Taxation of Aircrafts in Malta

by Shanice Finch tax advisor for Erremme Business Advisors Limited sfinch@easl.com.mt

In recent years, Malta has become a pioneer with respect to the field of registration, leasing and maintenance of aircrafts. The Government`s contribution through the update of the local aviation legislation, led to a rapid growth in the registration of Aircrafts with the Civil Aviation Directorate. As at March 2019, the number of registered Aircrafts with the National Aircraft Register has seen an exponential growth of 307 compared to 60 locally registered aircrafts in Malta in the last 10 years.

Malta enacted the Aircraft Registration Act (ARA) in 2010 with the main focus of boosting the registry for both commercial and private aircrafts. The 2010 Act also implements provisions on the Aircraft Protocol into Maltese Law and provisions adapted from the Convention on International Interest in Mobile Equipment held on November 2001 in Cape Town.

In recent years, Malta has become a leading jurisdiction of choice with respect to Aircraft maintenance contributed mainly by Aviation Cosmetics Limited, Lufthansa Technik Malta and Maleth-Aero AOC Limited.

From a taxation point of view, the local legislation includes advantageous refund contributions both on a corporate and also on a personal level. Certain management positions in the field of the Aviation industry can opt to a personal tax rate of just 15%. Moreover, a total tax exemption from Maltese tax is available on fringe benefits received by non-resident employees or officers for making private use of an aircraft and also to companies and partnerships trading in the ownership, leasing or operation of aircraft used in the international transport of passengers or goods.

The first tax advantage at company level is the full imputation tax system eliminating economic double taxation in the hands of the individual shareholders at dividends stage. The benefit is that the shareholders will be able to claim back the full tax on dividends paid by the company resulting in no extra tax leakages in the hands of individual shareholders.

With respect to Aircraft leasing, the Maltese tax system includes diverse advantageous distinguishing between operating and finance leasing. If the company will be trading in operating leasing, the wear and tear deductions will be allowable to the party who will be liable to the higher risks and rewards from the aircraft depending on the agreement between the lessee and the lessor. In the case of a finance lease, the tenant is entitled to avail himself of the wear and tear deductions.

In recent years, the minimum number of years over which one can depreciate aircraft assets has been decreased. As a consequence, through the increase in allowable deductions for wear and tear, the company will be taxed on lower chargeable profits as of the year 2018. This advantage on less tax expense will be mostly beneficial in the initial years after assets acquisition and the table below illustrates the minimum years over which these assets can be depreciated for wear and tear basis:

Furthermore, Malta has more than 70 double tax treaties and the largest part of these treaties are based on the OECD Model Tax Convention. Maltese registered and based companies also benefit from domestic unilateral relief mechanisms based on the European Union Tax Directives, including the Parent-Subsidiary Directive and the Interest and Royalties Directive in view of Malta`s membership in the EU. Moreover, Maltese legislation also provides the relief from tax liability where a Maltese resident pays or is liable to tax of a Commonwealth country, excluding the United Kingdom.

Non-resident companies generating income from the ownership, leasing or operation of an aircraft engaged in the international transport of passengers or goods, are not taxed in Malta on revenue arising outside of Malta. As a consequence, income generated by these companies arising outside of Malta, will not be taxable in Malta irrespective of the aircraft`s country of registration and whether it operates from Malta.

Alternatively, registered companies outside of Malta which are managed in Malta, will be taxable under Maltese tax rules only if their income is remitted to Malta on the Remittance basis or received in Malta on the Source basis. If double taxation will be triggered on the basis of Residence-Residence conflict or Residence-Source conflict, the double taxation agreements resolve these issues on the premise that any profits from the operation of aircraft in international traffic should be taxable in the jurisdiction where the enterprise is effectively managed.

Investment tax credits are also available depending on the services offered in the airline industry. In the case of small companies incorporated in Malta, they can benefit from a 50% tax credit on qualifying expenditure or wage costs for jobs created in Malta. Medium sized companies can benefit from a 40% tax credit while large companies are eligible for a 30% tax credit on the incurred costs. The qualifying expenditure relates to expenses incurred by the company in the year preceding the year of assessment for which the credit would be requested. Eligible companies also have the opportunity to carry forward any tax credits not fully utilized in the year they are granted.

Another important fact is that no import duty is payable in respect of civil aircrafts consisting of both passenger and cargo aircrafts excluding military aviation vehicles. Same principle applies with respect to stamp duty which is not charged on these types of assets. Furthermore, one should keep in mind that no tax is chargeable on aircrafts for private use, since there will be no income generated in Malta from this activity.

Additionally, airline operations for the international transport of passengers or goods and the supply of services for the modification, maintenance, chartering and hiring of aircrafts are considered as Exempt with Credit for Value Added Tax (VAT) purposes. If so, these airline companies will be in a position to claim back refund on vat paid on operational expenses while being exempt from paying any VAT on their sales.

Erremme Business Advisors Limited will be able to assist you in setting up an aviation or aircraft company in Malta, register the Aircraft vehicles with the Civil Aviation Directorate for appropriate licensing and assist the company through taxation advise for full benefit from the available opportunities for company set up in Malta.