Karl Cini -tax implications of Aviation.pptx

1. September 2011
Aspects of buying an aircraft
and tax implications of Aviation
Antwerp 2011

2. 1
Antwerp 2011
Agenda
• Purchasing an aircraft? – Main tax and non tax related considerations
• Ownership
• Plurality of Ownership: Fractional Ownership
• Aircraft Management, Financing and International Security
• Registration of Aircraft
• Aircraft Registration in Malta
• Tax aspects and opportunities in Aviation – an overview

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Antwerp 2011
Purchasing an Aircraft?
Mr. Millions

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Purchasing an Aircraft?
Whether a custom private jet or a corporate aircraft, ensure advance planning and consider the following:
• A cost-benefit analysis – to assess flight time per year to justify ownership of an aircraft. Consider
hidden costs, such as insurance, fuel, catering and pilots. There are aircraft management companies
which take care of these needs;
• Determine the size and flying range needed (where you fly, how often you fly, and how many guests fly
with you) and approach private jet manufacturers and/or jet dealers for aircraft specifications and
pricing;
• Obtain necessary advise in relation to contracting the purchase agreement ;
• Security: Ensure that aircraft is clear of all liens and encumbrances or that these are disclosed;
• Airworthy conditions;
• Determining registry of choice
• Financing;
• Special Purpose Vehicles to ensure tax efficiency;

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Purchasing an Aircraft?
Other important fiscal considerations:
•Business vs personal use
•Capital allowances
•VAT
•Offsetting expenses against income
•Fringe benefits
•Tax and permanent establishment issues

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Purchasing an Aircraft?
Capital Allowances
• Life expectancy (circa 25 years).
VAT
• Purchase or import
• Running the aircraft
Offsetting expenses against income
• Owner vs charterer

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Purchasing an Aircraft?
Fringe benefits / Benefits in Kind
• Business vs personal use
• Commercial charter agreements
• Exclusion of private use in contract of employment
• LLP vs corporate entity
Direct Tax
• Country of registration, airports called at, airport operated from ?
• OECD Model treaty. In 1992 equipment leasing income is excluded from the definition of royalties.
• ‘shall be taxable only in the Contracting State in which the place of effective management of the
enterprise is situated.’
• Careful examination of each case in relation to the treaty between the countries is required

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Ownership
• Limited Liability Company
The standard and simple approach taken by most non-aviation professionals, is to utilize a single
entity to hold title to the aircraft, and for the owners to take an ownership interest in the single entity.
While this structure may be expedient in the short term, it has longer term implications.
• Trusts
a) Aircraft Registration;
b) Aircraft Leasing
• Trust also allows for the ownership of the aircraft to be split in various portions;
• Certain jurisdictions allow for foreign owners to hold and register aircraft through a Beneficial
Trust (e.g. U.S. and Isle of Man);
• In case of Aircraft Leasing, a special purpose vehicle (SPV) in the form of a Trust may be set up
to act as owner and lessor of aircraft/ lessee and sub-lessor of the aircraft.

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Plurality of Ownership: Fractional Ownership
• Fractional jet ownership is shared ownership of a personal airplane that is staffed and maintained by a
fractional company. Fractional ownership allows you to purchase or lease-purchase a fractional
interest (also known as a share) in a single airplane, while offering you access to an entire fleet of
aircraft. Although you are technically buying a part of a specific aircraft for tax and depreciation
purposes, you are really buying into a jet service in which your fractional company runs a large fleet
and can send your jet or a jet of the same model whenever and wherever you need it.
• Typical share sizes
1/16th share = 50 flight hours
1/8th share = 100 flight hours
1/4th share = 200 flight hours
½ share = 400 flight hours
• A relatively novel concept in private aviation (developed primarily in the U.S and now spread even in
Europe);

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Plurality of Ownership: Fractional Ownership
• Flexible whilst ensuring value and quality;
• Allows for investors to share the acquisition and running costs of aircraft (such as maintenance,
technical problems, crewing and training);
• Share is a liquid asset;
• Companies providing similar fractional ownership include Netjets and Fractional Jets Europe;

