People working for Abramovich designed a corporate structure to give the false impression that the billionaire’s yachts were being commercially chartered to third parties, and therefore eligible for tax breaks, writes Ciren.Cy.
Key Findings
- To take advantage of an EU tax exemption for commercial vessels, executives at Abramovich’s companies devised a complex scheme in which his superyachts were leased to ostensibly independent customers.
- In reality, the customers leasing the vessels were companies owned by Abramovich’s offshore trust via opaque firms in a Caribbean secrecy jurisdiction.
- The scheme was in place from 2005 to 2012, when Cypriot tax authorities issued a 14-million-euro bill for unpaid value-added tax that Abramovich’s lawyers unsuccessfully appealed in court.
A company ultimately owned by the Russian billionaire Roman Abramovich set up a fake superyacht-leasing business in Cyprus in an apparent attempt to evade millions of euros in tax, leaked files and correspondence obtained by OCCRP reveal.
Between 1999 and 2010, the former Chelsea Football Club owner assembled a fleet of superyachts worth around $1.2 billion, including the world’s longest at the time, Eclipse, which boasted two helipads and a swimming pool that could turn into a dance floor.
The yachts spent part of the year sailing in European waters. Operating them was expensive, and under EU law, value-added tax was due on everything needed to keep them in service — fuel, staff, port fees, maintenance, and more. But these costs were exempt from the EU tax for vessels used for commercial purposes.
To claim the exemption, people working for Abramovich devised a complex scheme in which the luxury vessels were leased to what looked like independent customers paying to go on a cruise for a week or two. In reality, the companies hiring the superyachts were owned by an offshore trust whose beneficial owner was Abramovich.
Cypriot tax officials later found that the yachts were not in fact used commercially, and in 2012 the country’s tax authority ordered Abramovich’s company to pay 14 million euros ($18.5 million) to cover the unpaid tax. Lawyers for the company tried to overturn the order in court, but the appeal was finally dismissed last year. Representatives for Abramovich did not respond to questions about whether the outstanding tax bill had been settled.
Leaked emails from people working for Abramovich, discovered by The Bureau of Investigative Journalism and the BBC and shared with OCCRP, reveal an explicit intention to deceive tax inspectors. “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,” a director of Abramovich’s company wrote in an email in 2005, when the scheme began. “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.”
The email is a “smoking gun for tax artificiality,” Rita de la Feria, a professor of tax law at the University of Leeds, told reporters at OCCRP’s partner outlets the BBC and the Guardian.
“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.”
Asked by reporters whether the tax had been paid, the head of Cyprus’ Audit Office said only, “The matter will be examined by our Office.”
Lawyers for Abramovich denied “any allegation that [Abramovich] had or ought to have any knowledge of, is personally responsible for and/or is personally liable for any alleged deception of any government authority in order to evade payment of taxes which were lawfully due or for any other purpose.”
OCCRP has not seen any leaked emails about the yachts to or from Abramovich himself. But the emails frequently refer to the billionaire and include many exchanges between service providers and one of Abramovich’s close friends, who was also a business associate of his.
A ‘Tax-Efficient’ Structure for Superyachts
2005 was a big year for Roman Abramovich. In April, Chelsea F.C., the English football team he had purchased two years earlier, won its first-ever Premier League trophy. A few months later, the businessman earned $13 billion through the sale of his oil company, Sibneft, to the Russian state-owned industrial giant Gazprom.
Behind the scenes, his associates were also busy. On the eve of Chelsea’s league victory in April 2005, Jonathan Holloway, director of the Cyprus-based firm Blue Ocean Yacht Management, emailed Abramovich’s lawyer, his executive assistant, and the head of his U.K.-based consultancy firm a memo titled “Operating Structure” which set out a new system for managing Abramovich’s superyachts. This structure, Holloway said, would be “the most ‘tax efficient’” for the client.
At the time, Abramovich indirectly owned three superyachts, Ecstasea, Le Grand Bleu and Pelorus. Two others — Luna and the 162-meter-long Eclipse — were to be delivered by 2010.
Holloway laid out a proposed structure for managing these vessels.
Each was owned by a separate company in the British Virgin Islands, and all five companies were ultimately owned by a single trust whose sole beneficiary was Abramovich. (Trusts are legal arrangements that allow an asset to be managed by one person for the benefit of another.)
Each British Virgin Islands company leased its vessel to Blue Ocean, the yacht management firm he directed in Cyprus. They did this under renewable contracts lasting between one and three years. These “bareboat charter” agreements, which are common in the maritime world, cost Blue Ocean millions of dollars per year and made it responsible for arranging crew and provisions for the vessels.
Blue Ocean then sub-leased the five superyachts for short cruises, usually lasting one or two weeks, under what are called “time charter” agreements. The charters generated income to cover Blue Ocean’s operating costs, including fuel, staff, and maintenance for the vessels.
With its corporate branding and its office close to the historic center of the Cypriot city of Limassol, Blue Ocean might have seemed like any other yacht management business that sourced customers from the open market. That is certainly how Holloway wanted the firm to be perceived.
