Tax

9. Will the relevant law require any income, withholding or other taxes to be payable in respect of payments made by an aircraft lessee to a lessor?

Austria

In general, corporate lessors resident in Austria or trading in Austria through a branch or agency (permanent establishment) will be subject to Austrian corporate tax on profits. Non-resident lessors leasing to an Austrian operator (or sub-lessor) will normally not be liable to Austrian corporation tax (or income tax) on lease rentals.

Brazil

Lease rental payments made to Lessors incorporated in jurisdictions that are not considered “tax havens” under Brazilian law are exempt from withholding taxes.  There is a possibility that the Lessee would have to withhold Brazilian income tax at the rate of 15% on payments of interest (e.g., default interest). 

Lease rental payments made to Lessors incorporated in jurisdictions that are considered “tax havens” under Brazilian law are subject to Brazilian income tax withheld at source (i.e., withheld in Brazil), at the rate of 25% of the amount of the payment.  This tax is commonly referred to as “withholding tax”.   

“Tax havens” are defined as jurisdictions with annual corporate income tax rates under 20%.  The SRF publishes a list of countries that are treated as “tax havens” for tax purposes.  

In September 2016 the SRF added Ireland to its list of tax havens.  The result is that rent payment remitted to Irish lessors, commencing on October 1, 2016, are subject to the 25% withholding tax.  After Brazil’s airlines strenuously lobbied the Brazilian Government to remove Ireland from the list of tax havens, on October 13, 2016 the SRF issued a new regulation (IN1664) exempting commercial aircraft lease payments to lessors located in tax haven jurisdictions.  Thus, the SRF actually created a safe harbor for Brazilian airlines to lease aircraft from jurisdictions such as the Cayman Islands, the British Virgin Islands and Cyprus, all jurisdictions that have been on the list of “tax havens” for years.  It is doubtful, however, that the airlines will change their practices and begin to lease from those jurisdictions.  The exemption created by IN1664 is effective for leases dated through and including December 31, 2019 and for payments due through the end of calendar 2022.  There is a general expectation that this exemption will be extended prior to the end of 2019.  This exemption applies to commercial airlines only. 

Colombia

Within the Colombian legal order, the figure of aircraft leasing is given through financial or operational lease contracts depending on the lease modality: wet lessee or dry lessee. 

According to the National Tax Statute, income tax and sales tax are generated. 

Income tax: Article 127-1 of the Statute sets out how income tax is applicable for both financial and operating leasing, as well as establishing tax treatment for the owner and the tenant.  

Consequently, in the case of a financial lease, the lessor shall, at contract’s conclusion, recognize as a lease asset the value of the lease fees, the purchase option and the residual value. In addition, the lessor must include in the income statements all the income generated by that lease agreement. 

Similarly, the lessee must recognize such contract as an asset and record the sum of the royalties as a liability; which must match the value recorded by the lessor as an asset. In addition, the value that the lessee registers as an asset may be amortized or deducted; and sales tax may be deducted or discounted according to the type of good subject of contract. 

When it comes to an operational leasing, in the case of the owner, the same asset treatment must be given to the lease fees, as it is done in the financial leasing. On the contrary, for the tenant, there will be a difference in which it will be a deductible expense.  

In the other way, payments made on international leasing contracts of aircraft, and their parts, made with companies without domicile in Colombia, will be subject to a 1% withholding tax. 

Sales tax: The Colombian Tax Statute under Articles 127-1, 420, 421 and 429 provides the tax treatment for sales tax in the case of aircraft leasing. 

The law states that sales tax can be levied since this case is considered as a financed acquisition of an asset by the lessee. Thus, tax-speaking, a leasing contract involves the sale of the good object of the contract, which on this occasion concerns to an aircraft. 

In addition, the Tax Statute determines that this tax is generated when there is a sale; and, in turn, states that the payment of the portion of the royalties in the lease could be recognized as a sale. Hence, the cause of sales tax in aircraft leases. 

However, Colombian tax law does not set a differential rate for aircraft leasing. Therefore, it must be applied the 19% general tax rate.  

By the way, every transaction must be analyzed individually. 

Czech Republic

Leasing an aircraft to an airline operating for reward chiefly on international routes is exempt from VAT. In cases where the lessee does not qualify as such an airline, then the lease will be subject to VAT at the standard rate of 21%. The Czech VAT Act distinguishes between a finance lease, where the conditions of the respective leasing contract are set in a way that the lessee under regular circumstances buys the aircraft after the leasing contract is terminated, and an operating lease. If the lease of an aircraft is not exempt from VAT and qualifies as a finance lease, VAT from the whole value of the leasing contract must be declared and paid by the lessor upon hand-over of the aircraft. VAT in the case of an operating lease is payable only upon respective lease payments. 

