Part of the recently announced package of austerity measures announced by the German government prior to its parliament's summer break, is a proposal to raise a new tax on all flights departing from German airports. The draft bill, which is currently before the German parliament, states that the purpose of the new tax is to encourage environmentally friendly practices. Thinly disguised as a measure to help safeguard the environment from harmful aircraft emissions, the real reason for the proposal is the urgent need to reduce the budget deficit in Germany which exists as a result of the recent economic crisis. If it becomes law, the new tax is predicted to bring in up to 1 billion Euros per year for the public purse.
The new tax, which would come into force from January 2011, would make airline tickets up to 26 euro per flight more expensive for long-haul flights and 13 euro per flight on short-haul routes. This means that a passenger travelling on a domestic return flight would be taxed on both legs of the journey. It was originally anticipated that the proposal would seek to apply the tax on a sliding scale determined according to ecological reference points. Despite the draft legislation now proposing a fixed tax, some attempt to retain a link to the environmental concerns which the tax seeks to address has been retained as it is still determined by reference to the duration of a flight.
The tax will not apply to all flights as cargo and military flights are exempt from the new tax as are flights whose sole purpose is to serve the national interest. The only other exemptions relate to passengers under the age of two who do not travel in their own seat and transfer passengers whose point of origin is outside of Germany. This exemption has been included at the behest of amongst other Lufthansa AG who feared that passengers originating from outside the EU would otherwise choose to fly with competitors such as Air France, KLM and British Airways and use non-German hubs for their transfers. Other airlines have also criticised the proposals and threatened to move their operations to other nearby airports outside of Germany thereby avoiding the tax.
It is conceivable that the Ministry of Finance may reduce the level of taxation from 2012; certainly this is foreseen by the draft legislation. From this point airlines operating to and from the European Union (EU) will be subject to the EU emissions trading scheme. However, the level of any reduction is likely to depend on the amount of income which the State earns as a result of the emissions trading scheme (ETS). Should the amount raised by the EU ETS be less than the announced target figure of one billion euros which the new tax is predicted to bring in, then the new tax will only be reduced to a level which ensures that the target is still met.
One of the most interesting proposals in the draft legislation concerns foreign operators who fail to nominate an entity responsible for the payment of the tax. In such cases the owner [and operator] of the aircraft are responsible for the payment of the tax. In effect therefore owners and lessors of aircraft are potentially taking tax risk on their lessees. Should this provision be retained when the legislation is passed into law, then it is certainly a matter that will need to be addressed in relevant transaction documentation.
Matthias Weigert is an associate in the Corporate Finance team and Jonathan Mullender is an associate in the Banking team, Norton Rose LLP, Munich.
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