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Antwerp 2011
Aircraft Management
• Aircraft management and leasing companies manage privately and/ or commercially registered aircraft
on behalf of business, government and private owners.
• Private jet owners may engage a management and leasing company, which would hold an Air
Operating Certificate (AOC) and entrust the complete operational management of their aircraft
including: Charter, Flight Operation and Maintenance.
• Operating Lease: Aircraft may be leased (on a temporary basis) to these management and leasing
companies on a dry lease, which in turn will charter (for air transport services) to third parties and
manage the crewing, flight operations and maintenance.
• Companies providing similar aircraft management ExecuJets and Privatair;

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Antwerp 2011
Aircraft Financing
• Complex arrangements between Financiers, Vendor and Purchaser whereby even a transaction for
the acquisition of a private or corporate aircraft would require the following:
• The borrower provides basic information about themselves and their prospective aircraft to the
lender;
• The lender performs an appraisal of the aircraft's value;
• The lender performs a title search based on the aircraft's registration number, in order to confirm
that no liens or title defects are present. In many cases, a title insurance policy is procured;
• The Lender would likely request a security (depending on the credit-worthiness of the borrower);
• At closing, the loan documentation is executed and funds and title are transferred.
• Finance Leasing: a longer-term arrangement in the lessee may have the option to purchase the
aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the
lease

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International Security
• Cape Town Convention & Aircraft Protocol:
• An international framework/ registry for the creation, registration, recognition and enforcement of
international interests in airframes, aircraft engines and helicopters
• International interests cover registration of ownership, security interests, leases and conditional
sales contracts
• It reduces the financial risk to creditors by:
• facilitating the financing of the acquisition and use of aircraft
• facilitating the utilisation of asset based financing and leasing of aircraft
• ensuring that interests in aircraft are recognised and protected universally, and
• providing secure and readily enforceable default remedies given the easily identifiable and
high value mobile equipment being dealt with
• Clarity on priority of competing interests –“first in time, first in right”
• Greater confidence given to secured creditors in their ability to promptly enforce their security
(including repossession)

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Registration of Aircraft
• Most common jurisdictions for aircraft registration:
• Aruba;
• Bermuda;
• Cayman Island;
• Bahamas;
• Isle of Man
• Ireland
• Now also Malta
• Offshore registration may provide for exemption from income tax, corporate tax, sales tax,
dividend withholding tax and VAT, and excise tax, higher level of confidentiality, whilst allowing
for registration of aircraft not certified EASA which have been however certified by the FAA and
are eligible for an FAA Certificate of Airworthiness;

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Malta – Aviation Registry of Choice
• Registration that works for international aircraft operations;
• Malta offers to the international operations:
• An EU jurisdiction bound by all of the EU’s legal structure governing the regulation,
certification, airworthiness and safety of civil aviation. ;
• More transparency;
• A flag of confidence rather than of convenience;
• Acceptable jurisdiction to international lenders financing an aircraft;
• Malta aviation sector offers a variety of services (from MROs, financial services, aircraft
management to other support services);
• Excellent geographical location in the heart of Mediterranean;
• Competitive costs

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Antwerp 2011
Aircraft Registration in Malta
• The Malta Aircraft Register caters for private aircraft, corporate jets and commercial aircraft.
Aircraft are allocated the registration 9H;
• As from 1st January 2011 monitored by a single regulator – Transport Malta;
• Malta is member of the International Civil Aviation Organisation (ICAO), the European Civil
Aviation Conference (ECAC) and the European Air Safety Agency (EASA);
• The registration of aircraft, the registration and enforcement of aircraft mortgages and the
implementation of the Cape Town Convention and its interface with Maltese law are regulated
by the Aircraft Registration Act, 2010;
• Malta Aircraft Registry allows for a plurality of ownership, such as the recognition of fractional
ownership of aircraft and the registration of aircraft under the terms of a beneficial trust;
• An aircraft registered in Malta is subject to the laws of Malta and has all the rights and
privileges of a Maltese aircraft;
• Malta has at present around 55 Air Service Agreements that essentially facilitate air traffic
between various countries;

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Registration: Eligibility
• Applicants who may register an aircraft include:
i. the owner of an aircraft (even under construction); or
ii. operator under temporary title; or
iii. buyer under a conditional sale; or
iv. a trustee
• Possibility of registering an aircraft which is under construction (as soon as it is uniquely
identifiable)
• Re-registration of aircraft from other jurisdictions (but cannot be registered in more than 1
State);
Joint/Fractional Ownership:
Joint/fractional ownership are catered for in Malta. At least 50% of the owners of the shares in the
aircraft must be eligible as qualified persons. The same applies where registration carried out by a
trustee.

