Malta is proving to be one of the EU’s best regulated and most tax efficient jurisdictions for cross-border aircraft finance and related operations and for the aviation business in general. This is a result of the combination of recent legislative measures that include Malta’s adoption of the Cape Town Convention (CTC), the creation of dynamic aircraft and mortgage register, a comprehensive trust legislative framework and a number of tax measures and incentives aimed at ensuring attractive tax results and tax neutrality for international operators.
Malta’s success as a jurisdiction of choice for tax-driven structures is mainly attributed to a full imputation system of taxation coupled with tax refunds and exemptions. Other measures that make Malta a competitive base for cross-border operations include:
- participation exemption regime;
- absence of withholding tax on outbound dividends;
- exemption on interest and royalties derived by non-residents;
- extensive double taxation treaty network and other forms of double taxation relief;
- absence of thin capitalization, CFC and express transfer pricing rules;
- advance revenue rulings on international tax issues.
Tax provisions relevant to aviation
Domiciled and resident aviation operators Tax Refunds
Aviation operators who are incorporated and resident in Malta are subject to Maltese tax on their worldwide income. Profits from international and non-Maltese operations are taxable at 35% but the shareholders of the Maltese company are entitled to a refund of tax paid by the Maltese company on profits distributed to the shareholders. The extent of the refund depends on the nature and source of profits and on the account out of which the profits are paid (companies are required to allocate profits to various tax accounts).
- 6/7ths refund – refund of 30% out of 35% tax thus producing a tax liability of 5%. This is the typical refund due on trading profits derived by aircraft lessors, operators, financiers and managers that are based in Malta;
- 5/7ths refunds (refund of 25%) due in respect of passive interest & royalties;
- 2/3rds refund due where the company has claimed double taxation relief (relevant in the context of cross-border sources of income);
- 100% refund due where the profits derive from a Participating Holding.
Resident (only) aviation operators Foreign Source rule
Maltese tax legislation contains an interesting foreign source rule available to operators who derive income from the ownership, leasing or operation of aircraft or aircraft engines used in international aviation businesses, such as transport of passengers or goods. This type of income is deemed to arise outside Malta regardless of the country of registration of the aircraft/engines or whether the aircraft calls at or operates from Malta. Aviation operators who are only resident (but not incorporated) in Malta are subject to Maltese tax on their foreign-source income to the extent that such income is remitted to/received in Malta. Foreign source income that is not remitted to Malta is not subject to Maltese tax.
This rule is of particular interest to companies or entities that are registered or incorporated in another jurisdiction but resident in Malta for tax purposes – typically, this applies to companies that are managed or controlled in Malta.This foreign-source rule, combined with the rules on the operation of aircraft in international traffic contained in Malta’s double taxation agreements, presents interesting tax planning opportunities for operators setting up their residence in Malta.
The main implications of this tax treatment are:
- No withholding tax on lease payments made by Maltese lessees to foreign lessors;
- Tax planning opportunities for finance lessors and in general, for airlines and other aviation operators.
Aircraft and Engine Finance Leasing
Maltese tax legislation provides for guidelines on the tax treatment of finance leasing of aircraft.The main purport of the guidelines is to clarify the level of chargeable income taxable in the hands of the lessor and the type of deductions that the lessee is entitled to claim. As a rule, the lessor is subject to tax on the finance charge, being the difference between the total lease payments received from the lessee and capital expenditure effected by the lessor in the acquisition of the aircraft. The lessee is allowed a deduction from chargeable income in respect of the finance lease payments made to the lessor, aircraft maintenance and servicing, repairs and insurance. The lessee is entitled to capital allowances in respect of the aircraft.
The leasing guidelines are mostly relevant to lessors and/or lessees that operate from Malta using a Maltese registered company (domiciled and resident for tax purposes and therefore is subject to tax in Malta on its world-wide income).
Aircraft and engine depreciation
- Aircraft airframe – 6 years (16.7% per annum);
- Engine – 6 years (16.7% per annum);
- Engine or aircraft overhaul – 6 years (16.7% per annum);
- Interiors and other parts – 4 years (25% per annum);
- These rates compare very well with other EU jurisdictions.
Other Tax Measures
Profits deriving from a Participating Holding or from gains realised on the disposal of such holding are, subject to certain conditions, exempt from Maltese tax. A Participating Holding exists where a Maltese company holds at least 10% equity shareholding in a non-resident company or similar entity level of equity holding may be less than 10% subject to certain conditions. An exemption also applies to gains derived from a qualifying holding in a Maltese company. This exemption is of particular interest to multi-entity structures using Malta as a base for their group holding company/ies.
Double Taxation Relief
Apart from the double taxation treaty network with 67 countries, Maltese tax legislation contains domestic rules aimed at ensuring that income originating from overseas is not subject to double taxation even if there is no double taxation agreement in existence. Relief is provided on a unilateral basis (Unilateral Relief), through a Flat Rate Foreign Tax Credit (FRFTC), underlying relief and Commonwealth Relief.
Tax credits on investment
Maltese companies providing services consisting in the repair, overhaul and maintenance of aircraft, engines and equipment are entitled to investment tax credits that are deductible from tax due on profits derived from such activities. Tax credits are calculated as a percentage of the wage cost of jobs generated through the investment or the qualifying expenditure incurred.
15% tax rate for expatriate personnel
Expatriate personnel working with Malta-based operators are entitled to flat personal rate tax of 15% in respect of employment income derived in Malta.
The standard VAT rate is 18% but the law provides for an exemption with credit (zero-rate) in respect of the supply, acquisition, importation, chartering, maintenance, servicing and provisioning of aircraft engaged in commercial operations.