The European Commission is taking action against three EU member states for failing to collect sufficient value added tax (VAT) on yachts.

Pierre Moscovici, the EU’s commissioner for taxation, started formal infringement procedures against Cyprus, Greece and Malta for allowing yacht owners to pay less VAT than they should.

In particular, the commission argues, these three countries have developed local VAT rules that are unlawful because they favor buyers of large luxury yachts that sell for tens of millions of dollars.

“In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion,” Moscovici said.

Practices in Greece, Cyprus and Malta distort competition in the maritime sector, violate EU law “and must come to an end,” he said.

In its press release, the European Commission noted that concerns about the amount of VAT paid on private jets and yachts was drawn to public attention last November by the Paradise Papers investigation by the International Consortium of Investigative Journalists (ICIJ) and its partners.

ICIJ’s reporting focused mainly on complex corporate structures that avoided the VAT on luxury yachts and jets bought through the Isle of Man – an offshore tax haven not mentioned in the European Commission’s Mar. 7 infringement action.

Vanessa Mock, the Commission’s spokeswoman for tax and customs, said the Isle of Man was still under scrutiny.

“VAT evasion on aircrafts in the Isle of Man is an issue taken very seriously by the Commission. The issue is also being investigated by Eurofisc, the EU’s network of anti-fraud experts,” she said.

Although the Isle of Man is self-governing, it is a UK Crown Dependency and is treated as part of the UK for VAT purposes.

Last year, Moscovici wrote to the British finance ministry demanding an explanation of the Isle of Man’s VAT collection on yachts and private aircraft.

The UK authorities are currently conducting a review of relevant VAT practices in the Isle of Man and are expected to share the results with the commission.

Mock said: “Should it become necessary, the commission will not hesitate to take further action.”

Meanwhile, the infringement procedure begun against Malta, Cyprus and Greece will address both yacht purchases and leasing.

Under European Union rules, it is possible for member states to grant a VAT reduction on transactions if it can be proven that the yacht is to be used, in part, outside the EU. However, the commission claims that Greece, Cyprus and Malta have instead been applying a formula, based on a vessel’s size, to estimate the time it spends beyond EU waters.

Under the formula, the larger the vessel, the longer it is deemed to be outside the EU. This rule results in the largest yachts attracting the biggest VAT reductions – a practice the commission says is unlawful.