Understanding VAT in the aviation sector in Malta and the EU

The aviation sector is international by nature. Aircraft, operators, lessors, service providers and customers are often located in different jurisdictions, and transactions may involve several parties across the same commercial chain. This creates a VAT landscape that is rarely straightforward.

Understanding VAT in the aviation sector in Malta and across the EU is essential for operators, lessors and service providers dealing with cross-border transactions.

VAT in aviation: Why it is complex

In aviation, the VAT treatment of a transaction cannot be determined by looking at one element in isolation. Place of supply rules, exemptions, contractual arrangements, the status of the parties involved, and the actual use of the aircraft all need to be considered together. This is particularly relevant in the context of aircraft-related exemptions under Article 148 of the  EU VAT Directive, which apply only where specific conditions are satisfied.

VAT treatment of passenger air transport

One area where the VAT treatment may appear relatively clear is passenger transport. International passenger transport by air is generally treated as an exempt with credit supply under EU and Maltese VAT rules. This means that no VAT is charged to the customer, while the supplier may still be entitled to recover input VAT. However, this treatment is limited in scope and depends on the transport qualifying as international rather than domestic, among other factors.

Beyond passenger ticket sales, the VAT position becomes more nuanced. Many airlines and aviation operators use leasing arrangements rather than owning aircraft outright. This raises important questions around the nature of the supply, the place of taxation, and whether any exemption may apply.

VAT treatment of aircraft leasing (dry lease vs wet lease)

For example, a dry lease, where the aircraft is provided without crew, maintenance or insurance, will generally need to be assessed by reference to the rules applicable to the hiring or leasing of a means of transport. In contrast, a wet lease, often structured as ACMI, meaning aircraft, crew, maintenance and insurance, may be closer in nature to the provision of a broader aviation service. Since leasing models can vary significantly, the VAT treatment will depend heavily on the contractual and operational structure in place.

Aviation VAT exemptions under article 148 of the EU VAT directive

Importantly, exemptions within the aviation sector are not automatic. Under Article 148 of the EU VAT Directive, certain aircraft-related exemptions are generally linked to aircraft used by airlines operating for reward chiefly on international routes. This means that several conditions need to be assessed before the exemption can be applied.

The operator must qualify as an airline carrying out an economic activity involving the transport of passengers or goods by air. It must also hold the appropriate Air Operator Certificate issued by a competent aviation authority, evidencing that it is authorised to perform commercial air transport operations. The relevant flights must be carried out for consideration, rather than for purely private, recreational or internal corporate purposes.

Another important requirement is that the airline must be chiefly engaged in international transport. In practice, this is generally assessed by reference to the proportion of international activity carried out by the operator, based on measurable criteria. In Malta, specific percentage thresholds are applied in practice when determining whether an aviation operator is considered to be chiefly engaged in international transport for the purposes of the exemption.

The actual use of the aircraft is also central to the analysis. The exemption is linked to aircraft used by a qualifying airline for qualifying activities. This means that leasing or structuring arrangements need to ensure that the aircraft is effectively placed at the disposal of, and used by, the qualifying airline in line with the relevant conditions.

VAT challenges in aircraft leasing structures

Where one or more of these conditions are not met, the expected VAT relief may not be available. This may be the case, for example, where the operator does not hold an Air Operator Certificate, where the aircraft is used for non-commercial activities, or where the operator is not chiefly engaged in international transport. In such cases, the transaction would need to be assessed under the standard VAT rules.

Further complexity may arise where aircraft are leased through multiple entities before reaching the final operator. Each step in the chain needs to be considered separately. The VAT treatment at one level does not necessarily carry through to the next, even if the aircraft is ultimately used for international transport. As a result, an exemption available at the level of the final operator will not automatically extend to intermediate lessors, financiers or other parties in the structure.

There may also be cases where expected exemptions do not apply because of the way the transaction is structured, the status of the recipient, the place where the aircraft is made available, or the duration and terms of the lease. In certain situations, use and enjoyment rules may also need to be considered. These rules can affect the place of taxation or limit VAT to the portion of use taking place within EU airspace, introducing an additional layer of calculation and compliance for operators with both EU and non-EU activity.

VAT treatment of ancillary aviation services

The VAT framework in aviation in Malta and across the EU also extends beyond the aircraft itself.. Ancillary services such as ground handling, maintenance, repair and operational support may benefit from favourable VAT treatment where they are directly connected to qualifying international air transport. However, as with leasing and passenger transport, the application of any relief depends on the specific facts and on the status of the recipient.

Overall, VAT in aviation requires a careful review of both the legal framework and the commercial arrangements in place. Small differences in how a transaction is structured can have a significant impact on the VAT outcome. For businesses operating in this sector, understanding the rules at a high level is only the starting point. Applying them correctly to the facts is where the real challenge lies.

For aviation operators, lessors, financiers and service providers, the VAT treatment of aircraft-related transactions should be considered early in the structuring process. RSM Malta’s tax team can assist in reviewing the applicable VAT position, assessing potential exemptions, and supporting businesses with compliance and planning considerations.

To discuss how these rules may apply to your organisation, contact RSM Malta’s tax team.

Article written by Michela Scicluna - Manager, Tax and Kurt Polidano - Lead Senior, Tax
 

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32006L0112