VAT Department Issues Aircraft Lease Guidelines

The VAT Department has recently released a set of guidelines setting out how aircraft leasing is treated for the purposes of Value Added Tax.

In accordance with the guidelines, a lease agreement may be entered into by virtue of which the lessor, being the owner of the aircraft, grants the lessee the right to use the aircraft against payment of consideration.

The lease agreement would grant the lessee the right to purchase the aircraft at the end of the lease period at a percentage of the original cost. The general rule is that the lease of an aircraft is considered as the supply of a service which is subject to VAT with the right of deduction of input VAT by the Lessor. Such lease would be taxable according to the use of the aircraft attributed within the airspace of the European Union.

Movements of an aircraft

The movements of an aircraft in a particular airspace are very difficult to identify in order to establish the period that the aircraft is used in EU airspace or outside of it. As a result, the estimated percentage portion of the lease based on the time that the aircraft is used in EU airspace is determined by an independent study by a technical expert.

The standard rate of 18% is applied on the established percentage of the lease of an aircraft which is deemed to be used in European Union airspace. All calculations applicable to the lease can be accessed by Clicking Here.

VAT treatment - conditions

Additionally, in order to apply the above-mentioned VAT treatment to the lease of an aircraft, the following conditions must be satisfied:

1. The leasing agreement must be between a lessor who is established in Malta and a lessee also established in Malta who would not be eligible to claim input tax in respect of the lease;
2. The lease agreement cannot exceed a period of 60 months and the lease instalments must be payable on a monthly basis;
3. The Director General of the VAT Department may, at his own discretion, require the lessor to submit details regarding the use of the aircraft;
4. It is necessary to seek prior approval in writing from the VAT Department and each application is considered on its own merits.

Furthermore, the Director General may opt to impose other conditions which he may deem appropriate. In cases where, after the end of the lease, the lessee decides to exercise the purchase option, a VAT paid certificate will be issued provided that all the VAT due has been fully paid.