Tax Incentives for the Aviation Companies registered in Malta

Malta has created various fiscal incentives to make its position stronger and tax competitive in the Business Aviation Industry mostly in connection to aircraft engine and aircraft operators. The following are the salient fiscal incentives surrounding the Aviation Industry.

Aircraft Operations

One of the salient income tax provisions found in the Income Tax Act, is in connection to income derived from aircraft which may have operated from any airport in Malta such as this income derived from the ownership, leasing or operation of aircraft or aircraft engines shall be deemed to arise outside Malta for Maltese Income tax purposes. Such income is deemed to arise outside Malta irrespective of:

• The country of registration of the aircraft/engines;
• Whether the aircraft calls at or operates from Malta

As per the Income Tax Act Under Malta’s remittance basis of taxation, income deemed to arise outside Malta will be exempt from Maltese tax. Therefore this allows for the shifting of tax residence of an aircraft company to Malta in order to profit benefit from such an incentive

Depreciation of Aircraft

The Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010 provide for new depreciation periods for wear and tear of aircraft or aircraft equipment. These have been recently amended and the depreciation of aircraft and parts thereof will be as follows:

• Aircraft airframe - 6 years
• Engine - 6 years
• Engine or aircraft overhaul - 6 years
• Interiors and other parts - 4 years

New Exemption from Fringe Benefits

The Fringe Benefits (Amendment) Rules 2010, creates a new exemption from fringe benefits rules which applies to an employee or officer of an employer as well as corporate entities, whose business activities include the ownership, leasing, or operation of any one or more aircraft or aircraft engine which is used for or employed in the international transport of passengers or goods.

Aircraft Finance Leasing in Malta

The Commission for Revenue has also issued a Tax Guide to Finance Leasing of Aircraft. The following tax treatment is to be adopted for each year for the duration of the finance lease:

• i. The lessor is charged to tax on the annual finance charge, namely the difference between the total lease payments less the capital element divided by the number of years of the lease;
• ii. The lessee is allowed a deduction in respect of the (i) the finance charge; (ii) maintenance; (iii) repairs; and (iv) insurance;
• iii. The lessee is allowed capital allowances in respect of the aircraft and the parties may not opt to shift the burden of wear and tear onto the lessor;
• iv. Where the lessee exercises an option to purchase the aircraft on the termination of the finance lease, and the lessor is not trading in the purchase and sale of aircraft, the purchase price received by the lessor shall be considered to be of a capital nature and no tax thereon shall be payable by the lessor.

Qualifying Employment in Aviation

The objective of the Qualifying Employment in Aviation (Personal Tax) Rules (SL 123.168) is to give a long-term vision to the sector in order to adequately equip the necessary operations with the skills required and control the limitations encountered due to limited availability of human resources.

Eligible Offices

There are various eligible offices, some of them include

• Chief Executive Officer
• Chief Operations Officer
• Chief Financial Officer
• Chief Risk Officer
• Chief Financial Officer
• Chief Technology Officer
• Chief Commercial Officer
• Chief Investment Officer
• Chief Insurance Officer

Conditions for Eligibility

The rules apply to individuals not domiciled in Malta. Individual income from a qualifying contract of employment qualifies under these rules when it is received by a beneficiary in an eligible office. Such income is subject to tax at a flat rate of 15% provided that the income amounts to at least 45,000 euros (forty-five thousand euros) annually. The 15% tax rate applies for a consecutive period of five years for European Economic Area (that is, EU countries as well as Norway, Iceland and Liechtenstein) and Swiss nationals and for a consecutive period of four years for third-country nationals.

An individual may benefit from the 15% tax rate if the person satisfies all of the following conditions:

1. He is an individual who derives income subject to tax under article 4(1)(b) of the Act, being emoluments payable under a qualifying contract of employment, and received in respect of work or duties carried out in Malta, or in respect of any period spent outside Malta in connection with such work or duties, or on leave during the carrying out of such work or duties;
2. He is protected as an employee under Maltese law, irrespective of the legal relationship, for the purpose of exercising genuine and effective work for, or under the direction of, someone else, is paid, and has the required adequate and specific competence, as proven to the satisfaction of the competent authority;
3. He proves to the satisfaction of the competent authority that he is in possession of professional qualifications or experience;
4. He fully discloses for tax purposes and declares emoluments received in respect of income from a qualifying contract of employment and all income received from a person related to his employer paying out income from a qualifying contract as chargeable to tax in Malta;
5. He proves to the satisfaction of the competent authority that he performs activities of an eligible office; and
6. He proves to the satisfaction of the competent authority that:
   1. He is in receipt of stable and regular resources which are sufficient to maintain himself and the members of his family without recourse to the social assistance system in Malta;
   2. He resides in accommodation regarded as normal for a comparable family in Malta and which meets the general health and safety standards in force in Malta;
   3. He is in possession of a valid travel document;
   4. He is in possession of sickness insurance in respect of all risks normally covered for Maltese nationals for himself and the members of his family; and
   5. He is not domiciled in Malta.

Income shall not be construed to be income from a qualifying contract of employment if it is paid by the employer who has received a benefit or benefits under business incentive laws or arrangement in terms of the business incentive laws or is paid by a person who is related to the employer who has received a benefit or benefits under any business incentive laws or arrangement in terms of business incentive laws.

About the Author

This article has been co-authored by Dr Franklin Cachia, CSB Group Senior Manager Tax & Regulated Industries, Rachel Genovese, CSB Group, Regulatory Advisor, and Edward Meli, CSB Group, Business and Corporate Advisor. For any additional information or support required please contact us on [email protected].