“With our move towards commerciality one of the things we are trying to do is to prove our independence, that we are a standalone trading company,” he wrote in an email sent in June 2005.
But in reality, Blue Ocean was ultimately owned by another Cyprus-based trust benefitting Abramovich, the files show.
And the ‘customers’ agreeing to pay Blue Ocean up to $1.25 million per week-long cruise were four other British Virgin Islands companies that were also ultimately owned by Abramovich’s trust, the leaked files show.
Details of these entities’ ties to Abramovich were hidden behind a veil of secrecy provided by the British Virgin Islands, a British overseas territory in the Caribbean where information about company ownership is not public. The very existence of Abramovich’s trusts was not a matter of public record.
“No-one knows how many trusts exist, or even what assets they have, or who’s behind them, because they don’t need to register for them to exist,” Andres Knobel, a researcher on beneficial ownership at the NGO Tax Justice Network, told OCCRP. “They’re considered legal arrangements, not legal persons… This creates secrecy risk.”
Holloway declined to answer specific questions about the leasing arrangements for Abramovich’s superyachts.
“I have managed literally hundreds of vessels from many different locations around the world. Each vessel has a unique set up and I can’t be expected to remember the individual circumstances of every vessel I have ever managed,” he told reporters.
A Yacht-Leasing Company With Just Five ‘Customers’
Leaked emails suggest the purpose of these complex leasing arrangements was to skip VAT payments.
“If the authorities looked through all our structure to see effectively the owner using the boat (ie: forget the bareboat structure that is in place) could they then demand VAT on the boat???” Paul Heagren, the U.K.-based director of Abramovich’s consultancy firm Millhouse Capital UK, asked in an email sent in July 2006 to Holloway, Abramovich’s lawyer, and several Millhouse colleagues.
Heagren did not respond to a request for comment.
Emails from Blue Ocean’s Holloway also appeared to acknowledge that the arrangements were a sham.
“We basically have 5 ‘customers’ (4 BVI’s + RA),” he wrote in one email sent in November 2007. Holloway declined to comment when asked if he used quotation marks around “customers” because he considered the commercial relationship with them to be fictitious.
Those ‘customers’ could sign contracts to charter the yachts for short-term cruises, but leaked correspondence suggests the cruises didn’t necessarily take place, and that the purpose of the contracts was merely to justify movement of funds into Blue Ocean.
“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,” a memo authored by Holloway in 2005 explained.
“We will make all efforts to ensure that where it is possible, the timecharters raised coincide with the actual use of the yachts,” he added.
A leaked spreadsheet titled “Use of Boats” details the users of Abramovich’s yachts between April and December 2005. The most frequent user was “RA,” while others included Abramovich’s close political or business associates.
The parties actually chartering the vessels were usually Abramovich’s British Virgin Islands-based companies.
A former crew member on Eclipse, who asked to remain anonymous due to continued involvement in the yachting sector, said the vessel was used exclusively by Abramovich and his family. “From the standpoint of crew, at no point was it a charter yacht,” the crew member told OCCRP.
Blue Ocean also used the charter agreements to claim duty-free allowances on fuel, emails show — although at times this arrangement was jeopardized when staff at a company services provider failed to produce paperwork on time.
“I have not received the signed timecharter for Ecstasea for 6th September. I needed to get this to the fuel supplier by lunchtime today so he could arrange for a delivery of duty free fuel,” Holloway wrote on September 8, 2005. “The difference between the cost of duty paid and duty free fuel is $44,000. If we are going to try and claim duty free fuel in the future we need to be able to produce signed timecharters within 24 hours.”
Correspondence also reveals an intent to avoid tax on the value of the yachts themselves, though it’s unclear if the individuals working for Abramovich achieved this.
“We want to avoid paying VAT on the purchase price of the yachts,” Holloway wrote in 2005 as the scheme was being put in place.
Asked about the arrangements, Holloway told reporters: “In every ship management position I held I was asked to create structures for many different vessels. In creating those structures I followed the instructions of my principles [sic] and used industry standard structures to best meet the principles [sic] requirements.”
Abramovich declined to answer specific questions on the set-up.
“Our client has always obtained independent expert professional tax and legal advice in respect of his tax affairs and acted in accordance with that advice,” his law firm, Kobre & Kim, wrote.
Regarding the entities cited in this article, the lawyers added that, “to the extent that they relate to our client, our client expects that similar advice was sought at the relevant times by those with responsibility for the day to day running of such entities.”
‘An Illusion of Independence’
From the outset, the people implementing the sham arrangements were careful to make it look like the different parts of the set-up were independent.
“The different parties in our structure… should not have the same shareholders,” Holloway wrote in the memo shared with Abramovich’s executive assistant, his lawyer and several Millhouse employees in April 2005. “To anybody looking into our structure from the outside, a common link could be the first clue to make them look deeper.”
