Maltese tax aspects of aviation | KPMG | Malta

Maltese tax aspects of aviation

Maltese tax aspects of aviation

In recent years Malta has become a jurisdiction of choice in the fields of aircraft maintenance, aircraft registration and aircraft leasing.

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While Malta is one of the smallest European states, it is home to the largest shipping register in Europe. This fact is no surprise as Malta has always
been well known for the role it plays in the international field due to its
location in the heart of the Mediterranean. Malta was historically used as a
hub for the carriage of goods and has since flourished into a reputable centre for international business in the Euro-Mediterranean region. 

Some years back the Maltese Government refined its aviation related laws with the objective of emulating the success in the maritime industry. As can be noted from the graph below1, the amendments contributed to a rapid increase in the number of aircraft registrations in Malta. This is evidence that the island state has all the right ingredients in place to make it a suitable jurisdiction for aircraft registration.

In addition to aviation laws, a number of factors have contributed to Malta’s success, most notably accession to the EU in 2004, adopting the Euro currency in 2008, the use of English as the business language (with all documentation and laws being in English) and the attractive, flexible, efficient tax system, which was formally sanctioned by the EU Commission. Today, Malta has successfully cemented its leading position as a reputable jurisdiction for multinational groups and continues to grow as a hub for aircraft business.

In recent years Malta has become a jurisdiction of choice in the fields of aircraft maintenance, aircraft registration and aircraft leasing – Lufthansa Technic, SR Technics and VistaJet all have substantial presence in Malta. Maltese tax advantages are available both on a company level (see Tax Refund System below) and also on a personal level, where certain management positions in the aviation industry attract a personal tax rate of only 15%. 

Tax Refund System

As part of Malta’s imputation tax system which eliminates economic double taxation, Malta has embedded in its fiscal legislation a system of tax refunds.

Maltese resident companies, including a foreign company with a branch in Malta, first pay tax on their profits at 35%. Upon a subsequent distribution of these taxed profits, whether derived from local or foreign sources (other than from immovable property situated in Malta), the shareholders would be entitled to a full or partial refund of the tax paid by the company, generally resulting in an effective Malta tax charge of between 0% and 6.25%.

Aircraft Leasing

Over the last few years, the use of Malta for aircraft leasing structures has seen a sharp increase. Companies engaged in aircraft leasing transactions may benefit from Malta’s tax refund system, however, the tax treatment will vary depending on whether the lease is an operating lease or a finance lease.

Operating Lease

In an operating lease, the lessor would be entitled to tax depreciation on the value of the aircraft frame and aircraft engine at 16.7% per annum as well as a tax depreciation on interiors and other parts at 25% per annum. Through the application of the tax refund system, although the lessor will be subject to tax at 35%, the effective Malta tax charge will be reduced to between 0% and 6.25%. Furthermore, a disposal of the aircraft can be structured such that this would not attract any Maltese tax liability.

Finance Lease

In a finance lease scenario, the lessor will be taxable in Malta on the finance charge, with deductions allowable for any finance cost. Same as in an operating lease scenario, although the lessor will be subject to tax at 35% on its taxable income, the tax refund system will reduce the effective Malta tax charge to a maximum of 6.25%. Upon a disposal of the aircraft there are no tax consequences in Malta. 

Alternative Planning Opportunity

Where the lessor or lessee is a company that is resident but non-domiciled in Malta i.e. although incorporated outside Malta it is managed and controlled in Malta, it would only be subject to tax in Malta upon:

• any income arising in Malta; and

• any chargeable gains arising in Malta; and

• any income arising outside of Malta which is received in / remitted to Malta.

In terms of Malta’s source rules, any income derived from the ownership, leasing and operation of aircraft or aircraft engines, which is used for or employed in the international transport of passengers or goods, is deemed to be arising outside of Malta. Therefore, a resident non-domiciled company will only be taxable in Malta if it receives its income in Malta. Where the income is not received in Malta there would be no tax liability in Malta.


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[1] Source: Transport Malta 2015 Annual Report, page 70
http://live.transport.gov.mt/admin/uploads/media-library/files/TM%20Annual%20Report%202015%20FINAL%20(WEB).pdf

 

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