If the lessee in the case of a finance lease is a person whose registered office is outside the Czech Republic, the lease of the aircraft is usually exempt from VAT, provided that the lessor is able to prove that the aircraft was transported outside the Czech Republic upon its hand-over. In the case of an operating lease of an aircraft to a person whose registered office is outside the Czech Republic, the lease is not subject to Czech VAT unless the lessee operates the aircraft through a permanent establishment for VAT purposes in the Czech Republic; in the latter case, VAT would be chargeable, unless an exemption applies (for example, when being operated by an airline for reward chiefly on international routes).  

Lease payments made with regard to an aircraft for its leasing to a lessor who is a Czech tax resident are not subject to any taxes in the Czech Republic other than potential VAT as stated above. However, should a lessee who is a Czech tax resident pay leasing payments to a lessor who is not a Czech tax resident, the following scenarios may occur: 

• If the lessor is a tax resident of a state which has concluded a double tax treaty with the Czech Republic or the treaty on exchange of information in tax matters, withholding tax at the rate of 15% applies;  
• If the lessor is able to prove that it is a beneficial owner of the lease payments and that it is a tax resident of a state which has concluded a double tax treaty with the Czech Republic, the withholding tax rate is usually even lower than 15% based on the relevant tax treaty;  
• If the lessor is a tax resident of a state which has not concluded any of the agreements above, the leasing payments would be subject to withholding tax of 35%. 

Germany

German VAT does not apply to lease payments as leasing does not constitute a supply/delivery in a fiscal sense if the lessee does not obtain the power of disposal in relation to the aircraft (see definition of supply/delivery and exception mentioned under No. 1 above). 

However, depending on the jurisdiction of the lessor for tax purposes, the income a lessor earns from leasing an aircraft to a German entity, may be taxable in Germany. Section 49 German Income Tax Act (in German: “Einkommensteuergesetz” or abbreviated “EStG”) defines which income is taxable in Germany. Pursuant to Section 49 (1) No.2 (f) (aa) and No. 6 EStG income resulting from leasing payments is subject to income tax if the leased immovable asset is situated or registered in Germany.  

Pursuant to a judgement of the highest German Fiscal Court (in German: “Bundesfinanzhof” or abbreviated “BFH”) from 2 May 2000 – file no. IX R 71/96; BStBL. 2000 II page 467ff – aircraft are considered to be immovable assets in the fiscal sense pursuant to Section 21 (1) No. 1 EStG.  

Thus, income from leasing of an aircraft registered in Germany as well as the income generated from third party charter of a German registered aircraft could be considered income taxable in Germany. In other words, (in general) the income of a lessor from an aircraft lease is subject to German income taxation pursuant to German domestic tax law if the aircraft is registered in the German aircraft register.

However, in many cases, German taxation of the income of a foreign lessor from an aircraft registered in the German aircraft register is limited or excluded by a Double Taxation Treaty provided the Double Taxation Treaty expressly states that aircraft are regarded as movable (and not as immovable) assets. Thus, the answer to this question depends on the taxation jurisdiction of the lessor and whether that country has a Double Taxation Treaty with Germany and the content of such Treaty. 

Greece

Rent and other payments, made by an aircraft lessee to the respective lessor are -pursuant to local law– subject to withholding tax at the rate of 20% on their gross amount. If the lessor is tax resident in another country, and there is a Treaty for the Avoidance of Double Taxation between Greece and such other country, then any provisions in this respect of the respective treaty will prevail over local law; in many cases, a bilateral treaty would provide for zero withholding.  

Israel

In addition to VAT that would be imposed on lease payments in the ordinary course, the leasing of aircraft would generally attract income and withholding taxes as well.

Italy

Income taxes are subject to the tax rules of the state of tax residency of the lessor. In case of an Italian lessor, currently the national income tax is equal to 24% of the corporate profits. 

As far as the lease payments to a foreign lessor, withholding taxes are generally due at a rate of 30% of the rent. The tax can be reduced (or exempted) pursuant to double taxation agreements (DTA) entered into between Italy and the foreign lessor’s country. For instance, the DTA with Germany provides a withholding tax at a rate of 5%, the DTA with Ireland provides that no withholding is applicable, in any case subject to certain conditions (such as the actual tax residency of the lessor). 

