Tax Incentives for Aviation

Income from aircraft leasing arrangements is taxed at the standard corporate rate of 35% but under Maltese law there exists a system of tax refunds whereby a shareholder who receives a dividend from a Maltese company out of profits allocated to its Maltese Taxed Account or its Foreign Income Account, may claim a refund of a portion of the corporate tax paid by the company. The value of the refund depends on the nature of the profits out of which the dividend is being distributed.

Furthermore, Malta is currently the only EU member which allows a full imputation system to completely eliminate the economic double taxation of dividends. Under the full imputation system, the tax charged to the company on its profits is fully imputed to the shareholder upon dividend distribution by the company and shareholders will not suffer any additional tax on the receipt of dividends. In the event where the shareholder’s personal income tax rate is lower than 35%, the shareholder would receive a tax refund for the difference in the tax paid by the company

Malta’s tax system grants a full participation exemption with respect to dividend income received by a participating holding and to capital gains derived from the transfer of said holding. In order to benefit from the participation exemption, one must satisfy certain conditions.

Malta has also signed numerous double taxation agreements with various countries thus eliminating the occurrence of double taxation in a number of cases. Where no such agreement exists, there are other forms of double taxation relief that may be availed of.

No tax is chargeable on aircrafts for private use given that no income will be generated in Malta from this activity.

In terms of the Duty on Documents and Transfers Act, Chapter 364 of the Laws of Malta, there shall not be any import duty due on the importation of civil aircrafts into Malta. In addition to this, aircrafts do not attract any stamp duty in terms of the same Act as they are not deemed to be caught by the definition of chargeable assets.

In relation to income arising from the ownership, lease or operation of aircrafts or aircraft engines used for or employed in international transport of passengers or goods, the Maltese legal tax system has deemed that irrespective of the country of registration of the aircraft or aircraft engine or whether the aircraft may have called at, or operated from, any airport in Malta, such income is held to arise outside Malta.

The implications of this is that a non-Maltese resident aviation company will not be taxed in Malta, irrespective of the country of registration of the aircraft or from where it operates. On the other hand, a Maltese resident aviation company will only be taxed in Malta on a remittance basis i.e. on income that is remitted to Malta. In the latter case, where situations of double taxation arise, Malta has a number of double tax relief, including treaty relief, whereby Malta has signed an array of double taxation agreements with a number of countries and unilateral relief mechanisms, amongst others.

Another major feature of the Maltese regulatory framework is how depreciation of aircraft is to be calculated in terms of Maltese tax law; the accelerated depreciation feature. Through the concept of accelerated depreciation, the minimum number of years over which the aircraft is depreciated is decreased resulting in decreased tax on profit as the increased annual deductions for wear and tear bring about lower taxable profits. Through the Deduction for Wear and Tear of Plant and Machinery Rules, Malta has become increasingly competitive removing the 12 and 6-year minimum period thresholds and introducing the following:

1. A 4-year minimum depreciation period for aircraft airframe;
2. A 4-year minimum depreciation period for aircraft engines;
3. A 4-year minimum depreciation period for aircraft engines or airframe overhaul;
4. A 4-year minimum depreciation period for the aircraft’s interior or other parts.

The fact that aircraft assets depreciate quickly means that an aviation company will pay much less tax in the first four (4) years from the purchasing of the asset resulting in a better cash flow situation.

As a Member State of the European Union, Malta also takes advantage of being able to provide certain tax incentives in the form of a tax credit, in accordance with the EU framework on Regional Aid, to any undertaking which is involved in the maintenance, repair or overhaul (MRO) of aircraft, aircraft engines or their associated parts and equipment. The tax credit is determined on the basis of the level of investment which the undertaking has made during that year or in previous years and whether the undertaking is deemed to be a small, medium or large enterprise.

Certain individuals who are engaged within the aviation industry as outlined in the Qualifying Employment in Aviation (Personal Tax) Rules are eligible to qualify for a personal flat tax rate of 15% on all income derived from their employment in Malta. Just to name a few examples of offices which are considered eligible are the office of: Chief Executive Officer, Chief Operations Officer, Chief Financial Officer, General Manager and Head of Marketing, amongst others. A number of other criteria must be satisfied in order for said individual to qualify for this reduced income tax rate.

Another scheme exists under Maltese law, which is known as the Highly Qualified Persons (HQP) Scheme and applies to individuals whose employment is with an undertaking holding an air operator’s certificate and consists of specified senior positions as outlined in the Highly Qualified Persons Rules, such as chief officers, Aviation Accountable Manager and Aviation Continuing Airworthiness Inspector, amongst others. This is similar to the previously mentioned scheme in that the individual would also benefit from a favourable tax rate of 15% on all income derived from their employment in Malta, however, different criteria must be satisfied.

A total exemption from Maltese tax on fringe benefits is available under Maltese law. In terms of the Fringe Benefits Rules, the private use of an aircraft is not a benefit and thus, it is not taxable as such when the use is made by an individual who:

1. is an employee or officer of an employer, company or partnership whose business activities include the ownership, leasing and/or operation of one or more aircrafts or aircraft engines which are used for or employed in the international carriage of passengers or goods; and
2. is not resident in Malta.

Maltese VAT legislation holds that the supply of aircrafts for use by airline operators for a consideration, primarily for the international carriage of goods and/or passengers, is exempt from VAT (more specifically it is an exempt with credit supply). The same exemption applies to acquisitions or importation of aircraft between one Member State and another. It must be noted that this exemption is not applicable to aircraft which is acquired for non-commercial purposes.

In addition to the above, in terms of the Value Added Tax Act, Chapter 406 of the Laws of Malta, the following are also considered to be exempt with credit supplies:

• the supply to constructors, owners or operators of such aircraft of equipment incorporated or used therein;
• the supply of services consisting of the modification, maintenance, chartering and hiring of such aircraft or equipment;
• the supply to the owners or to the operators of such aircraft of goods for the fuelling or provisioning; and
• the supply of services other than those already referred to such as towage, pilotage, rescue services, valuation, use of the airports, services provided to aircraft operators by their agents acting as such, services necessary for the landing, take off or stay in airports, and assistance provided to the passengers or the crew for the account of the airline operators.

Essentially what this entails is that the aviation company will be able to claim back refund on VAT which is paid on operational expenses whilst at the same time being exempt from paying VAT on their sales.

VAT mitigation is possible in the sphere of the aviation sector with the availability of VAT leasing schemes applicable to the leasing of aircrafts. Through these leasing arrangements, VAT may be significantly reduced.