Guidelines Regarding VAT Treatment of Aircraft Leasing

Following the success of what is loosely referred to as the Yacht Lease Structure, the VAT Department in Malta have issued guidelines on the VAT treatment of aircraft leasing for private use. The devised structure, through which VAT can be paid, offers a safe business solution to those individuals wanting to acquire an aircraft under a Maltese company with a VAT paid status as well as the added benefit, if so desired, of registering such aircraft in Malta. The system allows for an aircraft owned by a Maltese company to be leased to third parties with an option to purchase the aircraft at the end of the lease.

What is the leasing agreement of an aircraft?

The leasing agreement of an aircraft is an agreement whereby the owner of the aircraft (the lessor) contracts the use of the aircraft to a person who leases the aircraft (the lessee) for a consideration. Furthermore, after the end of the lease period, the lessee may opt to purchase the aircraft at a percentage of the original cost. The final purchase option may be exercised by the lessee for a separate consideration, independent of the lease agreement.

How is the leasing agreement treated for VAT purposes?

For VAT purposes, other than aircraft used by airline operators in international traffic, the lease of an aircraft is a supply of a service which is subject to VAT with the right of deduction of input VAT by the lessor (where such right applies). This service is taxable according to the use of the aircraft attributed within the airspace of the European Union.

Whilst “The supply of aircraft destined to be used by airline operators for reward chiefly for international transport of passengers and/or goods” is an exempt with credit transaction, the lease of an aircraft is considered to be a supply of a service which is subject to VAT with the right of deduction of input VAT by the lessor (where such right applies).

How is the use of the aircraft within EU airspace calculated?

Given the nature of the aviation industry and the various flight patterns that any single aircraft may undertake, it is difficult to establish beforehand the movement of an aircraft in order to track the movement of an aircraft between EU and non-EU airspace in a precise manner. The VAT Department has therefore established a formula, based on an expert technical study establishing the estimated percentage portion of the lease based on the time that aircraft is used in the airspace of the EU.

The factors taken into consideration when calculating the chargeable proportion of the lease are:
• Aircraft Type
• Maximum Take-off Mass (MTOM) of the aircraft
• Maximum Fuel Capacity (kg)
• Fuel Burn
• Optimum Altitude (Feet at ISA conditions)
• Optimum Cruising Speed – True Airspeed (knots)

VAT at the standard rate of 18% is applied on the established percentage of the lease which is deemed to be related to the use of the aircraft in EU airspace.

Conditions

In order for the structure to be valid, the Maltese VAT department has issued the following criteria, all of which must be satisfied:

1. The leasing agreement shall be between a lessor who is established in Malta and a lessee who is also established in Malta and who would not be eligible to claim input tax in respect of the lease; and

2. The lease agreement shall not exceed a period of 60 months (5 years) and the lease instalments shall be payable every month; and

3. The Director General of the VAT Department may require the lessor to submit details regarding the use of the aircraft; and

4. Prior approval must be sought in writing from the VAT Department and each application will be considered on its own merits. Furthermore, the Director General of the VAT Department may impose other conditions which he may deem appropriate.
 

The newly revised Aircraft Registration Act (Chapter 503 of the Laws of Malta) provides for an aircraft to be registered as a commercial plane or for private purposes. For an aircraft to be registered it has to be owned by one or more of the following persons:

(a) The Government of Malta;
(b) Nationals of any European Economic Area;
(c) Undertakings formed in accordance with the law of an European Economic Area State and having their registered office, central administration or principal place of business within the European Economic Area;
(d) In the case of aircraft to be used for the purpose other than public transport or aerial work, persons in favour of whom a permit of residence has been issued.

The firm is well placed to provide assistance at all stages of the registration process of aircraft in Malta, including assistance with the drafting and the preparation of sale and purchase documentation as those connected with leasing and management of aircraft. Whether aircrafts are registered in the name of a charterer operating commercially under an Air Operator Certificate (AOC) or whether the aircrafts are registered for private purposes under an Air Services License with the Department of Civil Aviation in Malta, we are readily available to guide you through each step of the way.

Registration of an aircraft mortgage under the Maltese system provides the necessary security that a financier would require, as in case of bankruptcy and/or insolvency of the owner of an aircraft, all actions and claims, to which the aircraft may be subject, shall have preference over all other debts of the estate.

Furthermore, it may be stated in the instrument of the mortgage that it is prohibited to create further mortgages on an aircraft or to transfer the aircraft without the consent of the mortgagee (unless the transfer is made pursuant to a court order). It is also a great advantage that a registered mortgage is an executive title which can be immediately enforced thereby avoiding court proceedings.

Upon registration of a mortgage, the rights of any mortgagee shall not be affected by:

a) the creation of any separate privilege or charge on an aircraft or on any part;
b) the reservation of ownership rights by a seller on an aircraft or on any part;
c) any lease:
If there is more than one mortgage registered in respect of the same aircraft or share, the mortgagees shall be entitled in priority, one over the other, according to the date and the time at which each mortgage is recorded in the National Aircraft Register.

The mortgagee shall in the event of default by the mortgagor, be entitled to:

• take possession of the aircraft or share therein in respect of which he is registered;
• sell the aircraft or share in respect of which he is registered;
• apply for any extensions, pay fees, receive certificates, and generally do all such things in the name of the owner or registrant as may be required in order to maintain the status and validity of the registration of the aircraft;
• lease the aircraft so as to generate income;
• receive any payment of the price, lease payments, and any other income which may be generated from the management of the aircraft.