A number of fiscal incentives in relation to international aviation, being of particular interest and benefit to aircraft engine and aircraft operators have been introduced recently as a follow up to the Aircraft Registration Act. These are expected to render Malta a more attractive jurisdiction from where to conduct such operations.

Aircraft Operations

A fundamental provision has been introduced in relation to income derived from aircraft which may have operated from any airport in Malta such as this income derived from the ownership, leasing or operation of aircraft or aircraft engines shall be deemed to arise outside Malta for Maltese income tax purposes.

Such income is deemed to arise outside Malta irrespective of: (a) the country of registration of the aircraft/engines; (b) whether the aircraft calls at or operates from Malta.

Under Malta’s remittance basis of taxation, income deemed to arise outside Malta will be exempt from Maltese tax. Therefore this allows for the shifting of tax residence of an aircraft company to Malta in order to profit benefit from such an incentive. This benefit, combined with the benefits on the operation of aircraft in international traffic contained in Malta’s double taxation agreements, presents attractive tax planning opportunities for airline and aviation operators setting up their residence in Malta.

Depreciation of Aircraft

The Deduction for Wear and Tear of Plant and Machinery (Amendment) Rules, 2010 (L.N. 291 of 2010) provide for new depreciation periods for wear and tear of aircraft or aircraft equipment. These have been reduced providing a bigger benefit since the deductible amounts against taxable income can be taken much faster. In fact, prior to such changes, the minimum period for aircraft depreciation was 12 years, whilst with these amendments, depreciation of aircraft and parts thereof will be as follows:

–       Aircraft airframe – 6 years

–       Engine – 6 years

–       Engine or aircraft overhaul – 6 years

–       Interiors and other parts – 4 years

New Exemption from Fringe Benefits

The Fringe Benefits (Amendment) Rules 2010 (L.N. 292 of 2010) creates a new exemption from fringe benefits rules which applies to an employee or officer of an employer as well as corporate entities, whose business activities include the ownership, leasing, or operation of any one or more aircraft or aircraft engine which is used for or employed in the international transport of passengers or goods. ??

Aircraft Finance Leasing in Malta

The Maltese tax authorities have published guidelines on the tax treatment of finance leasing of aircraft. The guidelines relate to aircraft finance leasing arrangements not exceeding 4 years. Arrangements of 4 years or more are governed by different rules. The new guidelines clarify the position pertinent to the level of taxable income in the hands of the lessor and the type of deductions that the lessee is entitled to claim. The lessor is charged to tax on the annual finance charge, namely the difference between the total lease payments less the capital element divided by the number of years of the lease. On the other hand the lessee is allowed a deduction in respect of a number of items which include finance charges, maintenance and repair costs and insurance cover. ??The lessee is allowed capital allowances in respect of the aircraft and the parties may not opt to shift the burden of wear and tear onto the lessor. Where the lessee exercises an option to purchase the aircraft on the termination of the finance lease, and the lessor is not trading in the purchase and sale of aircraft, the purchase price received by the lessor shall be considered to be of a capital nature and no tax thereon shall be payable by the lessor.

These guidelines, as well as the ratification of the Cape Town Convention – giving secured creditors greater confidence in their ability to promptly enforce their security – have encouraged the use of international structures involving Maltese companies in transactions involving finance leasing and operating leases. The aircraft involved in these transactions are not necessarily registered in Malta.

Typically, financiers incorporate a special purpose vehicle in Malta to be able to take advantage of the minimal tax leakages that accrue to such vehicles. Back to back finance facilities are entered into with the Maltese company serving as junior lenders or as lessors in a sale/leaseback transaction. Shares in the Maltese company, as well as receivables due to the Maltese company in terms of the transaction, are generally pledged in favour of a security trustee for the benefit of the senior lenders.