The "Aircraft Registration Act" (ARA), was enacted in Malta aircraft legislation to regulate the registration of aircraft and aircraft mortgages in Malta. The Act features the Implementing law on the Cape Town Convention on International Interests in Mobile Equipment and its Aircraft Protocol, geared towards making asset-based financing easier while enhancing secured creditors' rights to enforce their interests in the aircraft. Tax incentives were introduced specifically targeting the aircraft maintenance sector.

Income from ownership, leasing or operation of aircraft or aircraft engines: The Source Rule

A crucial amendment to Malta tax legislation covers the treatment of any income derived from the ownership, leasing or operation of aircraft or aircraft engines used or employed in the international transport of passengers and goods.

For Malta tax purposes, this income shall be deemed to arise outside Malta irrespective of both the aircraft’s country of registration and whether it calls at or operates from Malta or otherwise.

Through the pertinent structuring, this provision is of particular interest to companies which are deemed to be resident but not domiciled in Malta for tax purposes. In the case of such entities, any income derived from the ownership, leasing or operation of aircraft or engines used internationally will be taxable in Malta solely in the event that such income is remitted or received in Malta.

When juxtaposing the Malta source rule, to the majority of Malta’s double tax treaties and the pertinent rule contained therein in relation to the income derived from international traffic attractive tax planning opportunities may be achieved.

The source rule affords the required certainty to foreign aircraft owners/operators when their aircraft fly to Malta. Income does not arise in Malta, hence it is not taxable in Malta. Moreover, the source rule ensures that non-resident aircraft owners or operators are not subject to withholding tax in Malta upon lease or other payments made in favour of the said non-residents. When payments such as finance charge/rent are made to a non-resident lessor no withholding tax applies, (the income is deemed to arise outside Malta and the recipient of the income is a non-resident person).