On 20 June 2019, the European Court of Justice gave its judgment in case C‑291/18 (Grup Servicii Petroliere SA). The case deals with the explanation of the VAT exemption for supplies to offshore jackup drilling rigs and the definition of “vessel navigation on the high seas”.
Is an offshore ‘jackup’ drilling rig ‘a vessel used for navigation on the high seas …’? This is the principal question which this Court is now required to answer following a reference from the Curtea de Apel Bucureşti (Court of Appeal, Bucharest, Romania).
In May 2008 Grup Servicii Petroliere SA (“GSP”) sold three offshore jackup drilling rigs, operating in the Black Sea (more precisely, according to the information contained in the request of the referring court, in Romanian territorial waters) to certain Maltese purchasers for the purpose of carrying 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 existence of 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 It is not until the legs are withdrawn at the end of the drilling operation that the hull can float again.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. While the Court was also informed at the hearing that the platform supports a crew, that there is a log book and that the platform can be manoeuvred by its engines to deal with ocean currents and sea drift, it would seem that even when floating the platform is transported from location to location by a tugboat.
GSP issued invoices, applying the VAT exemption scheme, in respect of the supply of these platforms. After the sale, GSP continued to operate these platforms in the Black Sea pursuant to the terms of a bare boat charter.
The Romanian tax administration issued a VAT adjustment notice to GSP on the grounds that, although the drilling 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 parked position: their columns are in a low position and rest on the seabed in order to lift the pontoon (the floating part) above the sea, from a height of some 60 to 70 metres. For the VAT exemption to be applied, they argued, it was necessary to establish that the vessel in question is navigating effectively and predominantly on the high seas.
The Romanian tax administration considered, however, that the evidence showed that the actual and preponderant use of the platforms occurs when they are in a parked position for the purpose of drilling activity and not when they navigate, which is only an activity subsidiary to drilling.
GSP did not agree with this and submitted a complaint against this notice which was rejected by a decision of the Romanian national tax administration.
The Romanian Court of Appeal decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘(1) Must Article 148 of the VAT Directive be interpreted as meaning that the exemption from value added tax applies, in some circumstances, to the sale of offshore jackup drilling rigs, that is to say, are offshore jackup drilling rigs covered by the term “vessels” within the meaning of that provision of EU law, given that, according to the title of Chapter 7 of that directive, that provision lays down rules governing “exemptions related to international transport”?
(2) If the answer to the first question is in the affirmative, must Article 148(c) of the VAT Directive, in conjunction with Article 148(a) of that directive, be interpreted as meaning that an essential condition for applying the exemption from value added tax to an offshore jackup drilling rig, which has navigated into international waters, is that it must in fact be in a state of movement while it is being used (for commercial/industrial activities), floating or moving at sea from place to place, for a longer period than the period during which it is stationary or immobile, as a result of carrying out drilling activities at sea — that is to say, that navigation must in fact predominate via-à-vis drilling activities?’
The ECJ rules as follows:
‘Vessels used for navigation on the high seas’ does not apply to the delivery of floating structures, such as self-raising offshore rigs of the type at issue in the main proceedings, which are predominantly used in position immobile, to exploit hydrocarbon deposits at sea.
The opinion of the AG can be found HERE.