When the time comes to buy your private jet, how do to you go about it? 

Other than determining inter alia the level of comfort, make, model and size of aircraft wished for, determining the best jurisdiction for the registration and operation of the aircraft can be a daunting exercise.  Choice of jurisdiction, method of financing, choice of operation and choice of type of registration must all be determined prior to the conclusion of the sale of aircraft.

Advances in Malta’s aviation law have brought about a new legal system for the registration, ownership, and operation of aircraft, primarily via the 2010 Aircraft Registration Act, itself transposing the provisions of the Cape Town Convention[1].

Malta’s EU membership also provides owners and operators of aircraft with a relatively cost effective and efficient manner of financing, owning, registering and operating aircraft in an EU jurisdiction.

On a broader scale, Malta’s political stability, access to over 70 double tax treaties, and attractive corporate tax regime allows for owners of aircraft to acquire and operate the aircraft in a tax efficient manner.

What does this mean in practice?

Three elements to take into account are:

  1. Different methods of ownership and operation of aircraft;
  2. Value Added Tax (VAT) treatment; and
  3. Income Tax Treatment of aircraft ownership structures.
  1. Ownership and Operation of Aircraft in Malta
  • Owner Operator

Under Maltese law, the direct owner of the aircraft may also be the operator of the same aircraft.  Actively operating the aircraft would in this case require the owner to also obtain an Air Operator’s Certificate (AOC) and meet the AOC’s ongoing obligations

  • Owner with third party operator

Alternatively, the owner of the aircraft may enter into a dry lease agreement with an already established and licensed operator, who would then take over all activities with regard to the operation of the aircraft.

  1. Value Added Tax Treatment of Aircraft

For VAT purposes, the leasing of the aircraft is deemed to be the supply of a service. Whilst this service would therefore be subject to VAT, this essentially entails the right of the owner of the aircraft to apply for a deduction of input VAT.

VAT on the leasing of the aircraft is charged at the normal rate of 18% on the consideration of the lease. VAT is however only charged pro rata according to the time that the aircraft is deemed to have been used within EU airspace. Seeing as the time spent in or out of EU airspace cannot accurately be determined a priori, the Maltese Tax Authorities have adopted the practice of estimating the percentage portion of the lease based on the time the aircraft is deemed to be used in EU airspace.  The standard VAT rate is therefore then calculated against this established percentage and applied accordingly.

The percentage of time spent in EU territory is calculated on a variety of factors:

  • Max Take-Off Mass (MTOM);
  • Maximum Fuel Capacity;
  • Fuel Burn Rate;
  • Optimum Altitude (at ISA conditions); and
  • Optimum Cruising Speed (True Air Speed).

Based on these factors, a typical mid-size private aircraft could be calculated to be considered as spending around 75% of its time used within EU airspace. As a brief example the standard 18% VAT rate would be charged on 75% of the consideration of the lease. The effective VAT charge in this respect would therefore be reduced to effectively 13.5%.

Once the lease comes to an end, and the lessee exercises the option to purchase the aircraft (should this have been included in the agreement), the VAT Department will issue a “VAT Paid” certificate. This will essentially grant the aircraft free movement within the European Union. It is important to note that the application of this tax treatment is subject to a number of conditions, most important perhaps is that for this reduction in tax to apply, both the lessor (owner) and lessee of the jet must be established in Malta. The lessee must also not be eligible to claim any input tax in respect of the lease. Further to this are the following:

  • The lease agreement shall not exceed 60 months (5 years);
  • Lease instalments shall be payable every month;
  • The Tax Authorities reserve the right to require the lessor to submit details regarding the use of the aircraft; and
  • Prior approval in writing must be obtained from the VAT Department, and each application is decided on its own merits.
  1. Income Tax Treatment of Aircraft Owners and Operators

Any income by a Malta company received as a result of leasing of an aircraft or service fee relating to the operation of an aircraft could be subject to an overall effective corporate tax rate of around 5%.

For over 20 years, Malta has had a well-regulated and efficient Tax Refund System. Tax is first paid by the Malta company at a flat rate of 35%.  On a distribution of dividends, part or all of the tax paid is refunded to the shareholders, resulting in an overall effective tax rate of 5%. The percentage of the refund depends on the type of income generated by the relevant company.

Further tax considerations include:

  • There is no further taxation in Malta on dividends distributed from the Malta company to the shareholder, as well as on the tax refund received by the shareholder on conditions being met;
  • Malta levies no withholding tax on the distribution of dividends;
  • Refunds are typically paid within 14 days from when a valid claim is made; and
  • Any tax due and refunds are paid in any convertible currency, based on the currency in which the share capital of the Malta company is denominated.

 

[1] The Cape Town Convention on the International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in mobile Equipment on matters Specific to Aircraft Equipment.