Abramovich evaded millions in VAT with fake yacht hire scheme

On Christmas Day 2011, Roman Abramovich stood in a linen shirt and shorts on the deck of his superyacht, the Eclipse. He was preparing to throw a lavish New Year’s Eve party at his vast estate on the Caribbean island of Saint Barthélemy, where guests would include Rupert Murdoch, George Lucas and Harvey Weinstein.

They would be treated to caviar-topped canapes and Cristal champagne. Live music would come courtesy of the Red Hot Chilli Peppers. And the Eclipse – then the world’s longest superyacht – was the perfect place to host: the length of one and a half football pitches, it boasted 24 guest cabins, two swimming pools, two helipads and a disco hall.

It sounds like the definition of a luxury leisure activity. Yet the Bureau of Investigative Journalism (TBIJ) can now reveal that Abramovich had registered his yacht as a commercial vehicle under a sham cruise scheme that helped him dodge millions of euros in tax.

Leaked documents seen by TBIJ, the BBC and the Guardian show several of the Russian oligarch’s yachts were supposedly being used for business purposes. In fact, Abramovich was simply “hiring” the boats from himself through a series of companies he also owned, allowing him to falsely claim a VAT exemption for maritime businesses and evade levies on fuel, provisions, and maintenance and other costs.

The papers also show agents for Abramovich discussing their intention to dodge VAT on the entire price of the superyachts themselves, which could have amounted to tens of millions of euros.

The documents, part of the Cyprus Confidential project led by International Consortium of Investigative Journalists and Paper Trail Media, show how members of Abramovich’s network created a fake cruise business on his behalf and deliberately tried to cover their tracks. They also point to how much tax was likely dodged in total, and ultimately reveal an illegal tax scheme.

Representatives for Abramovich said he obtained independent professional tax and legal advice and acted in accordance with it. He denied knowledge of any alleged deception to evade taxes and said he was not liable for any scheme.

But experts said there were clear indications of tax evasion in this case. Andres Knobel, lead researcher on beneficial ownership at the Tax Justice Network, a transparency group, said: “When you have intent to escape taxation and you create a scheme to create deception, it looks like tax fraud.”

Professor Lars Hummel of the International Tax Institute said: “If someone conceals the private use of a yacht because it would otherwise be subject to VAT, [that is] clearly tax evasion.”

How the scheme worked

The scheme began in 2005, when Abramovich was a newly minted multi-billionaire having sold his stake in Russian oil giant Sibneft for $13bn.

Abramovich developed a taste for luxury superyachts, buying several, including the Eclipse, as well as Ecstasea, Luna, Le Grand Bleu and Pelorus. They were frequently seen sailing in the Mediterranean and Caribbean.

The documents show these superyachts were each owned by separate companies registered in the British Virgin Islands (BVI), which were in turn all owned by a single trust. And the trust ultimately belonged to Abramovich.

The yachts themselves were registered in Bermuda: first as “other cargo – yachts”, then later as “commercial yachts” and finally as “passenger” vessels (a category used, for instance, by ferry operators).

Each of the BVI companies then leased the boats out to a company based in Cyprus called Blue Ocean Yacht Management. These agreements were long-term and cost Blue Ocean millions of dollars per year. They granted Blue Ocean control of the yachts, and in turn it leased the boats out for week-long cruises, generating huge profits it could then use to pay for maintenance, repairs and fuel tax-free. At its peak, Blue Ocean was spending $40m a year on these operational costs.

And if Blue Ocean had been a legitimate operation, it would have sourced customers from around the world to buy its cruises. Instead, leaked documents show that the “customers” hiring the yachts were simply another set of BVI companies, all of which again ultimately belonged to Abramovich.

It meant Abramovich was essentially the yacht owner, the service provider and the customer. He was thereby falsely claiming a tax exemption for companies whose use of vessels is central to their business, such as ferry or boat hire operators.

Tax should have been due in Cyprus – where Blue Ocean was based – and in the various EU countries where the yachts frequently cruised, refuelled and were maintained, including Germany, Italy, France and Spain.

If acting above board, a commercial operator will charge its customers VAT for renting out the yachts for leisure purposes. It then collects this VAT and passes it to the authorities in the EU country where it’s owed.

Leaked documents and court records show that for Abramovich’s yachts, this didn’t happen. Blue Ocean claimed its “customers” – the set of BVI companies which chartered the yachts out for cruises – were also “commercial operators”, and therefore exempt from paying VAT.

Neither Blue Ocean nor any of the BVI companies collected any VAT. In other words, Abramovich was using the yachts tax-free.

Professor Rita De La Feria, chair of tax law at Leeds University, said: “VAT is a consumption tax that is in principle this charge on everything that you consume [but] if you are a business, you can in essence deduct any VAT [and] then pass it on so that it’s the final consumer that actually bears that VAT.

“If you buy the yacht for commercial use, you can deduct all the VAT [but] if you buy the yacht for personal consumption, for personal use, then you are charged VAT and you have to pay that VAT. From what I’ve seen, it does appear that this structure is artificial – that it is set up in order to pass off private consumption of the yachts as business expenditure.”

Intent to deceive

An email sent while the scheme was being set up makes clear that its participants knew what they were doing. Writing to a group of Abramovich’s associates, Blue Ocean director Jonathan Holloway said that the people involved in the structure must “be aware of the risks”.

Holloway then spelled it out: “We want to avoid paying VAT on the purchase price of the yachts and where possible to avoid paying VAT on goods and services provided to the yachts.

