Aspects of buying an aircraft and tax implications of Aviation

1. Aspects of buying an aircraftand tax implications of Aviation Antwerp 2011

2. Agenda • Purchasing an aircraft? – Main tax and non tax related considerations • Ownership • Plurality of Ownership: Fractional Ownership • Aircraft Management, Financing and International Security • Registration of Aircraft • Aircraft Registration in Malta • Tax aspects and opportunities in Aviation – an overview

3. Purchasing an Aircraft? Mr. Millions

4. Purchasing an Aircraft? • Whether a custom private jet or a corporate aircraft, ensure advance planning and consider the following: • A cost-benefit analysis – to assess flight time per year to justify ownership of an aircraft. Consider hidden costs, such as insurance, fuel, catering and pilots. There are aircraft management companies which take care of these needs; • Determine the size and flying range needed (where you fly, how often you fly, and how many guests fly with you) andapproach private jet manufacturers and/or jet dealers for aircraft specifications and pricing; • Obtain necessary advise in relation to contracting the purchase agreement ; • Security: Ensure that aircraft is clear of all liens and encumbrances or that these are disclosed; • Airworthy conditions; • Determining registry of choice • Financing; • Special Purpose Vehicles to ensure tax efficiency;

5. Purchasing an Aircraft? • Other important fiscal considerations: • Business vs personal use • Capital allowances • VAT • Offsetting expenses against income • Fringe benefits • Tax and permanent establishment issues

6. Purchasing an Aircraft? • Capital Allowances • Life expectancy (circa 25 years). • VAT • Purchase or import • Running the aircraft • Offsetting expenses against income • Owner vs charterer

7. Purchasing an Aircraft? • Fringe benefits / Benefits in Kind • Business vs personal use • Commercial charter agreements • Exclusion of private use in contract of employment • LLP vs corporate entity • Direct Tax • Country of registration, airports called at, airport operated from ? • OECD Model treaty. In 1992 equipment leasing income is excluded from the definition of royalties. • ‘shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.’ • Careful examination of each case in relation to the treaty between the countries is required

8. Ownership • Limited Liability Company • The standard and simple approach taken by most non-aviation professionals, is to utilize a single entity to hold title to the aircraft, and for the owners to take an ownership interest in the single entity. While this structure may be expedient in the short term, it has longer term implications. • Trusts • Aircraft Registration; • Aircraft Leasing • Trust also allows for the ownership of the aircraft to be split in various portions; • Certain jurisdictions allow for foreign owners to hold and register aircraft through a Beneficial Trust (e.g. U.S. and Isle of Man); • In case of Aircraft Leasing, a special purpose vehicle (SPV) in the form of a Trust may be set up to act as owner and lessor of aircraft/ lessee and sub-lessor of the aircraft.

9. Plurality of Ownership: Fractional Ownership • Fractional jet ownership is shared ownership of a personal airplane that is staffed and maintained by a fractional company. Fractional ownership allows you to purchase or lease-purchase a fractional interest (also known as a share) in a single airplane, while offering you access to an entire fleet of aircraft. Although you are technically buying a part of a specific aircraft for tax and depreciation purposes, you are really buying into a jet service in which your fractional company runs a large fleet and can send your jet or a jet of the same model whenever and wherever you need it. • Typical share sizes • 1/16th share = 50 flight hours • 1/8th share = 100 flight hours • 1/4th share = 200 flight hours • ½ share = 400 flight hours • A relatively novel concept in private aviation (developed primarily in the U.S and now spread even in Europe);

10. Plurality of Ownership: Fractional Ownership • Flexible whilst ensuring value and quality; • Allows for investors to share the acquisition and running costs of aircraft (such as maintenance, technical problems, crewing and training); • Share is a liquid asset; • Companies providing similar fractional ownership include Netjets and Fractional Jets Europe;

