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VAT is in the air

Chelco VAT Ltd
19 January, 2018

By Panayiotis Panayi
Senior VAT Consultant
Chelco VAT Ltd
p.panayi@chelcoVAT.com

Following on the footsteps of the VAT Yacht Leasing Scheme (VYLS), the Cyprus Tax Department introduced in 2015 a similar scheme for private aircrafts, the VAT Aircraft Leasing Scheme (VALS).

With plans to establish Cyprus as an aviation hub by utilising the old Larnaca airport and by improving existing airport facilities, the VALS seemed like the ideal tool to that effect.

Although intentions did not quite materialise to the level intended, the VALS was introduced via circular 190 on 24 March 2015 and is available to high net worth individualswho would like to acquire a private aircraft for private or executive use at a reduced VAT rate.

The scheme follows the same principlesas the VYLS and is based on the place of supply rules as per article 56 of the EU VAT Directive and the use and enjoyment provisions of article 59a(a) as applied through the Cyprus VAT Laws. Similar to the VYLS, the Tax Department introduced the below fixed rates based on the maximum takeoff weight and the type of engine thatpowers the private aircraft in order to avoid the arduous task ofpresentingtravel logs as proof of usage.

Table A: Piston engines

Takeoff weight

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg - 3.000kg

100%

19%

Small: 3.001kg-5.700kg

80%

15,2% (80% x 19%)

Medium: 5.7001kg-15.000kg

60%

11,4% (60% x 19%)

Large: Over 15.001kg

40%

7,6% (40% x 19%)

Table B: Turbo engines

Takeoff weight

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg - 3.000kg

55%

10,45% (55% x 19%)

Small: 3.001kg-5.700kg

45%

8,55% (45% x 19%)

Medium: 5.7001kg-15.000kg

35%

6,65% (35% x 19%)

Large: Over 15.001kg

25%

4,75% (25% x 19%)

Table C: Jet engines

Takeoff weight

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg - 3.000kg

50%

9,5% (50% x 19%)

Small: 3.001kg-5.700kg

40%

7,6% (40% x 19%)

Medium: 5.7001kg-15.000kg

30%

5,7% (30% x 19%)

Large: Over 15.001kg

20%

3,8% (20% x 19%)

So, what are the conditions of the VYLS and how does it work?

Conditions:

  • Lessor must be a Cyprus resident and VAT registered company. The lessee may be any legal or physical person established or having their permanent address in Cyprus and not engaged in any economic activity.
  • The aircraft is required to fly to Cyprus within two months from the time the lease agreement is put in effect.
  • The value of the aircraft will need to be ascertained either via the purchase documentation (usually applicable for new aircrafts) or an independent valuation (usually applicable for the purchase of used aircrafts) as may be required by the VAT Department.
  • The maximum takeoff weight and engine type are determined as per the constructor’s certificate.
  • The lessee needs to contribute a minimum initial contribution of 40% of the aircraft value. This is subject to VAT at the reduced effective rate based on the aircraft specifications.
  • Lease payments will be monthly and the agreement can neither beshorter than 3 months (91 days, to meet the long term leasing definition) nor longer than 60 months.
  • Over the length of the leasing agreement the lessor must have a profit of no less than 5% of the aircraft value. This means that the total value of the lease agreement should represent the purchase value of the aircraft plus an additional minimum 5% margin. Half of that margin, that is 2,5% of the aircraft value, is applied over the lease payments and the other half over the last payment.
  • The final payment under the option to purchase the aircraft by the lessee, cannot be less than 2,5% of the aircraft value. This final payment is always subject to the standard VAT rate (i.e. 19% as of 13/01/2014).
  • To be able to apply the VALS prior application and written approval by the Commissioner of Taxation is required.

Together with the application the below certificates are also required to be submitted:

  • Noise certificate
  • Type certificate
  • Certificate of airworthiness
  • Airworthiness review certificate

The aircraft is not required to be registered in Cyprus. In fact, it may be registered on the register of any national aviation authority anywhere in the word.

Upon completion of the VALS, a VAT paid certificate will be issued to the lessee if they have exercised the option to purchase. Also, the Cyprus Customs Department will issue a T2L certificate upon settlement of the 40% initial contribution required under the VALS scheme.

Taking advantage of the favourable VAT regime under VALS in Cyprus means that the effective VAT rate on the purchase of a private aircraft could be reduced to as low as 4,4% based on the characteristics of the aircraft.

Example

Dassault Falcon X jet with takeoff weight of 30.000kg and a value of €20.000.000.

Using VALS leads to VAT savings of €2.926.000!

Net Amounts Involved:

Calculations

Aircraft value [(A)]

20.000.000

2,5% required profit [(B)=(A) x2,5%]

500.000

Total value incl. 2,5% expected profit [(C)=(A)+(B)]

25.000.000

Initial contribution by lessee 40% [(D)=(A)*40%]

8.000.000

Total lease instalments [(E)=(C)-(D)]

12.500.000

Monthly lease payments [(F)=(E)/48]

1.416.667 per month

Final payment [(G)=(A) x 2,5%]

500.000

Tax amounts involved over the lease period:

VAT amounts

Effective VAT Rate

VAT Amount (€)

Initial contribution (8.000.000)

3,8%

304.000

12 Lease payments (12 x (F)=12.500.000)

3,8%

475.000

Final payment ((G) 500.000)

19%

95.000

Total VAT paid under VALS

 

874.000

Effective VAT rate (874.000/20.000.000)

4,4%

 

Panayiotis Panayi is a Chartered Accountant (ACA) with close to 10 years of experience in indirect tax consulting with a solid track record of formulating, supervising and reviewing strategic VAT advice.


Tags: Taxation | Law


About the Author


Chelco VAT Ltd

Based in the business capital of Cyprus, Limassol, Chelco VAT Ltd are perhaps the only VAT-dedicated service provider on the island. It has founded its success on the provision of specialised, highly customised and practical VAT solutions to its clients that are based on years of experience, knowledge and expertise in the field. www.chelcoVAT.com

 

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