Significant Tax Benefits for the Aviation Industry
Unique 0% Remittance Tax Rule for Non – Resident Aircraft
Tax Exemption for Private Use Aircraft
Extended Capital Allowances Deductions
Highly Qualified Persons‘ 15% Income Tax Rate
With the aviation sector highlighted as an industry that the Government of Malta wants to attract, significant low tax rules have been implemented following the coming into law of Aircraft Registration Act (ARA), which follows the Cape Town Convention on International Interests in Mobile Equipment and its Aircraft Protocol.
Malta’s aviation laws and applicable tax rules are aimed at reducing tax and costs and thereby making Malta a particularly attractive jurisdiction for the registration of aircraft and aircraft mortgages, as well as asset based financing and the ability of secured creditors to enforce their interests in the aircraft.
Income – Ownership, Leasing or Operation; Aircraft or Aircraft engines
In order to benefit from Malta’s significant tax benefits for the aviation industry, the main rule in respect of income arising from the ownership, leasing or operation of aircraft or aircraft engines, is that they must be ‘used or employed in the international transport of passengers and goods’.
The Remittance Rule
Due to a special provision in the Malta Income tax act, companies that are resident but not domiciled in Malta for tax purposes, and any income derived from the ownership, leasing or operation of aircraft or engines used internationally, will be taxable in Malta only to the extent that such income is remitted or received in Malta.
Income that arises outside of Malta – irrespective of both the aircraft’s country of registration and whether it calls in or operates from Malta – will not be taxed in Malta.
This remittance rule combined with the additional benefits in respect of the operation of aircraft in international travel as set out in Malta’s double tax treaties allows for significant tax planning possibilities.
In addition, the remittance rule ensures that non-resident aircraft owners or operators are not subject to withholding tax in Malta due to the entering into any leasing, financing, charges, rents or other payments made in favour of non-resident aircraft owners. Meaning – when payments such as finance charges or rents are made to a non-resident lessor no withholding tax is levied.
Finance leases – where the aircraft are eventually purchased from the seller – are subject to the rules set out in the Malta Finance Leasing Rules 2005.
To qualify a lease for Malta tax purposes, the lessee must substantially be responsible for all risks and rewards associated with the ownership of the asset, other than the legal title. In addition, the period of the lease agreement must exceed four years. The resulting benefits are:
- lessor is chargeable to tax on the annual lease payments
- lessor is responsible for the burden of wear and tear – allows lessor to claim capital allowances on the leased asset
- lessee can deduct the full amount of the lease payments from chargeable income, as well as other relevant deductions
If lessor transfers ownership of the asset the lessee with the lessor making a payment exceeding the total annual lease cost, this payment is chargeable to tax in the hands of the lessor.
The Malta Inland Revenue Department has also issued guidelines in relation to aircraft leasing arrangements, which do not fall under the Finance Leasing Rules and which arrangements ought not to be longer than four years in duration. In such cases, the Guidelines clarify that the Malta tax treatment should be as follows:
- lessor is charged tax on the annual finance charge – represents the difference between the total lease payments less the capital element, divided by the number of years
- lessee is allowed deductions in respect of the following expenses:
- the finance charge
- any maintenance costs;
- any repair costs; and
- any insurance expenses;
- the lessee is the party entitled to deduct capital allowances in respect of the aircraft; and
- at the end of the lease, if the lessee exercises an option to purchase the aircraft, the payment received by the lessor is considered a capital payment and no tax is charged to the lessor.
Sale/Leaseback: where operating lessors order aircraft from manufacturers or buy them from airlines and leases the aircraft back to the airline (lessee), can be structured in a number of ways and over variable periods of time.
Wet leases: occur whereby airlines can also lease crew and pilots with the aircraft.
In respect of operating leases the lessor is subject to Malta tax on the full amount of the lease income and, subject to it maintaining the burden of wear and tear, the lessor can claim tax depreciation on the relevant asset.
Alternatively, if the lessee maintains the burden of wear and tear of the asset, the lessee is entitled to deduct the full amount of the lease payments and to claim tax depreciation in respect of the asset.
Capital Allowances – Aircraft, Aircraft Engines & Related Parts
Accelerated depreciation allows for increased portions of the depreciation value of an asset to be claimed earlier in the depreciation cycle and thereby larger deductions to be enjoyed in a much shorter depreciation period. This allows a company too much more capital and income release to start up and grow, by allowing companies to defer a portion of their tax liability.
Due to Malta’s Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010, the minimum periods for tax depreciation of aircraft have been reduced to the following time frames:
|Aircraft engine or air frame overhaul||6 years|
|Aircraft engines||6 years|
|Aircraft interiors and other parts||4 years|
Fringe Benefits Exemption
A total tax exemption from Malta tax is available in respect of fringe benefits. This exemption applies to the private use of an aircraft by non-resident employees or officers, companies or partnerships if their business activities include the ownership, leasing or operation of aircraft or aircraft engine used in the international transport of passengers or goods.
Investment Tax Credits
Entities that carry on a trade or business consisting of the repair, overhaul or maintenance of aircraft, engines or equipment incorporated or used in such aircraft can benefit from investment tax credits, which are calculated either as a percentage of:
- qualifying expenditure; or
- wage costs for jobs directly created by the project.
|Size of Undertaking||% of Qualifying Expenditure or Wage Costs|
Not only is the Malta tax credit is applied as against the tax due in Malta, but also underutilised investment tax credits may be carried forward against tax due in subsequent years.
Sales of Aircraft – Tax-Free Payments For Foreign Sellers
Payments made to a Malta company in respect of the transfer of legal title of an aircraft, are only liable for Malta tax if the sale is part of the seller’s trading activity.
In contrast, payments made to a foreign seller would only be taxable in Malta if the seller is:
(i) in the business of selling aircraft, &
(ii) is carrying on a trading activity in Malta
Aircraft for Private Use
As private aircraft are by their nature used for private purposes, no income is generated and therefore no Malta tax obligations arise.