VAT Treatment

Business aviation refers to the use of aircraft for a business purpose. A business aviation arrangement can take various forms, such as:
  • aircraft owned by a 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.
    The QA VAT exemption likewise cover services for the direct needs of QA and its cargo, such as:
    • 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 acquisition supplies and importation of aircraft are subject to no VAT (with right of recovery of any input tax) if the QA VAT exemption applies. If such exemption does not apply, VAT is applicable at standard rate (18% in Malta) if not qualifying for the QA VAT exemption. Parts and equipment sold with/accessory to aircraft are part of the same supply and follow the same VAT treatment. Supplies by sub-contractors to QA manufacturers may be covered by the QA VAT exemption (it is important for supplier to retain evidence supporting exemption).

    VAT Guidelines on Aircraft Leasing Arrangements

    The Malta VAT department has enacted guidelines in order to clarify the VAT treatment of aircraft leasing in cases other than those where aircraft used by airline operators in international traffic are involved. The guidelines provide that the effective VAT rate suffered on the use of a non-QA within EU airspace can be reduced to a minimum of 5.4%. Moreover, the Aircraft can be registered on the aircraft register of any country.
    Essentially, in accordance with these guidelines, aircraft leasing occurs when the lessor (owner of the aircraft) contracts the use of the aircraft to the lessee (the person who leases the aircraft) for a consideration. For VAT purposes, the supply of aircraft leasing is treated as supply of services which is taxable according to the use of the aircraft attributed within the airspace of the European Union. Therefore, VAT at the rate of 18% is only payable on the deemed use of the aircraft within the European Union’s airspace.
    In view of the practical difficulty to establish the actual use of the aircraft within the European Union’s airspace, the local authorities have issued a formula which takes into consideration essential features of the aircraft through which the percentage of deemed use of the aircraft within European Union airspace is established. Such formula takes into consideration the following criteria:
    • aircraft type
    • MTOM
    • maximum fuel capacity
    • fuel burn
    • optimum altitude
    • optimum cruising speed
    Practical Arrangement
    In essence the above is achievable through the following 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 above VAT treatment shall apply only insofar as the following criteria are satisfied:
    • 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

    Complimenting the above advantages, the Malta aircraft regime offer further benefits:
    • 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.

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