Cyprus: Why Is Cyprus An Attractive Jurisdiction For The Registration Of Aircraft?

Last Updated: 24 March 2016
Article by Robert Homem

In March 2014 the Cypriot Tax Authorities issued new guidelines for the  registration of private aircraft, making Cyprus one of the most attractive jurisdictions in the European Union.

The guidelines clarified the VAT treatment provided through the Cyprus Aircraft Leasing Scheme, and the potential VAT rate for aircraft registration in the EU can be effectively reduced to as low as 5% if organised in Cyprus.

The Definition of an Aircraft Leasing Agreement by the Cyprus VAT Department

A  Leasing Agreement is an agreement where the lessor (owner of the aircraft) enters into a contract with the lessee (the person who leases the aircraft) for the use of the aircraft, for a consideration.

The lessee may opt to purchase the aircraft at a price that is a percentage of the initial value of the aircraft. The purchase is strictly an option, which may be exercised by the lessee at the end of the lease period for a separate consideration.

VAT Treatment of the Lease Agreement

For VAT purposes the leasing of the aircraft constitutes a supply of services with the right to input VAT deduction in accordance with the provisions of the Cyprus VAT legislation.

The supply of services is a taxable transaction subject to the standard VAT rate (currently 19%) but only to the extent that the leased aircraft is used within the airspace of the European Union (EU).

An essential condition is that the lessor must be a VAT registered company in Cyprus and the lessee must be a legal entity resident in Cyprus or an individual resident in Cyprus. In addition, the lessee must not be engaged in any commercial activity in Cyprus.

Method of Calculating Use of the Aircraft within EU Airspace

For the purpose of calculating the aircraft's specific rate of use within EU airspace there is no requirement to maintain detailed records or log books of the movement of the aircraft. Cyprus VAT will only be applied to a percentage of the lease consideration and this percentage is based on the length and type of the aircraft (piston, turbo or jet aircraft).

Applicable VAT Rates – Tables Designating the Percentage of Use Within the  EU

Table A: Piston engine aircraft

Maximum Take off Weight

Percentage Use Within EU

VAT Calculation

Light: 1 kg  - 3.000 kg

100%

100% of consideration x 19%

Small: 3.001 Kg – 5.700 kg

80%

80% of consideration x 19%

Medium: 5.701 kg – 15.000 kg

60%

60% of consideration x 19%

Large: over 15.001 kg

40%

40% of consideration x 19%

Table B: Turbo aircraft

Maximum Take off Weight

Percentage Use Within EU

VAT Calculation

Light: 1 kg  - 3.000 kg

55%

55% of consideration x 19%

Small: 3.001 Kg – 5.700 kg

45%

45% of consideration x 19%

Medium: 5.701 kg – 15.000 kg

35%

35% of consideration x 19%

Large: over 15.001 kg

25%

25% of consideration x 19%

Table C: Jet aircraft

Maximum Take Off Weight

Percentage Use Within EU

VAT Calculation

Light: 1 kg  - 3.000 kg

50%

50% of consideration x 19%

Small: 3.001 Kg – 5.700 kg

40%

40% of consideration x 19%

Medium: 5.701 kg – 15.000 kg

30%

30% of consideration x 19%

Large: over 15.001 kg

20%

20% of consideration x 19%

Criteria for the Specific Rates to Apply

The following conditions need to be met for the specific VAT rates to apply:

  1. The lease agreement must be between a Cyprus company registered for VAT in Cyprus and a legal entity resident in Cyprus or an individual permanently resident in Cyprus.

  2. The aircraft must fly to Cyprus within two months of the start of the leasing agreement. An extension to the above can only be authorised by the VAT Commissioner.

  3. An initial payment must be paid by the lessee to the lessor of at least 40% of the value of the aircraft.

  4. The lease instalments are payable monthly and the lease agreement cannot be for less than 3 months (91 days) or for more than 60 months.

  5. The lessor is expected to make a total profit at the end of the lease period of a minimum 5% of the value of the aircraft. At the start of the agreement, the total lease payments (from which the VAT is calculated) are increased by half of the anticipated profit; for example, 2.5% if the anticipated profit is 5%.

  6. The final payment at the end of the lease agreement, when the  ownership of the aircraft is transferred to the lessee, cannot be less than 2.5% of the value of the aircraft and represents part of the total profit relating to the agreement. This final payment is subject to the full Cypriot VAT rate applicable on the date of payment. This rate is currently 19%.

  7. Prior approval, by the VAT Commissioner, is required to take advantage of the aircraft scheme. This approval will confirm the VAT rate applicable for the use of the aircraft in EU airspace and the acceptability of the declared aircraft valuation. The application to the VAT Commissioner must therefore be accompanied by a valuation certificate for the aircraft and a copy of the lease agreement.

  8. The following additional certificates must be submitted with the application:
  • Noise Certificate
  • Type Certificate
  • Certificate of Airworthiness
  • Airworthiness Review Certificate

Additional Features and Benefits

  • The private aircraft can be registered to any Aircraft Register in the world, not necessarily the Cyprus Aircraft Register.
  • If at the end of the lease period, the lessee decides to acquire the aircraft, the VAT Authorities will issue a certificate confirming the total VAT liability payment.
  • Once  the owner of the aircraft has paid the VAT relating to the initial payment (40% of the value of the aircraft) he can import the aircraft into Cyprus and the Cyprus Customs Office will issue a T2L certificate.
  • The total profit from the lease of the aircraft (minimum 5%) is subject to income tax at a rate of 12.5%.

Additional Information

The Dixcart office in Cyprus can provide further information on this topic and can undertake applications to register aircraft in Cyprus.

Originally published on 17 November 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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