The recent removal of the loophole that allowed aircraft owners to import aircraft into the European Union (EU) via the UK at a zero rate of value-added tax has prospective buyers scrambling for fiscally friendly alternatives. One option is for private operators to find a way to get registered for tax purposes under a commercial aircraft operatorπs certificate, but this could subject the operator to unfavorable scrutiny by the authorities.
“Taxation is now more of a concern for financiers,” Credit Suisse vice president Isabelle Newsom told the EBAA “One Europe” regional forum in Vienna, Austria, on January 21. “Financiers are realizing that they could be liable for the tax position [of the buyer and the aircraft], and that is causing a lot of uncertainty.”
Making matters worse, according to attorneys participating in the meeting, is the fact that tax officials from EU states have significantly different interpretations as to the definition of a commercial operation and on the distinction between operators flying internationally or domestically. Aoife O’Sullivan, an aviation specialist with London law firm Gates & Partners, said that the UK position itself is so contradictory that she finds it hard to give clients clear advice on this point.
However, fellow UK lawyer Ian Clark indicated that the UK interpretation could potentially remain open to zero-rate VAT for commercial operations, even if an operator does not hold an AOC. However, this is contingent on an aircraft owner assigning operations to a separate ‘flight department’ that is not part of the owner’s company or group of companies with the sole purpose of flying internationally–in this case defined as outside the UK. “This opens interesting possibilities for private owners,” he said.
Newsom added that, following problems exposed by the recent financial crisis, financiers are now scrutinizing far more carefully where aircraft are being registered. They want to be sure, among other things, that an aircraft’s register cannot be quickly transferred without their consent.
O’Sullivan explained that there is good reason for finance providers and sellers to pay closer attention to tax and registration arrangements made by an end user: the consequences of any adverse ruling could come back on them. For example, she warned that relying on an Isle of Man single-purpose-vehicle corporate registration as the basis for an aircraft lease is not necessarily reliable in legal terms.
Tonnies von Limburg, director of international sales with Bank of America, indicated that financing is now more readily available for aircraft transactions and that the market for pre-owned midsize and large jets is recovering. “Nobody wants to see a return to the fire sales in which people were selling aircraft quickly for 20, 30 or 40 percent less than their value because this caused a downward spiral in the market from which we are only now recovering,” he commented.