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Antwerp 2011
Registration: Qualifying Registrant
• As per the Aircraft Registration Act, the following persons are qualified to register any aircraft
(whether used to provide air service or otherwise):
I. The Government of Malta;
II. A citizen of Malta or a citizen of EU, EEA or Switzerland (provided place of residence or
business of that person is in Malta, EU or EEA);
III. An undertaking set up in Malta, in EU or EEA (provided registered office, central
administration and principal place of business is within Malta, EU or EEA) whereof not
less than 50% of the undertaking is owned and effectively controlled by Govt. Of Malta
or EU Member State or by Maltese citizen or citizen of EU, EEA or Switzerland;
IV. Trustees for such interests (the beneficiaries of the relevant trust would be considered
to determine eligibility to register).
For private aircraft (aircraft NOT used to provide air service), a resident agent is appointed where
a registrant (a natural person/undertaking) is not a ‘qualified person’.

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Use of Trusts in Malta
• The Aircraft Registration Act, 2010:
• allows a trustee who registers an aircraft may request that his position as registrant be
recorded more than once so as to reflect underlying principals or beneficial interests;
• Ownership held by trustees (for a single interest or more) may be recorded in the
National Register;
• Recognizes a mortgage to be executed and registered in favour of a security trustee
appointed or acting under a trust for the benefit of persons to whom a debt or other
obligation is due. Such security trustee shall, in any such case, be recognized as the
mortgagee of the particular mortgage and shall be entitled to exercise all the rights in
relation to that mortgage;

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Legal effects of registration
• Renders information public and effective against third parties;
• Creates priority between different rights;
• Creates legal effects between parties when same is conditional on registration
• All other effects under applicable law.

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General: Malta Fiscal Regime
• Any Malta company may own and operate an aircraft registered in Malta or registered
elsewhere;
• Tax treatment of Malta companies depends on the income stream
• The current income tax rate applicable to Malta companies is 35%
• Profits from the operation of an aircraft will be charged to tax at 35% but with the possibility of
a refund of 6/7ths upon distribution of a dividend, leaving only a net tax leakage of 5% in Malta
• Worldwide taxation : Domicile and residence
• Non-domiciled persons taxed on : Malta sourced income and capital gains + foreign
sourced income received in Malta. Foreign capital gains are not taxed
• However if tax treaty applies –profits from the operation of aircraft are generally taxable
only in the Contracting State in which the place of effective management of the enterprise
is situated (where Art. 8 OECD Model Convention is adopted)

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General: Malta Fiscal Regime
6/7ths Refund
No DTR
Revenue 1000
Operating expenses (200)
Tax depreciation (200)
Royalty expenses (200)
Interest expense (300)
Taxable profit 100
Tax at 35% 35
Relief of foreign tax -
35
6/7ths tax refund (30)
Tax suffered in Malta 5
% Tax suffered in Malta 5%

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Residence and Domicile and tax
opportunities
Malta follows the UK system of residence and domicile. Persons resident and domiciled
in Malta are subject to tax on a worldwide basis
Persons who are either not domiciled or not resident in Malta are subject to tax on a
source and remittance basis:
 Malta sourced income and capital gains
 Foreign sourced income which is received in Malta
 Foreign capital gains are not taxed, irrespective of whether received in Malta or not
A company that is incorporated outside Malta but having its place of management and
control in Malta is regarded to be resident and not domiciled.

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Aviation – Tax considerations and
opportunities
Income derived from the ownership, operation or leasing of an aircraft used in international
aviation business is deemed to arise outside Malta irrespective of:
• whether the aircraft calls at or operates from Malta;
• the country of registration of the aircraft/engines.
This amendment
• should not affect Maltese companies that are in the business of owning, operating and
leasing aircraft
• brings certainty to foreign aircraft owners/operators whose aircraft fly to Malta – income does
not arise in Malta, hence not taxable in Malta
• provides some interesting opportunities for persons in the business of owning, operating and
leasing aircraft…

