As some will know, European Union (EU) aircraft importations have been the basis of an ongoing discussion at EU level for a long time now. After the changes made to the end-use exemptions (customs duty) and the introduction of the new EU Customs Code, the discussion has been centred on a lessee’s right to reclaim the import VAT imposed in connection with aircraft importation.
This update relates only to a full importation into the EU where the aircraft is not exempt as being used for commercial flights with an AOC/Charter certificate. It does not apply to Temporary Admission with total relief from import duties.
Anyone considering a full importation in the EU and anyone having recently done it should read this update as the update have effect in all EU member states.
The Council Directive on the common system of value added tax (the VAT Directive) regulates the authorities right to claim and the companies right to reclaim VAT. Uncertainty as to the correct application of the provisions of the VAT Directive in the case of full importation of leased aircraft gave rise to consultations with the European VAT Committee back in 2013 (see European Commission Working Paper No 762).
Based on judgements of the European Court of Justice (ECJ) and opinions previously expressed by the European VAT Committee, the VAT Committee made it unambiguously clear that the importation of a leased aircraft is subject to import VAT and that neither the customs representative nor the lessee is entitled to reclaim VAT.
Consequently, some EU member states have declined lessees domiciled in the EU access to reclaim import VAT, arguing that the lessees have not incurred the costs of acquisition and do not, in fact, own the imported aircraft.
In 2015, the Legal Division of the Danish Customs and Tax Administration published a draft administrative act pointing out that a lessee cannot reclaim import VAT. Based on input from the industry, the Danish Customs and Tax Administration identified that this approach – denying lessees to reclaim import VAT – led to situations whereby both the lessee and the lessor were denied the right to reclaim import VAT.
The issue of the lessee’s right to reclaim import VAT – or lack of such right – was revisited by the European Commission, and once again the European Commission made it clear that the lessee did not have a right to reclaim import VAT. Based upon the position taken by the Commission, we expect the Danish Customs and Tax Administration to release the final administrative act closing down any discussion within the industry of the right to reclaim import VAT on leased aircraft.
Import VAT is imposed and becomes chargeable when the aircraft is imported into EU for free circulation (full importation). Import VAT is not imposed or chargeable when the aircraft is placed and maintained under the Temporary Admission regime with total exemption from import duty.
The lessee importing the aircraft and the customs agent representing the lessee do not have a right to reclaim the import VAT imposed by declaring the aircraft for fully imported into the EU.
If the aircraft is imported by the owner of the aircraft and used for his taxable economic activities, the owner has a right of reclaiming the import VAT. This right is conditional upon the owner acting as the importer and thus conditional upon the owner holding a customs import declaration specifying the owner as the importer. If the owner is not established in the EU, importation of the aircraft for free circulation within the EU requires payment of customs duty as the end-use regime is not applicable.
If the aircraft is imported by the lessee or by a third party representing the lessee, the lessee is denied the right of reclaiming the import VAT. In that connection, the Commission states:
“In cases where the owner of the goods is not established within the EU, the lessee could clear the goods for customs purposes himself and could be designated by the member State of importation as liable for the import VAT payment.
According to guidelines agreed by the VAT Committee a taxable person designated as liable for the payment of import VAT pursuant to Article 201 of the VAT Directive shall not be entitled to deduct it if (1) he does not obtain the right to dispose of the goods as owner and (2) the cost of the goods has no direct and immediate link with his economic activity.
Whilst the lessee of an aircraft may not be regarded as having a right to dispose of the aircraft as owner, it still has to be established whether the cost of that aircraft has an immediate and direct link with his economic activities.
However, the lessee does not actually bear the cost of the aircraft but only the amount of the lease to be paid to the owner. These costs, although directly related, are not the actual costs of the aircraft.
Therefore, following the VAT Committee guidelines, the lessee is not entitled to a VAT deduction because both (1) and (2) above apply in this case. This is irrespective of whether the procedural conditions of Article 178 (e) of the VAT Directive are fulfilled.”
The above statement is valid for all EU member states.
The risk of being denied access to reclaim VAT should be taken into consideration if the aircraft structure is based on a non-EU lessor with a lessee being the importing entity in the EU.
Please be cautious if the importer is not the real owner of the aircraft. Always ask yourself – which entity has the depreciation allowance and right of disposal as owner of the aircraft?
Nobody in the aviation industry appreciates the lack of possibility for aircraft lessees to reclaim VAT, but that is the way things have turned out. The clarification of practice has definitely closed some of the options used when importing aircraft into EU and will probably have a huge effect on a lot of the leasing schemes for aircraft and yachts etc. popular in some island jurisdictions and other jurisdictions with aircraft importations.
WARNING: Be aware if leasing agreements are used and structured in a way where a lessee is supposed to reclaim the VAT – based on suggested business use. The VAT rates in the EU are between 15-27%, implying a tremendous economic risk!
What to do for an EU entity – possible solution: Structure the ownership so that the real owner is the importer. This might prove difficult as many lessors/lenders/financers will probably not take the risk of being the importing entity.
What to do for a non-EU entity – possible solution: Simply use Temporary Admission. Most non-EU operators have already changed to using Temporary Admission. The risk of not getting the end-use exemption or of having it withdrawn due to breach of expectations or the information supplied is too high without a real EU establishment. Please have look here.
Our advice has always been to ask the local tax authorities for a binding advance tax ruling prior to any importation/admission in order to eliminate any doubt about the outcome. All cases are different in the details, and an binding advance tax ruling will also take into account all new ECJ judgements!
Even if you think you have a full working set-up, it is too risky to go through with the importation without a binding advance tax ruling from the EU member state into which the aircraft is to be imported. The ruling must include a full description of any finance/leasing/user/trust structure and all entities involved in the chain from aircraft owner/lessor/lessee to the operator.
All finance/leasing/user/trust agreements should be enclosed in un-redacted form when you ask for a binding advance tax ruling as the ruling will not be valid if relevant information has been withheld.
The mentioned ECJ cases have their origin in the United Kingdom (C-98/98, C-408/98, C-4/94), Holland (C-435/05), Sweden (C-29/08), France (C-16/00), Austria (C-465/03), Germany (C-437/06) and Lithuania (C-126/14), so these EU member states have already or will spearhead the enforcement of these limitations. The ECJ judgements are from the period 1995-2015, so the issue is not new in these jurisdictions, but it is probably the sum of all these judgements that is behind the recent limitation of the right to reclaim VAT.
Well-informed tax advisors and aviation service providers in the said member states should already have taken these changes into consideration at least since the end of 2015. We realise that not all EU member states have aligned their local interpretation at present, but all member states will eventually have to do so!
It is our opinion that the above is a very clear signal from the EU Commission and there is no way around it!
IF YOU WANT TO KNOW MORE
Please see these links:
We will continually be collecting background material on this issue – please give us a hint and we will keep you updated.
More to follow from us later this year about the handling of customs duty (end-use exemption) and how it is handled in practice in various member states known for aircraft importations.