Aviation Tax Planning Opportunities in Malta
Malta is one of the EU’s best regulated and most tax-efficient jurisdictions for cross border aircraft finance and the aviation business in general.
Why Choose Malta for Aviation?
Malta’s success as a jurisdiction of choice for tax-driven structures is mainly attributed to a full imputation system of taxation coupled with tax refunds and exemptions.
Other measures that make Malta a competitive base for cross-border operations include:
Tax Refund Mechanism;
Absence of withholding taxes on outbound dividends;
Exemption on interest and royalties derived by non-residents;
Extensive double taxation treaty network and other forms of double taxation relief; and
Absence of thin capitalization, CFC and transfer pricing rules.
Aircraft leasing from a Maltese VAT perspective
n order to further enhance Malta’s aviation sector, the Maltese VAT authorities have issued guidelines relating to VAT on aircraft leasing arrangements concerning privately operated aircraft.
As from 1 January 2013, for aircraft leasing agreements exceeding a continuous period of 30 days, when a lessee is a non-taxable person, the lease would be subject to Maltese VAT only when the lessee is established in Malta.
It also provides that services which are deemed to take place in Malta are to be considered to take place outside the EU if they are used and enjoyed outside the EU. For the aircraft industry, the Maltese VAT Department acknowledged the difficulty which arises to identify beforehand the movement of an aircraft to determine the period that the aircraft is used within the airspace of the EU and the time that it is used outside the EU.
Guidelines have been issued by the Maltese VAT Department to determine the estimated percentage portion of the lease, relating to the use of the aircraft in EU airspace which is dependent on the below variables:
Maximum takeoff mass in kilograms;
Maximum fuel capacity in kilograms;
Optimum altitude in feet; and
Optimum cruising speed in knots.
To this effect, the guidelines sought to determine the estimated percentage of the lease which is deemed to be related to the use of the aircraft in the EU airspace, depending on the aircraft type, calculated as per the table below:
|Aircraft Type by Range (KM)||% of Lease taking Place in the EU||Computation of VAT|
|0 – 2,999||60||60% of consideration X 18%|
|3,000 – 4,999||50||50% of consideration X 18%|
|5,000 – 6,999||40||40% of consideration X 18%|
|7,000 – upwards||30||30% of consideration X 18%|
Prior approval must be sought in writing from the VAT Department, and if the lessee exercises the option to purchase the aircraft at the end of the lease, a VAT paid certificate will be issued to the lessee provided that all due VAT has been paid.
VAT at the standard rate of 18% will be applied to the established percentage of the lease as mentioned above.
Conditions to apply the VAT aircraft leasing treatment procedure have to be satisfied:
To have a lease agreement between a lessor and a lessee who are both established in Malta and who would not be eligible to claim input tax in respect of the lease;
The lease agreement shall not exceed a period of 60 months, and the lease instalments shall be payable on a monthly basis; and
The lease agreement provides an option to the lessee to purchase the aircraft at the end of the lease term for a percentage of the original cost.
If the lessee exercises the option to purchase the aircraft at the end of the lease, a VAT paid certificate will be issued to the lessee provided that all VAT due has been paid.
The Income-Tax Refund System
A shareholder in receipt of a dividend distributed by a Malta resident company or a foreign company with a Maltese branch is entitled to claim a full or partial refund of the Malta tax paid on those profits.
Corporate tax is paid at the rate of 35%, and the above tax refunds are triggered upon a subsequent dividend distribution of the taxed profits, provided that the shareholder is duly registered for this purpose.
Refunds can be of either of 2/3ds, 6/7ths, 5/7ths or 100% of the company income tax paid depending on the type of income, with income generated by aviation-related entities, being active trading income, typically qualifying for a 6/7ths refund.
Aircraft Leasing Operations in Malta
Companies engaged in aircraft leasing operations may benefit from Malta’s tax refund system however the tax treatment will vary depending on the type of the lease, namely whether it is a finance lease or an operating lease.
Operating Leases – The lessor is taxable on the full amount of the lease income whilst the lessee will be allowed a deduction of the full amount of the lease payments provided that the aircraft is used as part of its trade. Depending on who maintains the burden of wear and tear, a deduction for tax depreciation will be allowable.
Finance Leases – The lessor is subject to tax only on the finance charge being the interest portion of the lease income with deductions allowable for any finance costs. Allowance for tax depreciation as well as deductions in respect of finance charges and costs associated with repairs and maintenance and insurance is given to the lessee. Where the lessee exercises the option to purchase the aircraft on the termination of the lease, and the lessor is not trading in the purchase and sale of aircraft, the purchase price received by the lessor shall not be subject to tax as it is considered to be the income of a capital nature.
Other Income Tax Considerations
A person who is both ordinarily resident and domiciled in Malta is taxable on a worldwide basis, irrespective of whether such income is received in Malta or not.
A person who is resident but not domiciled in Malta is taxable on all chargeable income arising outside Malta to the extent that such income is received in Malta and on all chargeable income earned or derived in Malta.
Income derived from the ownership/lease/operation of an aircraft/ aircraft engine used for the international transport of goods or passengers is considered to arise outside Malta. Foreign incorporated companies that are managed and controlled in Malta, thus deemed resident but not domiciled in Malta are not liable to tax in Malta on income not having a Maltese source to the extent that such income is not remitted to Malta.
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Why Choose Nexia BT?
Nexia BT provides a wide range of services ranging from basic company incorporation and compliance to specialised advisory services, audit, tax and accounting, for particular sectors such as financial services, international trade, remote gaming, investment funds, shipping and aviation. We offer international support including back-office operations and advisory services, in a responsive, proficient and professional manner.
Nexia BT can assist with a portfolio of services in connection with the aviation industry including tax structuring, the incorporation of the appropriate corporate structures and the liaison with legal and operations experts for the registration of aircraft and aircraft mortgages, coordination of aircraft financing transactions and administration and acting as the resident agent in Malta on behalf of aircraft owners and operators.