Fake journeys, fake customers: inside Roman Abramovich’s yacht rental scam

Superyachts are expensive – really expensive. They cost a fortune to design, even more to build, and after that you still need a crew to sail them and a place to moor. Then there’s insurance, certifications, maintenance, repairs … not to mention vast quantities of fuel.

You’d be better off tipping your money straight into the harbour. Yet they’ve long been the go-to status symbol among the uber-wealthy. When it comes to expenses, however, even the super-rich have their limits. And luckily for Europe’s yacht owners, there are various ways of keeping your costs down – principally by sidestepping certain taxes.

Roman Abramovich did exactly this, with a rental scheme revealed by TBIJ to have been a ploy to dodge taxes.

Abramovich denied knowledge of any alleged deception to evade taxes, and said he wasn't liable for any such scheme. His representatives told us he obtained independent professional tax and legal advice and did only as it said.

But experts said there were clear indications of tax evasion. The taxes that went unpaid should have been due in Cyprus and various EU countries including Germany, Italy, France and Spain, and would have amounted to huge sums. The VAT on importing the yachts into EU waters would have been around €100m – and that’s before getting to the huge operational costs.

But what exactly did the arrangement entail? And how was it any different to what so many other law-abiding yacht owners were up to?

Where did it all begin?

The scheme is all based around a simple idea: why not rent your boat out when you’re not using it?

It’s a double win. First, customers give you some cash to offset what you’ve spent on your yacht. But second, you can qualify for significant VAT cuts – because your yacht is now classed as a business.

This is courtesy of something called the commercial exemption (or, for EU VAT Directive enthusiasts, Article 148). VAT is a tax on the consumer, levied on goods and services they buy: a chair, a car, a concert ticket. Businesses are entitled to not pay VAT, and to pass it on to the customer instead. So if you operate a commercial vessel – a rental yacht for instance – then lots of your costs come tax-free.

But there’s no real halfway house when it comes to running a vessel: it’s either a business or it’s private. And if it’s a business, then when you want to use your yacht, you have to rent it out just like everybody else.

It’s the equivalent of taking money from one pocket and putting it in the other, but it’s necessary in order to show you’re just like all your other customers. You also need to show there were other customers – not just you.

Unsurprisingly, lots of yacht owners took advantage of this set-up. More often than not, they rented out their boats long-term to an independent management company, which would handle the tiresome day-to-day commercial operations of the vessels and arrange customer rentals. Like using a holiday-letting company to let out a property.

So that’s what Abramovich did?

Yes and no. Abramovich’s entourage clearly liked the idea of these tax exemptions. He had lots of yachts, and the bills were mounting. But Team Abramovich didn’t actually want to rent out any of his boats. They did, however, want to save on their tax bill.

Their solution was simple. Why not create their own commercial operation – and be their own customers?

Each of the yachts was already owned by an individual offshore company. All they needed to do now was establish another company to “manage” the yachts, then another set of companies – these ones outside the EU – to act as their “customers”.

To ensure it looked above board, all the companies involved would have different parent companies, different directors and, if possible, different addresses. And just for good measure, the management company at the centre of this web would be moved into a new trust, just for this purpose. No connections here.

To the outside world, this would look like business as usual. Abramovich would be like any other rich man hiring out his boat to save costs by taking on customers and claiming tax exemptions.

But … there were no customers?

No. The only people using the yacht were Abramovich, his close associates and guests. All the commercial activity was a façade.

And they even took the scheme a few steps further. Every few weeks, directors of his yacht management company Blue Ocean would send across some charter agreements between itself and its “customers”. There’s nearly 300 charter agreements in the leaked Cyprus Confidential files. TBIJ found evidence that more than two thirds of them were back-dated – slotted into previous months’ calendars as “proof” of commercial activity.

This went on for more than half a decade, charter after charter, shifting money from one pocket to the other, and claiming all the operational expenses VAT-free.

But the arrangement presented a legal problem. With all these VAT exemptions coming their way, at what point do the tax authorities finally get their share?

Amid all this, a landmark 2010 European Court case, known as the Bacino case, made an important ruling: that a yacht’s “use” trumped whatever “classification” it happened to have. VAT must be paid when the charter is for leisure, and only if it’s chartered out for commercial use could it be exempt.

How did that affect Abramovich?

It didn’t. His team appear to have already taken steps to pre-empt this outcome. In their solution, the offshore companies (owned by Abramovich) were themselves renting out the superyachts (owned by Abramovich), from the yacht management company (owned by Abramovich). So they weren't customers, they were commercial operators, just like Blue Ocean.

Confused? So you should be. The whole structure was designed to be opaque. But put simply: by claiming the offshore companies chartering the boats were also “commercial operators”, then it followed that they too were engaged in commercial activity. And so were exempt from VAT.

Not only that, but the companies were based in the BVI, so a step further out of EU jurisdiction. And harder to assess.

But the scheme still had flaws. VAT rules brought in around the time of the Bacino case stated that VAT on the “supply” of transport services, including yachts, should be paid where the vessels are, not where the company happens to be based. So even if the BVI companies truly were commercial operators – and there’s no evidence that they were – they’d still have to charge their “customers” VAT and pay this to the relevant authorities. And there is no evidence that they did.

And they were never forced to pay up?

Well, in 2012, the Cypriot courts came to a similar conclusion: the BVI companies chartering the yachts weren’t commercial, and so the exemption would not apply. An unpaid tax bill landed on Blue Ocean’s desk for €14m.

In terms of the total tax evaded on this scheme, that was likely small fry. For starters it only represented VAT on the charter income from the BVI companies between the end of 2005 and the end of 2009.

Some of 2005 was time-barred – the authorities had missed the chance to make their claim. And from 2010 onwards, the new rules had come into force about VAT on where the yachts were stationed. Abramovich didn’t use them in Cypriot waters.

As for the EU countries where the yachts were used after 2010, we’ve not seen any evidence VAT was paid there either.

Despite losing the initial case, Blue Ocean contested the VAT bill right up to the supreme court. Within months of losing that hearing (which it didn’t show up to), the company was dissolved. It’s not clear if it ever paid back the money.

But remember, the charters appear to have been created simply as a means to get money into the yacht management company, Blue Ocean. They were backdated, artificial, invented from thin air to show “commercial activity”.

The real tax savings were on the yacht operations – the maintenance and repairs in the shipyards of Europe, provisions for the ships, the fuel paid with no duty. And Abramovich’s biggest yacht, the Eclipse, spent upwards of $1.5m each time it filled up its fuel tank.

The Cypriot VAT assessment in 2012 heralded the end of Abramovich’s yachts operating under an artificial “commercial structure”. But they should never have applied in the first place – their only business was with themselves.