|Mark Galea Salomone||Kirsten Cassar|
As a result of its historical connections with the UK, Maltese tax law retains the notion of domicile and residence and extends this to a corporate environment. The extent of a foreign incorporated, and therefore non-domiciled but Malta-resident, person's liability to tax in Malta depends on the circumstances surrounding, and on the natures and source of the income derived by, that person. As a result, foreign incorporated SPVs that are resident in Malta are not liable to tax in Malta on such income to the extent that such foreign source income is not physically remitted to Malta. When combined with a deemed foreign source rule for income derived from ownership, leasing and operation of aircraft or aircraft engine, which is used for, or employed in, the international transport of passengers or goods, these Malta resident non-domiciled SPVs should be able to derive aircraft lease income which is not subject to tax in Malta. Such income is deemed to arise outside of Malta, irrespective of the aircraft's and/or engine's country of registration or of whether the aircraft calls at or operates from a Maltese airport.
As is applicable to other types of Maltese companies, following a distribution of dividends, the shareholders of the operating company would be entitled to claim a refund of 6/7 of the tax paid by the distributing company from the local tax authorities, thus effectively reducing their Maltese tax burden to 5%. However, this overall effective tax rate may be further reduced where:
- accelerated tax depreciation is claimed: airframes and aircraft engines are written off over six years and aircraft interiors over four years – and any unused amounts may be carried forward to subsequent years;
- the company opts for a step-up of the aircraft value from book value on the date of a migration to Malta. In this case, the 'stepped-up' value would represent the basis for Malta tax depreciation going forward;
- a credit for foreign tax levied on payments made to Malta may be claimed.
Moreover, in relation to the finance leasing rules, the tax treatment of income derived from finance leases is as follows. The lessor is taxable only on the finance charge being the interest portion of the lease income without being allowed to claim tax deprecation. The lessee is entitled to deduct the finance charges and costs for repairs, maintenance and insurance and to claim tax depreciation. Where the lessee exercises an option to purchase the aircraft on the termination of the lease, and the lessor is not trading in aircraft, the purchase price received by the lessor should not be taxable in Malta.
Guidelines have also been issued by the Maltese tax authorities in respect of aircraft leasing arrangements which are not regulated under the finance leasing rules. The following tax treatment is to be adopted for each year of the lease period:
- 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;
- the lessee is allowed a deduction in respect of the finance charge, maintenance, repairs and insurance; and
- 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;
The fringe benefits rules have also been amended providing that the private use of an aircraft by a non-resident who is an employee of an entity whose business activities include the ownership, leasing or operation of aircraft and/or aircraft engines used for international transport of passengers and/or goods will not be considered a fringe benefit and is therefore not taxable as a fringe benefit.
The aim of the amendments has been to put Malta at the forefront of the aviation industry. The above framework, alongside other elements such as: (i) a reduced income tax rate of 15% for highly qualified persons in the aviation sector; (ii) no stamp duty on the transfers of aircraft, airframes, engines and other aircraft related assets; as well as (iii) provisions for allowing re-domiciliation of companies with no exit or entry taxes, have each contributed to the growth of the aviation industry in Malta.
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