11. Aircraft Management • Aircraft management and leasing companies manage privately and/ or commercially registered aircraft on behalf of business, government and private owners. • Private jet owners may engage a management and leasing company, which would hold an Air Operating Certificate (AOC) and entrust the complete operational management of their aircraft including: Charter, Flight Operation and Maintenance. • Operating Lease: Aircraft may be leased (on a temporary basis) to these management and leasing companies on a dry lease, which in turn will charter (for air transport services) to third parties and manage the crewing, flight operations and maintenance. • Companies providing similar aircraft management ExecuJets and Privatair;

12. Aircraft Financing • Complex arrangements between Financiers, Vendorand Purchaser whereby even a transaction for the acquisition of a private or corporate aircraft would require the following: • The borrower provides basic information about themselves and their prospective aircraft to the lender; • The lender performs an appraisal of the aircraft's value; • The lender performs a title search based on the aircraft's registration number, in order to confirm that no liens or title defects are present. In many cases, a title insurance policy is procured; • The Lender would likely request a security (depending on the credit-worthiness of the borrower); • At closing, the loan documentation is executed and funds and title are transferred. • Finance Leasing: a longer-term arrangement in the lessee may have the option to purchase the aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the lease

13. International Security • Cape Town Convention & Aircraft Protocol: • An international framework/ registry for the creation, registration, recognition and enforcement of international interests in airframes, aircraft engines and helicopters • International interests cover registration of ownership, security interests, leases and conditional sales contracts • It reduces the financial risk to creditors by: • facilitating the financing of the acquisition and use of aircraft • facilitating the utilisation of asset based financing and leasing of aircraft • ensuring that interests in aircraft are recognised and protected universally, and • providing secure and readily enforceable default remedies given the easily identifiable and high value mobile equipment being dealt with • Clarity on priority of competing interests –“first in time, first in right” • Greater confidence given to secured creditors in their ability to promptly enforce their security (including repossession)

14. Registration of Aircraft • Most common jurisdictions for aircraft registration: • Aruba; • Bermuda; • Cayman Island; • Bahamas; • Isle of Man • Ireland • Now also Malta • Offshore registration may provide for exemption from income tax, corporate tax, sales tax, dividend withholding tax and VAT, and excise tax, higher level of confidentiality, whilst allowing for registration of aircraft not certified EASA which have been however certified by the FAA and are eligible for an FAA Certificate of Airworthiness;

15. Malta – Aviation Registry of Choice • Registration that works for international aircraft operations; • Malta offers to the international operations: • An EU jurisdiction bound by all of the EU’s legal structure governing the regulation, certification, airworthiness and safety of civil aviation. ; • More transparency; • A flag of confidence rather than of convenience; • Acceptable jurisdiction to international lenders financing an aircraft; • Malta aviation sector offers a variety of services (from MROs, financial services, aircraft management to other support services); • Excellent geographical location in the heart of Mediterranean; • Competitive costs

16. Aircraft Registration in Malta • The Malta Aircraft Register caters for private aircraft, corporate jets and commercial aircraft. Aircraft are allocated the registration 9H; • As from 1st January 2011 monitored by a single regulator – Transport Malta; • Malta is member of the International Civil Aviation Organisation (ICAO), the European Civil Aviation Conference (ECAC) and the European Air Safety Agency (EASA); • The registration of aircraft, the registration and enforcement of aircraft mortgages and the implementation of the Cape Town Convention and its interface with Maltese laware regulated by the Aircraft Registration Act, 2010; • Malta Aircraft Registry allows for a plurality of ownership, such as the recognition of fractional ownership of aircraft and the registration of aircraft under the terms of a beneficial trust; • An aircraft registered in Malta is subject to the laws of Malta and has all the rights and privileges of a Maltese aircraft; • Malta has at present around 55 Air Service Agreements that essentially facilitate air traffic between various countries;

17. Registration: Eligibility • Applicants who may register an aircraft include: • the owner of an aircraft (even under construction); or • operator under temporary title; or • buyer under a conditional sale; or • a trustee • Possibility of registering an aircraft which is under construction (as soon as it is uniquely identifiable) • Re-registration of aircraft from other jurisdictions (but cannot be registered in more than 1 State); • Joint/Fractional Ownership: • Joint/fractional ownership are catered for in Malta. At least 50% of the owners of the shares in the aircraft must be eligible as qualified persons. The same applies where registration carried out by a trustee.

