VAT Treatment of Aircraft Leasing
New Guidelines relating to the VAT implications arising out of aircraft leasing arrangements were issued in 2012 by the Malta VAT Department. The new VAT treatment applies to all aircraft other than those used by airline operators in international traffic since a VAT exemption applies in the latter case. The main intentions behind this VAT simplification measure are to:
- enhance Malta’s attractiveness as an aviation jurisdiction
- introduce a simplified VAT treatment of lease arrangements on the use of aircraft
- provide an attractive rate of VAT on lease payments, in respect of the use of such aircraft within EU airspace.
In terms of Malta’s VAT legislation, the supply of aircraft for use by airline operators for reward chiefly for international transport of goods and passengers is exempt from VAT. The same principles apply in respect of intra-community acquisitions or importation of aircraft. There is however no exemption in the case of aircraft acquired for non business purposes.
In accordance with Malta’s VAT legislation, the lease by a person established in Malta of an aircraft used purely for private purposes constitutes a taxable supply of a service taking place in Malta when:
- the aircraft is leased for a continuous period of not more than 30 days and is put at the disposal of the customer in Malta, and
- when the aircraft is leased for a continuous period exceeding 30 days to a person, established in Malta.
The Guidelines issued by the VAT Department stipulate that services which take place in Malta are considered as taking place outside the EU if they are enjoyed and used outside the EU. In view of the fact that it is practically impossible to determine the period when an aircraft is used within EU airspace, the Guidelines seek to establish a percentage of the lease on which Maltese VAT will be due, taking into consideration the aircraft model and other variables which are:
- maximum take off mass in kilograms;
- maximum fuel capacity in kilograms;
- fuel burn;
- optimum altitude in feet; and
- optimum cruising speed in knots.
The Malta VAT rate of 18% is only payable on that portion of the lease payment which is deemed to be for the use of the aircraft within EU airspace. The standard rate of VAT at 18% will be applied once the percentage of the lease which will be considered as the use of the aircraft within EU airspace is determined. The minimum percentage of time that an aircraft could be deemed to be in EU airspace is 30%, thus resulting in a minimum effective rate of VAT of 5.4%.
In order to benefit from the incentive provided in terms of the Guidelines, the following conditions must be satisfied:
- a Malta company has to be set up for the purposes of acquiring the aircraft;
- the lessor must be registered with the Malta VAT Department, and will then be able to claim any input VAT incurred on it supplies;
- the lessee cannot claim the input VAT in respect of the lease;
- a lease agreement has to be in place between the owner of the aircraft (lessor) and another Malta company (lessee). Both the lessor and the lessee must be established in Malta;
- the lease agreement can provide an option to the lessee to acquire the aircraft at the end of the lease term for a percentage of the original cost;
- the lease agreement cannot be for a period which exceeds 60 months;
- the lease installments must be payable on a monthly basis.
The VAT department must be informed in writing and must give its approval for the aforementioned simplification procedure to be applicable. The Director General retains the right to require the lessor to submit details regarding the use of the aircraft and may impose certain conditions before granting approval.
A VAT paid certificate will be issued at the termination of the lease if the lessee exercises the option to purchase the aircraft, thus allowing the aircraft free movement within EU airspace.