The European Commission has told Britain and Malta to change rules relating to value added tax (VAT) on yachts and private jets or face possible financial sanctions.

Pierre Moscovici, the EU commissioner for taxation, said he had written three weeks ago to the British finance minister about the Isle of Man and to the Maltese minister about VAT on yachts and private jets.

"There are practices that we have reasons to think are suspect," Moscovici told French television BFM TV.

"I asked that the rules be changed and if they aren't the European Commission will launch an infringement procedure that can bear extremely heavy financial sanctions," he said.

I asked that the rules be changed and if they aren't the European Commission will launch an infringement procedure that can bear extremely heavy financial sanctions

EU officials said the Isle of Man is suspected of exempting from VAT buyers of jets even when there is no ground to grant the waiver.

If a jet is bought for business reasons, no VAT is applied, but on the Isle of Man the Commission believes authorities do not check sufficiently whether buyers effectively use the planes for business or private reasons. In the latter case, VAT should be paid.

Malta is under scrutiny because of its rules on luxury yachts that slash the VAT rate applied to bigger ships on the grounds they are used mostly in international waters, an EU official said.

It would likely take years, however, for fines to be imposed under EU rules, which could happen only after two EU court rulings against the offending countries.

READ: ‘Yacht leasing tax suspicions a surprise’

The European Union is clamping down on tax avoidance, trying to close loopholes that allow the wealthy to cut their tax bills legally.

The release last week of the "Paradise Papers", a trove of financial documents mostly from offshore law firm Appleby, has refocused attention on the Isle of Man, a British crown dependency, and Malta among other offshore banking centres.

The leaked papers have given new impetus on tax issues with EU ministers aiming to approve a blacklist of tax havens next month, although they are divided over how to impose sanctions.

The British government said on Monday it was seeking the leaked papers to look into any allegations and has said holding investments offshore is not an automatic sign of wrongdoing.

Malta has insisted that, as confirmed by the EU's Pana Committee, its tax system is in line with EU and OECD rules. 

READ: €3 million in taxes saved on €13 million yacht 'owned' and registered in Malta 

On Thursday, Times of Malta reported that the Maltese government had expressed “surprise” that it was only now that the European Commission was reportedly querying the system of VAT levied on boat leasing.

“Nothing has changed in the arrangement regarding Malta’s VAT treatment of leasing of large yachts as reported to the European Commission way back in 2009,” a spokesman for the Office of the Prime Minister said.

“Malta uses a similar treatment and a predetermined schedule used in many EU member states, including France, Italy, Greece and Cyprus”.

Maltese practitioners in the yachting industry also confirmed that the scheme on the preferential rate of VAT related to yacht leasing has been in place for years.
They insisted there is nothing suspicious about it.

Speaking in Parliament earlier this week, Prime Minister Joseph Muscat insisted that Malta is not a tax haven and vigorously rejects being described as such. 

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