AVIATION
Promethean offers the following services
The Source Rule
The “Aircraft Registration Act” (“Act”) was enacted as part of Malta’s aircraft legislation to regulate the registration of aircraft and aircraft mortgages. The Act incorporates the implementing law of the Cape Town Convention on International Interests in Mobile Equipment and its Aircraft Protocol, facilitating asset-based financing while strengthening secured creditors’ rights to enforce their interests in aircraft. Tax incentives were also introduced to support the aircraft maintenance sector.
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Income from ownership, leasing or operation of aircraft or aircraft engines: The Source Rule
A key amendment to Malta’s tax legislation concerns aircraft taxation Malta, specifically the treatment of income derived from the ownership, leasing or operation of aircraft or aircraft engines used in the international transport of passengers and goods.
For the purposes of aircraft taxation Malta, such income is deemed to arise outside Malta regardless of the aircraft’s country of registration or whether it calls at or operates from Malta.
With the appropriate structuring, this provision is particularly beneficial for companies that are resident but not domiciled in Malta for tax purposes. In such cases, income derived from the ownership, leasing or operation of aircraft or aircraft engines used internationally is taxable in Malta only if the income is remitted or received in Malta.
When considered alongside Malta’s source rule, the provisions of Malta’s double tax treaties relating to income from international traffic may provide attractive tax planning opportunities.
The source rule provides certainty for foreign aircraft owners and operators when their aircraft operate to or from Malta. As the income is deemed to arise outside Malta, it is not subject to tax in Malta. In addition, the source rule ensures that non-resident aircraft owners or operators are not subject to Malta withholding tax on lease payments or similar payments made in their favour. Where finance charges or rent are paid to a non-resident lessor, no withholding tax applies because the income is deemed to arise outside Malta and the recipient is a non-resident
Leases
FINANCE LEASES
Finance leases are similar to bank loans, except that the purchaser ultimately acquires the aircraft from the seller. The airline makes monthly lease payments and, at the end of the lease term, typically becomes the owner of the aircraft. Aircraft finance leasing is therefore similar to a hire purchase arrangement.
The income tax treatment of aircraft finance leasing was clarified with the introduction of the Finance Leasing Rules in 2005. These rules apply where the lessee substantially assumes all the risks and rewards associated with ownership of the asset, other than legal title. In addition, the lease agreement must exceed four years. For a qualifying finance lease, the following income tax treatment applies
the lessor is chargeable to tax on the annual lease payments;
the burden of wear and tear is deemed to be borne by the lessor, allowing the lessor to claim capital allowances on the leased asset; and
the lessee is entitled to deduct the full amount of the lease payments from chargeable income, together with any other relevant deductions available under Article 14(1) of the Income Tax Act.
If the ownership of the asset is subsequently transferred from the lessor to the lessee with the latter making a payment exceeding the total annual lease payments, this payment shall be chargeable to tax in the hands of the lessor.
The Commissioner for Revenue has also issued guidelines for aircraft leasing arrangements that do not fall within the Finance Leasing Rules and that do not exceed four years in duration. In these cases, the guidelines provide that the Malta tax treatment is as follows:
the lessor is charged to tax on the annual finance charge, representing the difference between the total lease payments and the capital element, divided by the number of years;
the lessee is allowed deductions in respect of the following expenses:
the finance charge;
any maintenance costs;
any repair costs; and
any insurance expenses;
the lessee is entitled to claim capital allowances in respect of the aircraft; and
where the lessee exercises an option to purchase the aircraft at the end of the lease, the consideration received by the lessor is treated as a capital payment and is not subject to tax in the hands of the lessor.
OPERATING LEASES
Operating lessors either order aircraft from manufacturers or purchase them from airlines before leasing them back under a sale and leaseback arrangement. The operating lessor leases the aircraft to the airline, which acts as the lessee. Aircraft operating leases may last from a few months to several years, allowing airlines to meet seasonal demand. Airlines may also lease aircraft together with crew and pilots under what are known as wet leases.
In the case of aircraft operating leases, the lessor is subject to Malta tax on the full amount of the lease income and, where it retains the burden of wear and tear, is entitled to claim tax depreciation. The lessee, on the other hand, may deduct the full amount of the lease payments and claim tax depreciation where it assumes the burden of wear and tear.
Allowances and Benefits
CAPITAL ALLOWANCES
Accelerated depreciation allows a larger portion of an asset’s depreciation value to be claimed earlier in its depreciation cycle, resulting in higher deductions over a shorter period. For businesses, aircraft tax depreciation can reduce costs during the early years of operation by deferring part of their tax liability. To support this, the minimum tax depreciation periods for aircraft were reduced under the Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010.
Before these rules came into force, the minimum period for aircraft wear and tear was 12 years. Under the revised aircraft tax depreciation rules, the applicable tax depreciation periods are as follows:
Aircraft Airframe
6 years
Aircraft Engine or Airframe Overhaul
6 years
Aircraft Engines
6 years
Aircraft Interiors and Other Parts
4 years
FRINGE BENEFITS EXEMPTION
The Fringe Benefits (Amendment) Rules, 2010 introduced a full exemption from Malta tax on certain aircraft fringe benefits. The exemption applies to the private use of an aircraft by non-resident employees, officers, companies or partnerships whose business activities include the ownership, leasing or operation of aircraft or aircraft engines used in the international transport of passengers or goods.
This exemption for aircraft fringe benefits provides additional tax efficiency for international aviation businesses operating through Malta.
