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Tax alert no. 9 – CJEU: Opinion of the Advocate General in respect of the VAT exemption for sales of offshore jackup drilling rigs

In this issue:

When and how does the VAT exemption applies for sales of offshore jackup drilling rigs ?

Opinion of the Advocate General in the case C- 291 /18 Grup Servicii Petroliere

On 10 April 2019 the Court of Justice of the European Union (CJEU) delivered the opinion of Advocate General Hogan (AG) in this Romanian referral asking whether Article 148(c) of the VAT Directive, in conjunction with Article 148(a) is to be interpreted as meaning that exemption from VAT applies, in certain circumstances, to the sale of offshore jackup drilling rigs?


Facts of the case

In May 2008, Grup Servicii Petroliere (GSP) sold three offshore jackup drilling rigs to Maltese purchasers to carry out drilling activities. Jackup rigs, or self-elevating units, are mobile platforms which consist of a buoyant hull which has been fitted with several movable legs. The hull enables the drilling unit and all attached machinery to be transported to the proposed drilling site with its legs up and the hull floating on the water. When the rig arrives at the location, the legs are then extended (‘jacked’) into the water. The legs thus anchor the rig on to the sea-bed and the hull platform is then elevated well above the surface of the sea. When the rig is in this extended (or ‘jacked-up’) position it forms a static platform. It is not until the legs are withdrawn at the end of the drilling operation that the hull can float again.

The three rigs at issue are not self-propelled, but manoeuvred by towing. Also, whilst they support a crew, there is a log book and they can be manoeuvred by its engines to deal with ocean currents and sea drift, the AG noted - although these are facts ultimately for the referring court to verify - that even when floating the units are transported from location to location by a tugboat.

GSP raised sales invoices for the three rigs applying the VAT exemption under national legislation which transposes Article 148(c) of the VAT Directive. After the sale, GSP continued to operate these platforms in the Black Sea pursuant to the terms of a bare boat charter. On inspection, the tax authorities challenged this VAT treatment on the grounds that, although the rigs could be considered as ‘vessels’ within the meaning of the national legislation and are suitable for unlimited use at sea, they do not ‘navigate’ during drilling activity but are rather in a static position. For a supply to fall within the exemption it was necessary to establish that the vessel in question is navigating effectively and predominantly on the high seas. The tax authority considered navigation to be a subsidiary use.

The AG noted that Article 148(a) and (c) refers not only to ‘vessels’ but to ‘vessels used for navigation on the high seas’. In ordinary language the word ‘vessel’ connotes a craft of some sort which is capable of doing something on the water involving the carriage of persons or goods. The AG opined that it is doubtful that a rig of the kind subject to the referral can properly be described as a ‘vessel’ in this sense. Even if it could be considered a vessel, the AG noted that this does not mean that it is a vessel ‘used for navigation on the high seas’ as required by Article 148(a). The objective of Article 148 is to exempt the supply of vessels taking place within the geographical scope of the VAT Directive, but which are intended to carry out economic activities outside of it, the application of that provision to a vessel requires, implicitly, but necessarily, that the former is at least navigated in order to leave the EU waters.

The AG suggested that whilst the rigs were designed to withstand adverse weather conditions and capable of being transported on the high seas, this is not the same as saying that they ‘are used for navigation on the high seas’. The AG opined that any other conclusion would amount to a distortion of language and would justly be viewed with some scepticism.

The AG also opined that transactions covered by Article 148(a) and (c) are exempted because they are related to goods or services purchased within EU territories but which are expected to be used outside those territories. This means that the vessel in question must move from a place situated within EU waters to a place outside them, where the activities in question will be carried out. It is not sufficient for a vessel to be ‘suitable’ for being used on the high seas, the vessel ‘needs to be mainly and effectively engaged’ in an activity conducted on the high seas.

By way of clarification the AG also considered, in the concept of the referral, that ‘high seas’ must be understood as designating the water outside the territorial scope of the VAT Directive. When a rig is performing drilling activities in the exclusive economic zone or in the continental shelf of a Member State, such activities are carried out within the territorial scope of application of the VAT Directive. The rigs at issue in the main proceedings were, when, purchased, performing drilling activity in Romanian territorial waters in the Black Sea and they continued to perform those activities after the point when they were purchased. As the Black Sea falls entirely under one or the other exclusive economic zones of its various coastal States no part of the Black Sea can be considered as part of the high seas within the meaning of Article 148(c). It follows, therefore, that even if the rigs could be regarded as ‘vessels’ which were ‘used for navigation on the high seas’, their supply nonetheless cannot fall under Article 148(c), precisely because of the location where they carried out their activities immediately after they had been supplied. The AG opined that contrary to the argument put forward by GSP, this conclusion is neither contradicted by the fact that these rigs could be moved in the future nor by the principle of fiscal neutrality, understood here in the sense of equal treatment.


What is new about the CJEU case Grup Servicii Petroliere ?

A specific set of circumstances and we await to see whether the Court follows the AG’s opinion. The opinion does however introduce a wider issue in that some Member States require, for exemptions related to international transport, that a vessel only needs to be ‘suitable’ to navigate the high seas, regardless of the time spent doing so. The AG has suggested that it is not sufficient for a vessel to be suitable for being used on the high seas, the vessel needs to be mainly and effectively engaged in an activity conducted on the high seas.


Prepared by:
Niclas Butan, Tax Manager, Indirect Tax


For additional information, please contact:

Alex Milcev, Partner – Head of Tax&Legal


Ernst & Young SRL

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