RESOURCES
Guidelines Regarding VAT Treatment of Aircraft Leasing
Date: 20th November 2012
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:
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Aircraft Type
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Maximum Take-off Mass (MTOM) of the aircraft
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Maximum Fuel Capacity (kg)
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Fuel Burn
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Optimum Altitude (Feet at ISA conditions)
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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.