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Aviation and aircraft ownership structures
Air Operator Certificate
(AOC) holder
SPV in Malta to
own the aircraft
Can be a limited liability
company or a Trust
Individual
Management agreement
• Lease income is subject to tax in Malta at a
standard rate of 35% reduced by double tax
relief, where applicable
• Operating vs Finance Lease
• Deduction for capital allowances where burden
of wear and tear is kept
• Further opportunity to reduce Malta tax
leakage through the application of the tax
refunds…

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Antwerp 2011
Aviation – Tax considerations and
opportunities
Foreign Company
(Lessor)
Company incorporated
Outside Malta
Management
And Control
Foreign Co moves management
and control to Malta
Income from lease/operation of
aircraft taxable in Malta only if
received in Malta
• Consider a foreign
incorporated company that
owns/leases aircraft
• If such company is managed
and controlled from Malta,
such company would be
regarded as resident but not
domiciled in Malta
• Accordingly, under general
principles of income tax,
such company is taxed on
income arising in Malta and
income arising outside of
Malta which is received in
Malta

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Antwerp 2011
Aviation – Tax considerations and
opportunities
Foreign Company
(Lessor)
Company incorporated
Outside Malta
Management
And Control
Foreign Co moves management
and control to Malta
Income from lease/operation of
aircraft taxable in Malta only if
received in Malta
• As long as the aircraft is used for
the international transport of
goods or passengers, income
derived from the lease/operation
of the aircraft is considered to
arise outside of Malta
• Accordingly, as long as the
income is not received in Malta
such income should not be
taxable in Malta
• Given that such companies are
regarded as resident in Malta, the
companies should have access to
Malta’s 55+ double tax treaties
(naturally, subject to certain
limitation of benefit clause
provisions which may apply)

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Aviation – Tax considerations and
opportunities
Foreign Company
(Lessor)
Owner of aircraft Aircraft operator
Aircraft leased to MaltaCo
• No withholding tax applies on lease payments
to lessor as long as aircraft is used for the
international transport of goods or passengers
• Lessor may be resident in a country with which
Malta does not have a tax treaty
• If lease is an operating lease, lessee may
generally claim full deduction for lease
payments against his income
• Lessee may also claim capital allowances if the
burden of wear and tear falls on him
• If aircraft lease is a finance lease, lessee is
entitled to a deduction in respect of:
• interest element of the finance lease
• repairs and maintenance
• insurance, and
• capital allowances
Malta Co
(Lessee)
Lease payments

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Aviation – Tax considerations and
opportunities
Foreign Company
(Lessee)
Operator of aircraft Owner of aircraft
Aircraft leased to ForeignCo
• Lease income is subject to tax in Malta
at a standard rate of 35% reduced by
double tax relief, where applicable
• If the lease is an operating lease, then
the lessor is subject to tax on the full
lease payment
• However, if the lessor maintains
burden of wear and tear, the lessor is
able to claim capital allowances in
respect of the aircraft at the rates
described earlier
• If the lease is a finance lease, then the
lessor is chargeable solely on the
interest element of the finance lease
• However, in such cases, no deduction
is available for capital allowances
• Further opportunity to reduce Malta tax
leakage through the application of the
tax refunds…
Malta Co
(Lessor)
Lease payments

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Conclusion
• Transparency of all rights and interests in aircraft;
• Fractional ownership
• Broad registration possibilities for all aircraft, whether used for private or commercial air transport;
• Facilitation of enforcement of mortgages and other security interests;
• No withholding tax on lease payments where the lessor is not a tax resident of Malta;
• Competitive minimum depreciation periods for aircraft;
• Applicability of the Cape Town Convention provides financiers with a higher degree of protection
and more effective enforcement remedies whilst allowing lower borrowing costs;
• Availability of a wide range of airline services (aircraft and engine maintenance, repair and
overhaul, aircraft management, aircraft maintenance training and other ancillary support services);
• Private use is not a taxable fringe benefit.
• Attractive and efficient tax regime for operators and leasing arrangements

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Contact details
For further information please contact:
Karl Cini B. Accty (Hons), FIA, FCCA, Dip. Tax. MIT
Nexia BT
Tower Business Centre
Ground Floor
Tower Street
Swatar BKR4013
Malta
Tel: +356 21637778
Fax: +356 21634383
Email: karl.cini@nexiabt.com
Web: www.nexiabt.com