Tax Incentives for the International Aviation Industry
Endeavouring to support the aviation industry in Malta, the Maltese government has clarified its position in relation to income derived from aircraft which may have called or operated from any airport in Malta. A fundamental provision has been introduced in relation to such in that income derived from the ownership, leasing or operation of aircraft or aircraft engines shall be deemed to arise outside Malta for Maltese Income tax purposes. Such income is deemed to arise outside Malta irrespective of:
- The country of registration of the aircraft/engines;
- Whether the aircraft calls at or operates from Malta.
Under Malta’s remittance basis of taxation, income deemed to arise outside Malta will be exempt from Maltese tax. Consequently, a highly viable option is presented allowing for the shifting of tax residence of an aircraft company to Malta in order to profit from the deemed source provision. This rule, combined with the rules on the operation of aircraft in international traffic contained in Malta’s double taxation agreements, presents attractive tax planning opportunities for airline and aviation operators setting up their residence in Malta.
Depreciation of Aircraft
The Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010 provide for new depreciation periods for wear and tear of aircraft or aircraft equipment. These have been decreased rendering Malta increasingly competitive. These amendments change the minimum period of wear and tear of aircraft for income tax purposes. Prior to such changes, the minimum period for aircraft depreciation was 12 years. With the coming into force of these amendments, depreciation of aircraft and its constituent parts will range over a minimum number of years as follows:
- Aircraft airframe – 6 years
- Engine – 6 years
- Engine or aircraft overhaul – 6 years
- Interiors and other parts – 4 years
The abovementioned minimum periods are effective retrospectively as from 1st January 2009.
New Exemption from Fringe Benefits
L.N. 292 of 2010, namely Fringe Benefits (Amendment) Rules 2010, creates a new exemption from fringe benefits rules. This applies to an employee or officer of an employer as well as companies or partnerships, whose business activities include the ownership, leasing, or operation of any one or more aircraft or aircraft engine which is used for or employed in the international transport of passengers or goods. Moreover such persons ought to be non-Maltese residents.
Tax Guidelines on Aircraft Finance Leasing in Malta
The Maltese Tax Authorities have published guidelines on the tax treatment of finance leasing of aircraft. The guidelines pertain to aircraft finance leasing arrangements not exceeding 4 years. Arrangements of 4 years or more are governed by different rules. The new guidelines clarify the position pertinent to the level of taxable income in the hands of the lessor and the type of deductions that the lessee is entitled to claim.
The lessor is charged to tax on the annual finance charge, namely the difference between the total lease payments less the capital element divided by the number of years of the lease. On the other hand the lessee is allowed a deduction in respect of:
- Finance charge;
- Repairs; and
The lessee is allowed capital allowances in respect of the aircraft and the parties may not opt to shift the burden of wear and tear onto the lessor. Where the lessee exercises an option to purchase the aircraft on the termination of the finance lease, and the lessor is not trading in the purchase and sale of aircraft, the purchase price received by the lessor shall be considered to be of a capital nature and no tax thereon shall be payable by the lessor.
The abovementioned clarifications are mainly pertinent to lessors and/or lessees that operate from Malta using a Maltese registered limited liability company. A Maltese company is subject to tax in Malta on its worldwide income. On the other hand, the international aviation income derived by a lessor/lessee that is resident but not registered in Malta is deemed to arise outside Malta. Accordingly such income shall be taxable in Malta solely on a remittance basis.