18. Registration: Qualifying Registrant • As per the Aircraft Registration Act, the following persons are qualified to register any aircraft (whether used to provide air service or otherwise): • The Government of Malta; • A citizen of Malta or a citizen of EU, EEA or Switzerland (provided place of residence or business of that person is in Malta, EU or EEA); • An undertaking set up in Malta, in EU or EEA (provided registered office, central administration and principal place of business is within Malta, EU or EEA) whereof not less than 50% of the undertaking is owned and effectively controlled by Govt. Of Malta or EU Member State or by Maltese citizen or citizen of EU, EEA or Switzerland; • Trustees for such interests (the beneficiaries of the relevant trust would be considered to determine eligibility to register). • For private aircraft (aircraft NOT used to provide air service), a resident agent is appointed where a registrant (a natural person/undertaking) is not a ‘qualified person’.

19. Use of Trusts in Malta • The Aircraft Registration Act, 2010: • allows a trustee who registers an aircraft may request that his position as registrant be recorded more than once so as to reflect underlying principals or beneficial interests; • Ownership held by trustees (for a single interest or more) may be recorded in the National Register; • Recognizes a mortgage to be executed and registered in favour of a security trustee appointed or acting under a trust for the benefit of persons to whom a debt or other obligation is due. Such security trustee shall, in any such case, be recognized as the mortgagee of the particular mortgage and shall be entitled to exercise all the rights in relation to that mortgage;

20. Legal effects of registration • Renders information public and effective against third parties; • Creates priority between different rights; • Creates legal effects between parties when same is conditional on registration • All other effects under applicable law.

21. General: Malta Fiscal Regime • Any Malta company may own and operate an aircraft registered in Malta or registered elsewhere; • Tax treatment of Malta companies depends on the income stream • The current income tax rate applicable to Malta companies is 35% • Profits from the operation of an aircraft will be charged to tax at 35% but with the possibility of a refund of 6/7ths upon distribution of a dividend, leaving only a net tax leakage of 5% in Malta • Worldwide taxation : Domicile and residence • Non-domiciled persons taxed on : Malta sourced income and capital gains + foreign sourced income received in Malta. Foreign capital gains are not taxed • However if tax treaty applies –profits from the operation of aircraft are generally taxable only in the Contracting State in which the place of effective management of the enterprise is situated (where Art. 8 OECD Model Convention is adopted)

22. General: Malta Fiscal Regime 6/7ths Refund

23. Residence and Domicile and tax opportunities Malta follows the UK system of residence and domicile. Persons resident and domiciled in Malta are subject to tax on a worldwide basis Persons who are either not domiciled or not resident in Malta are subject to tax on a source and remittance basis: • Malta sourced income and capital gains • Foreign sourced income which is received in Malta • Foreign capital gains are not taxed, irrespective of whether received in Malta or not A company that is incorporated outside Malta but having its place of management and control in Malta is regarded to be resident and not domiciled.

24. Aviation – Tax considerations and opportunities Income derived from the ownership, operation or leasing of an aircraft used in international aviation business is deemed to arise outside Malta irrespective of: • whether the aircraft calls at or operates from Malta; • the country of registration of the aircraft/engines. This amendment • should not affect Maltese companies that are in the business of owning, operating and leasing aircraft • brings certainty to foreign aircraft owners/operators whose aircraft fly to Malta – income does not arise in Malta, hence not taxable in Malta • provides some interesting opportunities for persons in the business of owning, operating and leasing aircraft…

