VAT department issues guidelines for the treatment of the lease of an aircraft

The VAT Department has recently released a set of guidelines stipulating how aircraft leasing is treated for the purposes of Value Added Tax.

A lease agreement of an aircraft is an agreement whereby the lessor, being the owner of the aircraft, contracts the lessee the right to use the aircraft against payment of a consideration. Furthermore, the lease agreement would grant the lessee the option to purchase the aircraft at the end of the lease period at a percentage of the original cost.

The lease of an aircraft, other than aircraft used by airline operators in international traffic, 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. This lease is taxable according to the use of the aircraft attributed within the airspace of the European Union.

It is very difficult to determine beforehand the movements of an aircraft so as to define the period that the aircraft is used within EU airspace and the time outside the EU. Consequently, the estimated percentage portion of the lease based on the time that the aircraft is used in EU airspace is established on the basis of an expert technical study.

The rate of 18% VAT is applied on the established percentage of the lease of an aircraft which is deemed to be related to the use of the aircraft in EU airspace. Applicable calculations to the lease can be accessed on (http://vat.gov.mt/AircraftLeasing.aspx).

In addition, in order to apply such VAT treatment to the lease of an aircraft, the following conditions must be satisfied:

• The leasing agreement must 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 cannot exceed a period of 60 months and the lease instalments must be payable every month;
• The Director General of the VAT Department may require the lessor to submit details regarding the use of the aircraft; and,
• It is necessary to seek prior approval in writing from the VAT Department and each application is considered on its own merits.

Furthermore, the Director General of the VAT Department may opt to impose other conditions which he may deem appropriate.

Where, after the end of the lease, the lessee decides to exercise the option to purchase the aircraft, a VAT paid certificate is issued provided that all the VAT due has been fully paid.

For further information on Aircraft Registration in Malta and Aircraft Leasing in Malta, kindly direct your request to info@cg.com.mt