Aircraft Leasing: Why Malta should be your jurisdiction of choice

The aviation leasing market has experienced strong growth in the past decade. Whilst the acquisition of aircraft historically highlighted an airline’s financial stability and enhanced – arguably – its prestige in its customers’ and competitors’ eyes, several factors have led to a significant increase in global aircraft leases, namely the rapidly-changing market, the constant improvements in aircraft efficiency as well as the generous taxation treatment of said leases by several jurisdictions.

These leases are usually made by aircraft leasing companies, who would possess a large and varied fleet of aircraft – acquired directly from manufacturers – to suit their clients’ (the airlines) specific short- and long-term needs.

Short-term operating leases are usually required by airlines either as result of unforeseen technical difficulties in any of its existing aircraft, or as a means of dealing with an expected sudden increase in demand (such as when a particular country is hosting the World Cup, or the Olympic Games).

Most short-term leases are what are known as wet leases – a leasing arrangement whereby the lessor (usually an airline) provides an aircraft, complete crew, maintenance, and insurance (ACMI). Fuel and airport fees, as well as any other duties and taxes are covered by the lessor, who charges the lessee an hourly rate for the services provided. Wet leases may also be used to fly services into countries where the lessee is banned from operating.

Dry leases are more common for longer-term leases. In this case, the lease only includes the aircraft to be provided by the operator. The lessee is responsible for providing the crew, the aircraft maintenance, insurance, fuel and all ancillary fees.

Over the last few years, Malta has become a jurisdiction of choice for many aircraft leasing structures. This is largely due to the establishment of a strong and reliable legal and regulatory backdrop and the attractive corporate tax regime offered. Furthermore, a number of fiscal advantages are applicable specifically to the aviation sector, namely:

Income Derived from Aircraft Used for International Transport (The ‘Foreign Source’ Rule)

In terms of Malta’s source rules, any income of a company that is resident but not domiciled in Malta, derived from the ownership, lease or operation of an aircraft that is used in the international transport of passengers and/or goods, is deemed to have arisen outside Malta, and would therefore not be chargeable to tax in Malta unless remitted to Malta.

Malta’s tax treaties are generally based on the OECD Model Tax Convention on Income and on Capital, which states that income derived from the operation of aircraft in international traffic is taxable in the state where the effective management of the enterprise is situated. This allows for interesting tax planning opportunities which would ensure that the income derived would not be taxable in the source territory either.

Aviation Industry Capital Allowances

In an operating lease, the lessor is entitled to capital allowances (depreciation) on the aircraft frame and engine at 16.7% per annum, thereby effectively depreciating the entire value over a period of six (6) years. The value of the aircraft interior and other parts may be depreciated at 25% per annum. This compares very well to the Irish tax regime which allows for an eight (8) year write-down period (at a rate of 12.5% per annum).

VAT Treatment of Aircraft Leasing

In the latest Commissioner for Revenue Guidelines regarding the VAT treatment of Aircraft leasing by Maltese companies, it is assumed that any leased Aircraft would only be partly used within EU airspace, and partly outside. The Guidelines provide guidance as to the deemed percentage use of an Aircraft within the EU. Accordingly, Malta VAT at the rate of 18% is only payable on that portion of the lease payments which is deemed to be for use of the Aircraft within the EU. The deemed percentages, calculated on the basis of the aircraft’s range, are as follows:

Aircraft Type by Range (KM)% of Lease Taking Place in the EUComputation of VAT Effective VAT % Rate
0 – 2,99960%60% of consideration x 18% 

10.8%

3,000 – 4,99950%50% of consideration x 18% 

9%

5,000 – 6,99940%40% of consideration x 18% 

7.2%

7,000 – upwards30%30% of consideration x 18% 

5.4%

An aircraft with a range in excess of 7,000 kilometres will therefore derive the highest benefits in terms of the Guidelines.

AE Aviation Industry Team

The AE Aviation Industry team can draw on its experience in the aviation industry in order to assist both owners and operators with various legal aspects related to the successful conclusion of an aircraft lease. Our team works very closely with several complementary practice areas, namely our corporate and tax departments in order to offer our aviation clients a fully-integrated legal advisory service.

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