INVESTMENT TAX CREDITS
A person carrying on a trade or business involving the repair, overhaul or maintenance of aircraft, aircraft engines or equipment used in such aircraft may qualify for aircraft maintenance tax credits. These tax credits are calculated as a percentage of either:
qualifying expenditure; or
wage costs for jobs directly created by the project.
| Size of Undertaking | % of Qualifying Expenditure / Wage Costs |
|---|---|
| Small | 50% |
| Medium | 40% |
| Large | 30% |
The aircraft maintenance tax credits are offset against tax due in Malta. Any unutilised investment tax credits may be carried forward and used against tax liabilities in subsequent years.
These incentives have encouraged leading Maintenance, Repair and Overhaul (MRO) businesses to establish substantial facilities in Malta, creating hundreds of skilled jobs and supporting the relocation of related aviation service companies to the island
AIRCRAFT FOR PRIVATE USE
Aircraft used for private purposes should, as a general principle, not generate income and therefore should not give rise to aircraft tax implications in Malta.
A payment made to a Maltese vendor for the sale of an aircraft is taxable in Malta only where the vendor is carrying on a trading activity. In the case of a payment to a foreign vendor, the payment is taxable in Malta only if the vendor is in the business of selling aircraft and carries on a trading activity in Malta. These aircraft tax implications depend on the nature of the transaction and the vendor’s trading status.
VAT Treatment
Business aviation refers to the use of aircraft for business purposes. A business aviation arrangement can take various forms, such as:
aircraft owned by a Special Purpose Vehicle (“SPV”) beneficially owned by a private individual or family;
aircraft owned by a company and used for the transportation of its senior officers and employees.
The EU VAT Directive and local VAT Legislation provide for an exemption with credit (i.e. zero rate) for Qualifying Aircraft (“QA”). Hence such aircraft qualify for the zero rate (VAT exemption with right of recovery of any VAT paid).
The EU VAT Directive holds that a QA is an “…aircraft used by airlines operating for reward chiefly on international routes.” On the other hand, Maltese VAT law states that a QA constitutes an “…aircraft destined to be used by airline operators for reward chiefly for international transport of passengers or goods”
The QA VAT exemption covers the:
supply (sale/transfer) of QA;
supply of equipment used/incorporated in QA to constructors, owners, or operators;
modification, maintenance, chartering and hiring of QA and equipment used/incorporated in QA;
goods for the fuelling and provisioning of QA.
Towage;
Pilotage;
Rescue services;
Valuation;
Use of airports (including landing fees);
Services provided to aircraft operators by their agents acting as such;
Services necessary for the landing, take off or stay in airports;
Assistance provided to passengers or crew.
Intra-EU acquisitions and the importation of aircraft are not subject to VAT, with the right to recover input VAT, where the QA exemption applies. Where the aircraft VAT exemption does not apply, VAT is charged at the standard Malta rate of 18%. Aircraft parts and equipment supplied with or as accessories to the aircraft form part of the same supply and follow the same VAT treatment. Supplies made by subcontractors to QA manufacturers may also qualify for the exemption, provided the supplier retains sufficient evidence to support its application.
VAT GUIDELINES ON AIRCRAFT LEASING ARRANGEMENTS
The Malta VAT Department has issued guidelines to clarify the VAT treatment of aircraft leasing VAT arrangements in cases other than aircraft used by airline operators in international traffic. Under these guidelines, the effective VAT rate on the use of a non-Qualifying Aircraft (non-QA) within EU airspace can be reduced to as little as 5.4%. The aircraft may also be registered in the aircraft register of any country.
In accordance with the guidelines, aircraft leasing occurs when the lessor (the aircraft owner) grants the use of the aircraft to the lessee in return for consideration. For VAT purposes, aircraft leasing VAT is treated as a supply of services, taxable according to the proportion of the aircraft’s use within EU airspace. As a result, VAT at the standard Malta rate of 18% is payable only on the deemed use of the aircraft within EU airspace.
As it is often impractical to determine the aircraft’s actual use within EU airspace, the Maltese authorities have introduced a formula to calculate the deemed percentage of use. The formula is based on the following criteria:
aircraft type;
Maximum Take-Off Mass (“MTOM”);
maximum fuel capacity;
fuel burn;
optimum altitude;
optimum cruising speed;
Practical Arrangement
the lessor, which would ideally be a company incorporated in Malta and would be using the aircraft for its economic activity, thus the leasing of the aircraft to the lessee, and the possible sale of the aircraft to the lessee, would be entitled to deduct any input VAT incurred on the purchase of the aircraft;
the monthly lease charges made by the lessor to the lessee would be subject to 18% VAT; however, the 18% VAT would only be applicable to the portion of use of the aircraft within the EU airspace, which is calculated on the basis of the above-mentioned formula;
at the end of the lease period, the lessee would have the option to purchase the aircraft. In case the option to purchase the aircraft is exercised, a VAT paid certificate will be issued by the VAT department.
the lease agreement shall be entered into by a lessor who is established in Malta and a lessee which is also established in Malta and who would not be eligible to claim input tax in Malta;
the lease agreement shall be for a period of not more than 60 months and the lease instalments shall be payable on a monthly basis;
the Director General (VAT) may request the lessor to submit details regarding the use of the aircraft;
prior approval must be sought in writing from the VAT Department and each application shall be considered on its own merits.
OTHER FUNDAMENTAL ADVANTAGES
Malta company law affords for the possibility to re-domicile a company to Malta, resulting in the continuation of the company without going into liquidation.
availability of efficient exit strategies where gains on the disposal of an aircraft or aircraft parts may not be taxable in Malta.
no withholding taxes on outbound payments such as interest, royalties, dividends, lease payments or liquidation proceeds.
there are no official transfer pricing, controlled foreign company (“CFC”) and thin-capitalisation rules in Malta.
Malta’s professional services community, which, through its experience in ship finance, ship registration and ship mortgages has propelled Malta to become the largest EU flag state, is well positioned to support new opportunities in aircraft finance and leasing.