VAT Treatment of Aircraft Leasing

Under the VAT Department Aircraft Leasing Guidelines, the lease of an aircraft, except for aircrafts used by airline operators in international traffic, is a supply of a service which is subject to VAT with the right of deduction of input VAT by the lessor. This service is taxable according to the use of the aircraft attributed within the airspace of the European Union.

Since it is difficult to identify the movement of an aircraft in advance, the guidelines simplify the criteria for determining the use of the aircraft in accordance with the following:

• Aircrafts with a range of 0 km to 2,999 km are deemed to have conducted 60% of the lease in the EU. Thus, VAT is computed as follows: 60% of consideration x 18%.
• Aircrafts with a range of 3,000 km to 4,999 km are deemed to have conducted 50% of the lease in the EU. Thus, VAT is computed as follows: 50% of consideration x 18%.
• Aircrafts with a range of 5,000 km to 6,999 km are deemed to have conducted 40% of the lease in the EU. Thus, VAT is computed as follows: 40% of consideration x 18%.
• Aircrafts with a range of 7,000 km and upwards are deemed to have conducted 30% of the lease in the EU. Thus, VAT is computed as follows: 30% of consideration x 18%.

An aircraft lease is defined as an agreement whereby the lessor (being the owner of the aircraft) contracts the right of use of the aircraft to a lessee against payment of a consideration. In addition, 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.

In order for one to be eligible to benefit from this abovementioned VAT treatment, the following criteria must be satisfied:

1. The lessor and lessee must both be established in Malta the lessee must 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 every month;
3. The Director General of the VAT Department may require, at his own discretion, the lessor to submit details regarding the use of the aircraft;
4. Prior approval must be sought in writing from the VAT Department and each application will be considered on its own merits.

The Director General may decide to impose other conditions as he deems necessary. At the end of the lease, where the lessee decides to exercise his/her right to purchase the aircraft, a VAT paid certificate will be issued provided that all VAT due has been paid in full.