At the time, Blue Ocean was ultimately owned by the same trust that also ultimately owned the superyachts. To create a degree of separation, Holloway wrote that a lawyer for Abramovich had “already agreed to start work on putting Blue Ocean into an orphan trust.” Less than one week later, another trust was established in Cyprus with Abramovich as its beneficiary. Days after that, in May 2005, shares in Blue Ocean were transferred to the new trust.
That lawyer, Andre de Cort, recommended other ways to make Blue Ocean look like a commercial enterprise — including increasing the number of “customers.”
“As regards to how many companies we use as time charterers, there is not [sic] specific requirement or golden rule,” he wrote of Blue Ocean in a June 2005 email. “It is a matter of BOYM showing a commercial operation. It would look better with say 4 or 6 companies, but it [sic] that is not possible we’ll have to run that risk.”
The following year, Holloway arranged for the yachts to be reclassified as “commercial vessels” in Bermuda, where they were legally registered.
But Abramovich would continue to be the main user of the yachts, despite the registration of the vessels as commercial, according to an email from another lawyer advising Blue Ocean.
“Notwithstanding the categorization of the yachts as ‘commercial’, their use continues to be ‘private/pleasure’, and the ‘user’ is mostly the [ultimate beneficial owner] and his guests,” Michael McBride, managing partner of Chrysses Demetriades, the Cypriot law firm which represented Blue Ocean, wrote in 2012.
Leaked files show how Blue Ocean frequently backdated charter agreements and signed them retroactively according to its budgeting needs — and even destroyed paperwork for charters that were supposed to have taken place months earlier.
“It has been decided that the Pelorus time charter dated 16th August must now have period dates entirely within October,” Holloway wrote in an email in December 2005. “Therefore please destroy the time charter for Pelorus dated 16th August sent earlier today and replace it with the one attached.”
Despite the effort that went into the sham, staff arranging the paperwork were sometimes sloppy.
One agreement, dated July 2005, appeared to allow British Virgin Islands-based Eyke Services Limited to charter the 115-meter-long Pelorus that month for a week in Malta. But official company records show that Eyke Services wasn’t even created until August 2005 — one month after it was purported to have signed the agreement with Blue Ocean.
In response to questions, Holloway said “it would be wrong to think that I ever created something unique, I used structures that others in the industry were using.” Holloway said he only ever operated with the agreement of the client. He said this statement applied to his entire career in ship management, not just at Blue Ocean.
De Cort said, “Any allegations of wrongdoing on my behalf are denied.”
McBride said Chrysses Demetriades & Co LLC had provided general tax advice to Blue Ocean in 2004 and represented the firm in a 2012 VAT claim, but had never been involved in discussions over the corporate structure set up to manage the leasing and re-hire of the yachts. McBride said the firm had not “been part…of any alleged scheme involving an attempt to evade VAT and duties.
“We acted as attorneys to the client only after the tax dispute ensued and promoted its case before the Court based on our professional opinion as to the legal merits of the client’s case.”
A 14-Million-Euro Tax Bill From Cyprus
The scheme came under pressure in 2010, when Cyprus’ tax authority began investigating Blue Ocean. In March 2012, officials issued the company a 14-million-euro ($18.5 million) bill for unpaid taxes from 2005 to 2010, court records show.
Tax officials found that Blue Ocean “did not present sufficient supporting evidence that the vessels were chartered for the purposes of carrying out an economic activity … The taxpayer has failed, both during the audit and during the examination of the objection, to present any evidence that the legal entities to which the vessels were chartered were carrying out an economic activity.”
Blue Ocean appears to have shut down the scheme around the time of the probe. In 2011, the company earned $58.4 million from charters; in 2012 this dropped to $13.3 million. By 2013, charter revenue was down to zero, financial statements show.
Blue Ocean contested the findings in court, but in 2018, Cyprus’ Administrative Court dismissed the firm’s application, ruling that Blue Ocean’s claim that it did not need to pay VAT were “unfounded.”
An appeal by Blue Ocean to Cyprus’ Supreme Court was dismissed in March last year after its attorney said she had “lost contact” with the firm and sought permission to withdraw the case, according to court records obtained by CIReN, OCCRP’s Cypriot member center.
Blue Ocean was dissolved last July. OCCRP was not able to determine whether the company ever paid the money owed to the tax authority.
Chrysses Demetriades, the law firm that represented Blue Ocean, said it had “no information” about whether Blue Ocean paid the outstanding tax bill.
The country’s tax commissioner declined to comment.
Cyprus was not alone in investigating Blue Ocean’s tax affairs. Italian authorities also brought proceedings against Blue Ocean over unpaid fuel duties relating to several refuelling stops in Trieste between 2009 and 2012, and initiated criminal proceedings against the captains of three of Abramovich’s superyachts, according to an email sent by de Cort in September 2015.
But court records and leaked correspondence show that prosecutors dropped proceedings against the captain of Pelorus after de Cort and his team told Italian authorities that the vessel was used for commercial purposes and therefore exempt from duty on fuel.
De Cort denied wrongdoing but declined to comment on specific allegations.
Cyprus Investigative Reporting Network (CIReN) contributed reporting.