Since the aviation industry has been identified by the Government of Malta as a target growth opportunity, domestic legislation for the registration and security of aircraft was overhauled. To this end an Act entitled the “Aircraft Registration Act” (ARA), was enacted in Malta aircraft legislation so as 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. For more information about Malta Aircraft Registration click here.
As a part of the above overhaul, tax provisions were introduced in Malta tax legislation in order to complement the ARA. Moreover, particular 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).
Finance leases are similar to bank loans, except that the purchaser at some point then buys the aircraft from the seller. The airline would make monthly lease payments and at the end of the lease it would typically own the aircraft. Finance leasing is akin to a hire purchase arrangement.
The income tax treatment of finance leases was clarified with the introduction of the Finance Leasing Rules in 2005.These rules are applicable in those scenarios where the lessee substantially assumes all risks and rewards associated with the ownership of the asset, other than the legal title. Furthermore, the period of the lease agreement ought to exceed four years. The following arrangements shall apply in the case of a qualifying finance lease for income tax purposes:
- the lessor is chargeable to tax on the annual lease payments;
- the burden of wear and tear is assumed to be borne by the lessor, meaning that the lessor is entitled to claim capital allowances on the leased asset; and
- the lessee is entitled to deduct the full amount of the lease payments from chargeable income, as well as other relevant deductions under Article 14(1) of the Income Tax Act.
If the ownership of the asset is subsequently transferred from the lessor to the lessee with the latter making a payment exceeding the total annual lease payments, this payment shall be chargeable to tax in the hands of the lessor.
The Malta Inland Revenue Department has also issued guidelines in relation to aircraft leasing arrangements, which do not fall under the Finance Leasing Rules and which arrangements ought not to be longer than four years in duration. In such cases, the Guidelines clarify that the Malta tax treatment should be as follows:
- the lessor is charged to tax on the annual finance charge, which represents the difference between the total lease payments less the capital element, divided by the number of years;
- the lessee is allowed deductions in respect of the following expenses:
- the finance charge;
- any maintenance costs;
- any repair costs; and
- any insurance expenses;
- the lessee is the party entitled to deduct capital allowances in respect of the aircraft; and
- where the lessee exercises an option to purchase the aircraft on the termination of the lease, the consideration received by the lessor is considered to be a capital payment and no tax thereon is charged by the lessor.
Operating lessors either order aircraft from manufacturers or buy them from airlines and lease them back (this is known as sale/leaseback). The operating lessor leases the aircraft to the airline, which can also be referred to as the lessee. Leases can be as short as a couple of months to cope with seasonal demand Airlines can also lease crew and pilots with aircraft. These are known as wet leases.
In an operating lease scenario, the lessor is subject to Malta tax on the full amount of the lease income and, if it maintains the burden of wear and tear, it will be able to claim tax depreciation. On the other hand the lessee is entitled to deduct the full amount of the lease payments and to claim tax depreciation if it maintains the burden of wear and tear.
Accelerated depreciation allows larger portions of the depreciation value to be claimed early in the depreciation cycle, resulting in larger deductions for a shorter depreciation period. Accelerated depreciation can reduce costs during a company’s startup years. The increased deductions created by accelerated depreciation allow companies to defer a portion of their tax liability. To this end, the minimum periods for tax depreciation of aircraft have been reduced via the Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010.
Prior to the introduction of these rules, the minimum period for aircraft wear and tear was 12 years. With the enforcement of the rules, aircraft depreciation for tax purposes will be reduced to the following timeframes:
|Aircraft engine or airframe overhaul||6 years|
|Aircraft engines||6 years|
|Aircraft interiors and other parts||4 years|
Fringe Benefits Exemption
The Fringe Benefits (Amendment) Rules, 2010 also introduce an outright exemption from Malta tax attributable to the taxation of fringe benefits. This exemption applies to the private use of an aircraft by non-resident employees or officers, companies or partnerships whose business activities include the ownership, leasing or operation of aircraft or aircraft engine used in the international transport of passengers or goods.
Investment Tax Credits
A person that carries on a trade or business consisting of the repair, overhaul or maintenance of aircraft, engines or equipment incorporated or used in such aircraft may benefit from investment tax credits. Such tax credits are calculated either as a percentage of:
- qualifying expenditure; or
- wage costs for jobs directly created by the project.
|Size of Undertaking||% of qualifying expenditure / wage costs|
The Malta tax credit is credited against the tax due in Malta. Moreover, unutilised investment tax credits may be carried forward against tax due in subsequent years.
Such incentives led to Maintenance, Repair and Overhaul (MRO) leaders setting up substantial facilities on the island, employing hundreds of technicians and encouraging the relocation of related aviation service companies to Malta.
Aircraft for Private Use
Aircraft used for private purposes, should, by way of general principle, not generate income and hence should give rise to no Malta tax implications.
A payment made to a Maltese vendor for the alienation of aircraft, should only be taxable in Malta if such vendor is carrying on a trading activity. In case of payment made to a foreign vendor, such payment should only be taxable in Malta if vendor is in the business of sale of aircraft and is carrying on a trading activity in Malta.
VAT Treatment of Aircraft Operations
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:
- Rescue services
- 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
- maximum fuel capacity
- fuel burn
- optimum altitude
- optimum cruising speed
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.