VAT Guidelines on Aircraft Leasing

Last month the Malta VAT Department issued the guidelines on the VAT treatment of aircraft leasing arrangements. Such guidelines determine that 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. The Guidelines take into account the rules in the European Union’s VAT Directives for the determination of the place of supply of goods and services where the effective use and enjoyment of goods and services takes place outside the EU. In fact, 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.

As from 1 January, 2013, the long term leasing of an Aircraft for a period of more than 30 days will be deemed to be a taxable supply of services in the country where the lessee is established.

Unlike the guidelines issues in relation to the leasing of yachts, which determine the percentage of use and enjoyment in the EU based on the length of the vessel, these guidelines determine the percentage of use and enjoyment  within the airspace of the European Union. In view of the practical difficulty to establish the actual use of the aircraft within the airspace, the VAT Department 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 airspace is established. Such formula takes into consideration the following criteria:

1.       The type of Aircraft

2.       Take Off Weight

3.       Fuel Capacity

4.       Fuel Consumption

5.       Altitude

6.       Cruising Speed

The system shall operate in the following manner:

·         The lessor, ideally a company incorporated in Malta and using the aircraft for its economic activity, 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 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.

Application of this tax treatment is subject to approval in writing by the VAT Commissioner and is subject to the following:

·         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;

·         The lease agreement shall not exceed a period of 60 months and the lease instalments shall be payable every month;

·         The Director General (VAT) may require the lessor to submit details regarding the use of the aircraft;

For further enquiries, you may contact us on [email protected];