. Where such assets are held in countries or territories considered tax havens, the violation is punishable by a penalty ranging from 6% to 30% of the undeclared amounts.

Furthermore, in the case of assets held in tax havens, it must also be borne in mind that in the event of a violation of the aforementioned tax monitoring obligations, there is a presumption (Art. XNUMX, para. XNUMX of Decree Law XNUMX of XNUMX) that such foreign assets, unless proven otherwise, were acquired through the use of income evaded from taxation.

* Income Tax Form for Individuals or Income Tax Form for Non-Profit Entities for Simple Partnerships.

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