Kristy Cooper of
Norton Rose considers how a recent case offers clarification on VAT
for aircraft lessors
The European Court of Justice (Court)
has published its decision in the case of A Oy (Case C33/11)
stating that supplies of aircraft to intermediaries where the end
user is an airline operating for reward chiefly on international
routes can be zero-rated.
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This largely supports HMRC’s current approach
of adopting a “look through” test so that supplies of aircraft
which will ultimately be used by an airline operating for reward
chiefly on international routes will be zero-rated. This will be a
welcome clarification of the VAT treatment of aircraft for lessors
of aircraft.
The Court has also helpfully clarified that
“international routes” for these purposes are not restricted to
regular scheduled flights. Consequently, airlines which operate
international charter flights will also benefit from zero-rating
thereby preserving competition.
The Sixth Directive (recast as the EU Directive
2006/112/EC) (Directive) provides that supplies of aircraft used by
airlines operating for reward chiefly on international routes shall
be zero-rated. A, a Finnish company, purchased two aircraft which
it dry-leased to a company which organised international charter
flights. The Southeast Finland Tax Office issued two assessments
for VAT on the acquisition of the aircraft which were upheld by the
Administrative Court of Helsinki.
A appealed to the Supreme Administrative Court
of Finland which referred three questions to the Court: First, does
the concept of an airline “operating for reward chiefly on
international routes” include charter flights? Second, does the
exemption apply to supplies of aircraft to intermediaries which do
not operate for reward chiefly on international routes but which
will make the aircraft available to such an operator? Finally, is
the answer to the second question affected by the fact that A
charges the use of the aircraft to its individual shareholder who
uses the aircraft for his own purposes?
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By GlobalDataThe Court stated that the Directive does not
require an airline to operate scheduled international flights. In
order to ensure fiscal neutrality it is important that the VAT
treatment of airlines which operate regular flights be the same as
those operating charter flights. Consequently, the answer to the
first question must be that the exemption extends to airlines
operating international charter flights.
The Court considered that the objective is to
zero-rate supplies of aircraft which will ultimately be used by an
airline for reward chiefly on international routes, rather than
being supplied direct to such an operator. If VAT was charged to an
intermediary it is likely that the cost would be passed onto the
operator thereby undermining this objective. The Court therefore
considered that the exemption should apply to supplies of aircraft
to an operator which is not itself an airline operating for reward
chiefly on international routes but which makes the aircraft
available solely for such use.
Finally, the Court stated that the only
criteria for determining if the exemption applies is whether the
aircraft is used by an airline operating for reward chiefly on
international routes. Consequently, the fact that the use of the
aircraft was charged to an individual shareholder who used the
aircraft for his own purposes is irrelevant.
Kristy Cooper is an associate with the tax
department of Norton Rose