Kenya

In Kenya, taxation of asset leasing arrangements (excluding land and buildings) is governed by the Income Tax Act and the Income Tax (Leasing) (Amendment) Rules, 2007. The following taxes are applicable:

• Income tax

Generally, lease payments in respect of a cross-border lease for equipment and self-propelling vehicles made by a resident lessee to a non-resident lessor are subject to withholding tax at the rate of 15% of the gross amount payable. However, pursuant to section 35 (1) (c) of the Income Tax Act, lease premiums made by a resident lessee to a non-resident person not having a permanent establishment in Kenya in respect of use of an aircraft are not subject to withholding tax.

Where a lessor who is resident in Kenya enters into a cross-border lease arrangement with a non-resident lessee, the gross lease payments made to the lessor is income which is subject to tax in Kenya. Where both the lessor and the lessee are resident in Kenya, withholding tax is not applicable on the lease payments, however, the taxable income in respect of the lease payments will be subject to tax in the hands of the lessor.

• VAT

As discussed in question 1 above, the leasing of aircraft is exempt from VAT and therefore the lease payments made in respect of leasing of aircraft are not subject to VAT in Kenya.

• Stamp duty

Nominal stamp duty of KES 200 (approximately USD 2) is payable by the lessee on the lease agreement in respect of the aircraft.

Mexico

Rental income received by a non-Mexican tax resident is subject to income tax withholding if the aircraft is used in Mexico. Mexican law presumes that an aircraft is used in Mexico in an active trade or business when lessee is a Mexican tax resident or a foreign resident with a permanent establishment in Mexico. The payer is required to withhold at the rate of 25%. If the aircraft is operated in Mexico under an air transportation concession or permit granted by the Mexican Federal Government (Civil Aviation General Bureau), then it is  subject to a 5% withholding rate as long as the aircraft is used to render public transportation services. Such rate is reduced to 1% if the Mexican resident bears the income tax withholding and the relevant operating  lease agreement provides for the foregoing.   

Nigeria

Yes.  Income tax, withholding tax and value added tax are payable in respect of payments made by an aircraft lessee to a lessor. However, the tax treatment of such payments made by an aircraft lessee to an aircraft lessor will depend on whether the lease is an operating lease or a finance lease.

The income derived from an operating lease is classified as rent under the Companies Income Tax Act (“CITA”) which defines rents to include “payments for the use of and hire of charter vessels, ship or aircraft”. Section 79 of CITA provides that payments due or payable to a lessor shall at the time of payment be subject to the deduction of withholding tax by the lessee. Taxes withheld pursuant to Section 79 shall be payable as final tax if the lessor is a non-resident. The Lessee will be liable to pay VAT as imposed by the Value Added Tax Act.

The lessee in a finance lease will be entitled to claim for capital allowances (where the agreement provides for the transfer of ownership, risk and reward to the lessee) on all payments to the lessor, interest payments are also treated as allowable deductions for the lessee while the interest earned by the lessor is a return on investment and is not subject to VAT.

a.     Companies income tax is assessed at the rate of 30% of any profits accruing to the company and is payable by either the lessor or the lessee depending on whether the lease is an operating or a finance lease.

Withholding tax (“WHT”) is withheld at the rate of 10%. However, where the lessor is resident in a country with which Nigeria has entered into a double taxation agreement/treaty, the rate at which tax will be withheld from the payment will be 7.5%. Nigeria currently has double taxation agreements with 14 countries: Canada, Pakistan, Belgium, France, Romania, Netherlands, United Kingdom, China, South Africa, Italy, Philippines, Czech Republic, Slovakia and Singapore. The lessor is required to withhold and remit the tax to the Federal Inland Revenue Service.

VAT is assessed at the rate of 5% and is payable by the Lessee.

Norway

For tax and VAT considerations, distinctions have to be made between financial and operational leasing. The tax consequences will depend on what type of leasing we are facing. For instance, the Norwegian VAT Act section 3-6 b) explicitly names financial leasing as not being exempted from VAT, while operational leasing may be exempted (zero-rated) pursuant to the VAT Act Section 6-10.  

These are, however, complex questions that must be considered on a case by case basis. 

Panama

Payments made by lessee to a lessor under an aircraft lease are subject to corporate income tax if the aircraft is economically used within the Republic of Panama or by a local operator for international transport. The applicable tax rate is of 25% per cent of net taxable income.   

Payments made by a lessee to a non-domiciled lessor under a lease of an aircraft economically used within Panama or by a local operator for international transportation are subject to a withholding tax of 50% per cent of the applicable tax rate on 100 per cent of the amounts credited to the non-domiciled lessor unless reciprocity agreements are in effect between the Republic of Panama and the country of the lessor.   

Peru

In effect, the lease paid by the lessor in favor of the lessee for the use and enjoyment of a movable good in this case of the aircraft is taxed with the first category income tax, in accordance with numeral B of article 23 of the Income Tax Law. 

