A number of provisions on the taxation of aviation income have been introduced into the Maltese legislative framework to complement the new Aircraft Registration Act, which provide interesting tax planning opportunities for entities carrying on business in the aviation sector.

Amongst the specific measures aimed at encouraging aviation industry players and operators to operate from Malta, reference may be made to the following:

1. Income from aircraft used for international transport

Income derived from the leasing, ownership or operation of aircraft or aircraft engines used for international transport is considered to arise outside Malta for tax purposes, irrespective of the aircraft’s country of registration or whether the aircraft calls at, or operates from, a Maltese airport.

This rule is of particular significance to companies or entities that are registered or incorporated in another jurisdiction but resident in Malta for tax purposes (typically, companies that are managed or controlled in Malta), since aviation operators who are only resident in Malta are subject to Maltese tax on their foreign-source income only to the extent that such income is remitted to/received 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, which are generally based on the OECD model, present interesting tax planning opportunities for operators setting up their residence in Malta.

2. Aircraft and Engine Finance Leasing

With a view to clarifying the Malta tax treatment applicable throughout the term of an aircraft and/or engine finance lease (not exceeding 4 years), specific guidelines have been issued by the Malta tax authorities, which are relevant should the lessor and/or lessee be a Malta company and accordingly, subject to tax in Malta on its worldwide income. In this respect:

– the lessor would be charged to tax on the annual finance charge (that is, the difference between the total lease payments less the capital element divided by the number of years of the lease);

– the lessee would be allowed a deduction in respect of the finance charge, maintenance costs, repairs, and insurance

– the lessee would also be allowed capital allowances in respect of the aircraft although the parties would not be entitled to shift the burden of wear and tear onto the lessor;

– should the lessee exercise an option to purchase the aircraft on the termination of the finance lease and, additionally, provided that the lessor does not trade in the purchase and sale of aircraft, the purchase price received by the lessor would be considered to be of a capital nature such that no tax thereon would be payable by the lessor.

3. Minimum depreciation periods

The Deduction for Wear and Tear (Plant and Machinery) Rules, 2010 provide for new depreciation periods for wear and tear of aircraft or aircraft equipment, effective retrospectively as from 1st January, 2009, as follows:

– 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);

4. Private use is not a taxable fringe benefit

By virtue of LN 292 of 2010, the private use of an aircraft by an individual who is not resident in Malta and who is an employee of an entity whose business activities include ownership, leasing or operation of aircraft/aircraft engines used for international transport of passengers/goods shall not be considered a fringe benefit and is therefore not taxable as a fringe benefit.

5. Tax credits to Maltese incorporated entities involved in the aviation industry

Malta grants tax incentives, in line with the EU Framework on Regional Aid, to companies which are involved in the maintenance, repair or overhaul of aircraft, engines or associated equipment, in the form of a tax credit.

6. VAT

Maltese law provides for an exemption with credit in respect of the supply, acquisition, importation, chartering, maintenance, servicing and provisioning of aircraft engaged in commercial operations.

Other measures that make Malta a competitive base for cross-border aviation operations include:

– Tax refund on distributed profits – Aircraft leasing and other profits derived by Maltese incorporated and Maltese resident entities from international air transport operations is taxable at the corporate rate of 35%. However, on distribution of these profits, qualifying shareholders are to a refund of 6/7ths of the tax suffered on the distributed profits.

– Double taxation agreements – Malta has an extensive network of double taxation treaties with over 60 countries

– Double taxation relief – Apart from a broad network of double taxation agreements, 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) and Commonwealth Relief.