The lease of an aircraft may involve the physical crossing of an EC border by such aircraft. This is considered as the importation of an aircraft. However, such importation should not necessarily trigger import duties or VAT. In this article, we will look at what the triggering events are. We will also look at when the lease of an aircraft is subject to VAT and who is responsible for paying such VAT to the tax authorities. Recent developments in this area are certainly noteworthy.
Aircraft Crossing Borders
Irrespective of the type of transaction (i.e. a sale or a lease), an aircraft crossing an EC border is considered as being 'imported'. In this context, what generally is referred to as "import duties", actually covers two areas of law: customs duties and VAT.
a) Customs Duties
Generally, customs duties are not of great concern for civil aviation because they are 0%. Only military and similar aircraft could be subject to a 2.7% duty.
However, the customs status of aircraft could have a major impact on the VAT treatment. This mainly depends on whether the aircraft is permanently or temporarily imported.
If an aircraft is not registered in a Member State and does not qualify as an EC good, the aircraft must be declared for free circulation in the EC and will be permanently imported. Depending on the end use (i.e. civil/commercial use) of the aircraft, such importation for free circulation should be exempt from custom duties, provided the importer or the entity on whose behalf the aircraft are imported has received written authorisation from the customs authorities of the Member State in which the aircraft will be declared.
If the aircraft is registered in a non-Member State in the name of a person established outside the territory of the EC and only enters the EC in transit (i.e. there is no formal importation of the aircraft in the EC), the aircraft upon arrival in the Community will be placed under a special customs arrangement pursuant to which no customs/import duties are payable. This is "temporary importation with total relief from import duties". There is no requirement for a written or oral declaration in respect of the aircraft to the customs authorities in order to place the aircraft under the customs arrangement.
However, this regime is only available if the aircraft is (1) registered outside the customs territory of the EC in the name of a person established outside that territory; (2) is used by such a person; and (3) is exclusively used for transport beginning or ending outside the customs territory of the EC. Hence, if a private jet was used for transporting EU resident board members or employees of a group owning such aircraft, it would no longer be considered as being used by a non-resident and thus would be disqualified for temporary importation.
It is important to note that every time an aircraft crosses an EC border in the other direction (i.e. outbound), it is deemed 'exported' and loses its status of being admitted into 'free circulation'. Hence, upon re-entering the EC, it will again be imported. However, as we will see below, the 're-importation' can benefit from a different VAT treatment.
If an aircraft has not yet been imported for free circulation in the EC and is subsequently imported, for instance, to put it at the disposal of the lessee, VAT import duties may fall due in the Member State within whose territory the aircraft is located when it enters the Community.
No importation will be deemed to occur while the aircraft benefits from the (temporary) suspension regime for customs duties (see above). Importation will only occur at the time the aircraft is released from such suspension regime.
However, even if such a suspension regime is not applicable, such importation may still benefit from an exemption. For instance, in the case of re-importation, or if the taxpayer can demonstrate that the sale of the aircraft would be eligible for an exemption. This exemption is comparable to the one applicable for the lease of an aircraft (see below).
The Lease Agreement
Until 31 December 2009, the lease of an aircraft was a service deemed located in the lessor's jurisdiction. For example, with respect to the lease by an Irish resident lessor, the service was deemed located in Ireland, and thus subject to Irish VAT rules, inclusive of the Irish exemption requirements.
In some circumstances, an alternative localisation rule could have applied with respect to aircraft that were leased from a lessor who was resident in a jurisdiction outside the EC.
As from 1 January 2010, the new localisation rule under the VAT Directive identifies the jurisdiction of which the lessee is a resident as the place of service. For example, with respect to an aircraft leased from an Irish resident lessor to a Belgian resident airline, the service is, in principle, deemed located in Belgium, and thus subject to Belgian VAT rules (as well as the Belgian exemption rules).
Also a new alternative rule is introduced with respect to the short-term hiring of aircraft (i.e. for a period of not more than 30 days). In such cases, the lease is deemed located in the jurisdiction where the aircraft is put at the disposal of the lessee (which is not necessarily the lessee's jurisdiction). For example, if a Belgian airline's aircraft is defective – beyond a same day repair – on arrival at an American airport and, in order to make a scheduled departure, leases another aircraft for a one-week period, the lease will be deemed located in the US and Belgian VAT rules will not apply to the lease agreement.
The lease of aircraft is generally exempt from VAT if the aircraft is used by an airline operating for reward chiefly on international routes. Hence, the lease of private jets will not qualify for the exemption.
There used to be some 'back doors' to circumvent this taxation through permanent importation via Denmark or the UK. As far as Denmark is concerned, that door has been closed since 1 January 2009. The UK has historically adopted a 'weight and design' criteria to grant a VAT exemption. The UK Government has announced that as from 1 September 2010 it will no longer be possible to import aircraft above 8, 000 kg free from VAT, unless they also qualify for the exemption under the general rule, i.e. being used by an airline operating for reward chiefly on international routes (see our earlier newsletter) or are used by a State institution. At this stage there is uncertainty as to whether these changes in the UK will apply retrospectively.
The exemption for airlines operating for reward chiefly on international routes may be subject to further authorisation or formalities in certain jurisdictions.
For instance, in Belgium, the VAT legislation imposes documentary evidence requirements, which are nevertheless considered as eligibility criteria for the exemption. In other words, not complying with the documentary evidence requirements, even if the factual exemption conditions (i.e. being a qualifying aircraft and a qualifying airline) are met, will trigger Belgian VAT at 21%. The documentary requirements mainly concern specific references in the transaction documents (i.e. the lease agreement) and the invoices.
In Germany, the VAT regulations set out the specific procedure in order to assess whether an aircraft is used for international aircraft services. In particular, the lessee must be registered with the Federal Ministry of Finance in Berlin showing that the officials have confirmed that the lessee is conducting international aircraft services. Pursuant to the internal rules of the German fiscal authorities, the respective tax office in charge for the lessee must issue certification to show that international services are being conducted. Such certification is required for a contractual party to provide invoices without VAT. Also, the certification requirement applies to any other agreement the main characteristic of which is the cross-border lease of aircraft. For instance, a management service agreement whereby the lessor leases an aircraft to an aircraft operator (the lessee) who must render transport services to the lessor, acting as a customer of the lessee.
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.