25. Aviation and aircraft ownership structures Management agreement SPV in Malta to own the aircraft Air Operator Certificate (AOC) holder Can be a limited liability company or a Trust • Lease income is subject to tax in Malta at a standard rate of 35% reduced by double tax relief, where applicable • Operating vs Finance Lease • Deduction for capital allowances where burden of wear and tear is kept • Further opportunity to reduce Malta tax leakage through the application of the tax refunds… Individual

26. Aviation – Tax considerations and opportunities • Consider a foreign incorporated company that owns/leases aircraft • If such company is managed and controlled from Malta, such company would be regarded as resident but not domiciled in Malta • Accordingly, under general principles of income tax, such company is taxed on income arising in Malta and income arising outside of Malta which is received in Malta Company incorporated Outside Malta Foreign Co moves management and control to Malta Foreign Company (Lessor) Management And Control Income from lease/operation of aircraft taxable in Malta only if received in Malta

27. Aviation – Tax considerations and opportunities • As long as the aircraft is used for the international transport of goods or passengers, income derived from the lease/operation of the aircraft is considered to arise outside of Malta • Accordingly, as long as the income is not received in Malta such income should not be taxable in Malta • Given that such companies are regarded as resident in Malta, the companies should have access to Malta’s 55+ double tax treaties (naturally, subject to certain limitation of benefit clause provisions which may apply) Company incorporated Outside Malta Foreign Co moves management and control to Malta Foreign Company (Lessor) Management And Control Income from lease/operation of aircraft taxable in Malta only if received in Malta

28. Aviation – Tax considerations and opportunities • No withholding tax applies on lease payments to lessor as long as aircraft is used for the international transport of goods or passengers • Lessor may be resident in a country with which Malta does not have a tax treaty • If lease is an operating lease, lessee may generally claim full deduction for lease payments against his income • Lessee may also claim capital allowances if the burden of wear and tear falls on him • If aircraft lease is a finance lease, lessee is entitled to a deduction in respect of: • interest element of the finance lease • repairs and maintenance • insurance, and • capital allowances Owner of aircraft Aircraft operator Foreign Company (Lessor) Malta Co (Lessee) Lease payments Aircraft leased to MaltaCo

29. Aviation – Tax considerations and opportunities • Lease income is subject to tax in Malta at a standard rate of 35% reduced by double tax relief, where applicable • If the lease is an operating lease, then the lessor is subject to tax on the full lease payment • However, if the lessor maintains burden of wear and tear, the lessor is able to claim capital allowances in respect of the aircraft at the rates described earlier • If the lease is a finance lease, then the lessor is chargeable solely on the interest element of the finance lease • However, in such cases, no deduction is available for capital allowances • Further opportunity to reduce Malta tax leakage through the application of the tax refunds… Operator of aircraft Owner of aircraft Foreign Company (Lessee) Malta Co (Lessor) Lease payments Aircraft leased to ForeignCo

30. Conclusion • Transparency of all rights and interests in aircraft; • Fractional ownership • Broad registration possibilities for all aircraft, whether used for private or commercial air transport; • Facilitation of enforcement of mortgages and other security interests; • No withholding tax on lease payments where the lessor is not a tax resident of Malta; • Competitive minimum depreciation periods for aircraft; • Applicability of the Cape Town Convention provides financiers with a higher degree of protection and more effective enforcement remedies whilst allowing lower borrowing costs; • Availability of a wide range of airline services (aircraft and engine maintenance, repair and overhaul, aircraft management, aircraft maintenance training and other ancillary support services); • Private use is not a taxable fringe benefit. • Attractive and efficient tax regime for operators and leasing arrangements

31. Contact details For further information please contact: Karl Cini B. Accty (Hons), FIA, FCCA, Dip. Tax. MIT Nexia BT Tower Business Centre Ground Floor Tower Street Swatar BKR4013 Malta Tel: +356 21637778 Fax: +356 21634383 Email: karl.cini@nexiabt.com Web: www.nexiabt.com