Portugal

VAT and Corporate Income Tax should be due.

Puerto Rico

In the case of foreign entities (corporations and partnerships) not engaged in trade or business in Puerto Rico, there shall be deducted and withheld at the source, a tax equal to twenty-nine percent  (29%) of said income. 

In those cases where the withholding agent shows to the satisfaction of the Secretary of the Treasury, or when the Secretary himself determines, that the withholding provided in the Code will cause  undue hardship without any practical result whatsoever because the amounts thus withheld would have to be reimbursed to the recipient of the income, or the withholding would be excessive, the Secretary may, under such rules and regulations as he/she may prescribe, relieve the withholding agent of the obligation of withholding, in whole or in part. 13 L.P.R.A. § 30281. 

Romania

The income derived by a Romanian resident (i) from operational leasing and (ii) the interest from a financial leasing agreement is taken into consideration as taxable when assessing the tax on profit. Withholding taxes may apply depending on the qualification of the payments and on the type of legislation applied. Thus:  

• under Romanian tax law, nonresidents are subject to withholding taxes of 16% on (i) interest income obtained from a Romanian resident and (ii) royalties obtained from a Romanian resident; in accordance with our domestic law the income obtained for the use or the right to use an equipment is considered as royalty.  
• the withholding tax may be reduced or the taxation in Romania may be restricted under DTTs concluded by Romania or under Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. 

South Africa

• No withholding tax is payable on lease payments of operating leases.  However, any default interest will be subject to a withholding tax of 15% (payable by Lessee), subject to any applicable treaty relief. 
• Non-residents are only subject to income tax in SA on income from a source or deemed source in SA.  Whether or not income is from a source or deemed source in SA will depend on the facts of each case. 
• VAT at a rate of 15% may be payable on lease payments if Lessor is a registered VAT vendor.  To avoid the obligation to register as an SA VAT vendor and charge VAT on lease payments one would need to apply for a VAT exemption directive in terms of the Value-Added Tax Act, 1991 from SARS. 

Spain

Yes 

Spanish source royalty payments are normally taxed at a 24% withholding tax rate (19% tax rate applies for EU countries) unless a double tax treaty between Spain and the country of residence of the recipient exists. This may reduce that rate, to even zero.  

Intragroup royalty payments may be subject to a 0% withholding tax rate for EU lessors if certain requirements apply.  

Switzerland

For tax considerations, distinctions between finance, dry and wet leases (ACMI) have to be made: 

1. Finance lease: the Swiss VAT Act explicitly names only the sale and lease-back to be Swiss VAT-exempt without credit. However, provided certain conditions are met, alternative finance lease transactions can be Swiss VAT-exempt without input Swiss VAT credit, subject, however, to a written confirmation of the competent Swiss VAT Administration. By carefully drafting a lease agreement, a finance lease can qualify as taxable supply subject to Swiss VAT with input VAT credit, therewith avoiding the input VAT, including but not limited to Swiss import VAT, if any, to become a final cost. In cross border finance leases, provided that the leased aircraft will be predominantly used outside Swiss customs territory, the Swiss resident lessor may apply the 0% Swiss VAT rate and is still eligible to reclaim any input VAT, including Swiss VAT on the import, if any. 
2. Dry lease: a dry lease is a delivery, thus a supply potentially subject to Swiss VAT at 7.7% (please see further above for details and exemptions). 
3. Wet lease (ACMI-leases): a wet lease of an aircraft does not qualify as a supply of goods, but a transportation service rendered at the place where it was used. The place of such service is governed by the place of enjoyment rules, taking into account the effective use of the aircraft. However, cross border flights originating from or ending on Swiss territory are Swiss VAT-exempt at 0%.  

United States (Miami)

Commercial operators (Part 135) may be subject to the tax on transportation of persons or property. For  commercial transportation, Federal Excise tax takes the form of a percentage tax or a head tax, or both. The traditional FET is a percentage tax on the amount paid for commercial transportation. There is also a segment fee due on each domestic segment. Finally, a head tax also applies to international transportation of persons. The excise taxes due on commercial air transportation are: Percentage Tax 7.5%; Domestic Segment Fee  $4.20; International Arrival/Departure Head Tax $18.60; Hawaii/Alaska Flight Tax $9.30 

If there is a nonresident alien individual or foreign corporation involved, a 4% tax may also be imposed for each taxable year on such individual’s or corporation’s United States source gross transportation income for such taxable year.  

Different tax considerations depend on a number of factors, including, but not limited to, the ownership structure, taxpayer status, operation of the aircraft and locations of operations.