The Malta VAT Department launched guidelines in 2012 which explain the department’s interpretation of aircraft leasing arrangements, particularly applicable to those aircrafts which are not employed by airline operators.
These guidelines were effectively revamped in 2016, with the scope to enable a broader range of aircraft to benefit from the arrangements. Essentially, such guidelines provide that the VAT payable by these non-airline operators on such aircraft leasing supplies is applicable only to the amount of the lease which is attributable to the time spent by the aircraft within EU airspace.
In accordance with these guidelines, an aircraft leasing supply occurs when the lessor (a company registered in Malta) contracts the use of the aircraft to the lessee (which has to also be a company registered in Malta) for a consideration. For VAT purposes, the supply of aircraft leasing is treated as supply of services, which is taxable at the standard rate; and which the rate is solely applied to the percentage of use of the aircraft within the airspace of the European Union.
How is the percentage of use of the aircraft within the airspace of the European Union calculated?
In view of the practical difficulty to establish the actual use of the aircraft within the European Union’s airspace, the local authorities apply an expert technical test which takes into consideration the range of movement of the aircraft in EU airspace. The table below indicates the established percentage portions according to the type of aircraft:
|Aircraft type by Range (KM)||% of lease taking place in the EU||Computation of VAT|
|0-2999||60%||60% * 18%|
|3000-4999||50%||50% * 18%|
|5000–6999||40%||40% * 18%|
|7000 upwards||30%||30% * 18%|
Mechanics of Arrangement
- The lessor, which would ideally be a company incorporated in Malta, would be exploiting the aircraft for business purposes (i.e. the leasing of the aircraft to the lessee) and for which, in return, it would be receiving a consideration from the lessee. On this basis, any input VAT incurred in the furtherance of the economic activity of the company would be deductable in the hands of the company. This is particularly relevant for the purposes of acquiring the aircraft from a foreign (EU) entity, and for which VAT would have to be accounted for under the reverse charge mechanism.
- The monthly lease charges made by the lessor to the lessee would be subject to 18% VAT, however the 18% VAT would only be applicable to the percentage of use of the aircraft within the EU airspace which is determined by the above-mentioned formula.
- At the end of the lease period, the lessee may have the option to purchase the aircraft. In case the option to purchase the aircraft is exercised, a VAT paid certificate will be issued by the VAT department.
The above VAT treatment shall apply only insofar as the following criteria is satisfied:
- The lease agreement shall be entered into by a lessor who is established in Malta and a lessee which is also established in Malta and who would not be eligible to claim input tax in Malta;
- The lease agreement shall be for a period of not more than 60 months and the lease installments shall be payable on a monthly basis;
- The Director General (VAT) may request the lessor to submit details regarding the use of the aircraft;
- Prior approval must be sought in writing from the VAT Department and each application shall be considered on its own merits.