“Our structure must as clearly as possible separate the different parties so that an investigator checking on our operation would see it as a legitimate structure. But we all have to recognise that a determined investigator could eventually discover this is an in-house structure with the possible consequences that would entail.”

Approached for comment Holloway said he used structures that others in the industry were using, and that he can’t be expected to remember what happened in this case 20 years ago.

Further correspondence showed associates of Abramovich, including the oligarch’s lawyer Andre de Cort, discussing how they could make it look like the companies involved were truly independent entities with no link to each other. One suggestion was to place Blue Ocean under the ownership of a completely separate trust with its own address.

In the email, Holloway said: “It is my view that the different parties in our structure … should not have the same shareholders, directors or registered addresses. To anybody looking into our structure from the outside, a common link could be the first clue to make them look deeper.”

De La Feria said of the email: “It’s clearly a smoking gun for tax artificiality … It’s actually quite rare now to see such explicit statements in documentation.” She added: “Clearly this is a tax scheme.”

De Cort denied any wrongdoing.

Counting the cash

The sums involved in the scheme were huge. Accounts for Blue Ocean show that between 2005 and 2012, the company made more than $280m from its “customers”, while in turn spending $72m to rent out the boats from their respective corporate “owners”.

Other documents show at least some of this money was being “round-tripped” – passing from the BVI charterers to Blue Ocean to the BVI ship-owners and then back round again to the charterers via other Abramovich-owned companies in a continuous loop.

The fact that the rental agreements (known as “time charters”) were a facade was made clear in an email from Holloway. He wrote: “At the beginning of each week we will have a meeting in Blue Ocean where we will look at our current bank balances and our cash needs for the next 1~2 weeks. If we see a need for a cash injection we will raise an appropriate time charter and invoices.”

He added: “We will make all efforts to ensure that where it is possible, the time charters raised coincide with the actual use of the yachts.”

In other words, the rentals were not actually happening. They existed only as a reason to move cash into Blue Ocean’s accounts to cover its monthly expenses.

This is evidenced by the fact that the time charters did not always correspond with real boat trips, giving a location for the cruise which – according to maritime traffic data – could not possibly have matched the yacht’s actual location. In many instances, the charters were backdated, signed after the supposed cruises had actually taken place.

It’s clear from Blue Ocean’s accounts that the company needed a lot of cash. Its financial statements show it spent more than $160m on operational costs including fuel, maintenance, insurance and other overheads.

Yet, throughout the period Blue Ocean operated, its expenses almost perfectly matched its charter revenue, leaving only tiny profits and meaning almost no corporation tax was due in Cyprus.

Large tax bill

The original email laying out the scheme made clear that one of its two priorities was to “avoid paying VAT on the purchase price of the yachts”.

If VAT needed to be paid on either the construction, purchase or import of the yachts, the potential tax bill would have been enormous. The Eclipse alone carried an estimated price tag of €370m, while Luna was worth around €290m. The VAT on importing the yachts into EU waters without any exemptions would amount to around €100m.

There were other taxes the scheme sought to dodge: on maintenance costs, of which there were many, and also fuel duty. Between 2005 and 2012, Blue Ocean recorded fuel costs of over $15m and maintenance costs of nearly $50m.

In one case, correspondence shows a time charter was specifically backdated in order to buy VAT-free fuel, saving Blue Ocean $44,000 in tax.

Avoidance and evasion are both serious matters in tax law that both involve not paying tax that’s due, but evasion involves deception or concealment and is a criminal offence. De La Feria said it is instances like these – where the locations of the yachts are misrepresented in paperwork, or contracts are backdated – that would take the case over the threshold into evasion.

Authorities alerted

TBIJ and the BBC can also reveal the arrangements have twice come to the attention of tax authorities. In 2015, Italian authorities started proceedings against Blue Ocean in relation to €500,000 of unpaid duty on fuel. They also began criminal proceedings against the captains of three of Abramovich’s yachts.

The criminal charges were batted away by Blue Ocean, which produced documentation “proving” that the vessels were entered into various registers as “commercial boats” and used for “commercial purposes or for hire”. No further action was taken.

However, had the authorities been aware of just how “commercial” Abramovich’s yachts really were during this time, they may have reached different conclusions. In the event, they had been deceived.

And in a case originally heard in 2013, Cypriot authorities successfully argued that €14m tax was owed by Blue Ocean on the value of the rental agreements. In 2018, the Court of Appeal upheld the decision.

The VAT authorities successfully argued that none of Blue Ocean’s “customers” were operating commercially, or had any evidence of economic activity. Therefore no exemption to paying VAT on the charters should have applied.

It’s unclear if Abramovich’s company ever paid back the tax however. In internal correspondence seen by TBIJ, officials for Blue Ocean said it would contest the decision at the island’s Supreme Court. Documents shared by TBIJ’s Cypriot partner, the Cyprus Investigative Reporting Network, show that the case was dismissed in March last year after the courts lost all contact with Blue Ocean.

In fact, only a few months later, Blue Ocean was officially dissolved and no longer exists.

The yacht scheme itself was scrapped when the Cypriot authorities began pursuing Blue Ocean in 2012. It’s unclear whether Abramovich's camp went on to adopt a new approach, though shipping registers suggest at least one of his yachts was classed as "commercial" three years later.

By then, though, the scheme had served its purpose, helping to evade millions in tax.