School of Aviation Finance International Tax Issues Impacting the Aviation Leasing Industry Brian Leonard, Partner, PricewaterhouseCoopers
www.pwc.ie Interna tiona l ta x issues im p a cting the a v ia tion lea sing ind ustry 20 January 2016
Introd uction Brian Leonard PwC Ireland Tax Partner T: +353 (0)1 792 6179 M: +353 (0)86 378 9325 E: brian.a.leonard.@ie.pwc.com 20 January 2016 PwC 3
Agend a 1. Permanent establishment 2. Withholding taxes 3. Double tax agreements 4. BEPS 5. Indirect taxes (VAT) 6. Sales and novations 7. Structuring a leasing transaction 20 January 2016 PwC 4
Perm a nent esta blishm ent 1 20 January 2016 PwC 5
Perm a nent esta blishm ent ov erv iew What is a Perm anent establishm ent (“PE”)? • Essentially a taxable presence in a foreign jurisdiction other than that in which the Lessor is resident What are the consequences of creating a PE? • A portion of profits and gains m ay be taxable in that foreign jurisdiction • May give rise to local filing requirem ents How is a PE determ ined? • Local domestic rules • Treaty rules • OECD guidelines 20 January 2016 PwC 6
PE – trea ty a na ly sis Article 5 of the OECD Model Convention – Similar PE definition should be included in most treaties 1. Fixed place of business test • Requires some form of business practice • Is there a place of management / branch / office/ workshop? 2. Dependent agent test • Habitually exercising authority to conclude contracts may create a PE – thresholds in some jurisdictions is quite low • An independent agent should not create a PE Individual treaty analysis should be carried out 20 January 2016 PwC 7
PE – non trea ty a na ly sis Non-Treaty Countries Minim al activities can cause lease rental income and gains to be subject to tax in that jurisdiction Key Points Article 5 of the OECD Model Tax Convention sometimes referred to in determining the existence of a PE Individual analysis of the non-treaty position and basis upon which a PE could be created/ taxed should be carried out 20 January 2016 PwC 8
Lea sing a ctiv ities a nd PE risk Sp ecific a ctiv itie s Holding meetings with Lessees, presence of employees in country Originating / negotiating deals in country Presence of an aircraft/ engine in country PE risk for Lessor Use of aircraft or engines in country Signing a non-binding letter of intent (“LOI”) in country Signing an acceptance certificate at the time of delivery in country A com bination of these activities may increase the risk of a PE 20 January 2016 PwC 9
Lea sing a ctiv ities a nd PE risk … (cont’d ) OECD Model Convention Com m entary The m ere leasing of equipm ent Will not constitute a PE Supplying personnel who m erely operate / m aintain the equipm ent under the direction, responsibility, control of Lessee 20 January 2016 PwC 10
Sa fegua rd s a ga inst crea ting a PE In Practice: Originate, Sign all negotiate and docum ents conclude outside Lessee Generally, Lessor contracts outside jurisdiction should m inim ise Lessee presence in jurisdiction Lessee jurisdiction 20 January 2016 PwC 11
W ithhold ing ta xes 2 20 January 2016 PwC 12
W ithhold ing ta xes Considerations: Lessor • Rate of WHT • Base (gross lease rentals / grossed up payments ) • Application to associated Associated Lease lease rental / lease rental payments rental m aintenance paym ents paym ents • Gross up clauses (local issues) • Secondary liability for Apply withholding tax? Lessor Lessee Associated lease rental paym ents: m aintenance reserves security deposits 20 January 2016 PwC 13
Im p a ct of lea se cha ra cterisa tion on w ithhold ing ta x a na ly sis Operating lease? How is it viewed in Finance lease? Lease Agreem ent local jurisdiction? Hire purchase? Factors to consider: • Purchase options? • Automatic transfer of title at lease termination? • Form of document? • Term of lease? • Classification for accountancy purposes? 20 January 2016 PwC 14
Dom estic exem p tions/ rulings Considerations: Specific domestic • Use of aircraft – airline/ aircraft operating in exemptions international / domestic routes • Payments to havens/ blacklisted countries Specific local rulings • Local anti-avoidance rules - Non-owner Lessor / intermediate Lessor General exemptions / • Local beneficial ownership requirements - rulings Lessor tax resident certificate 20 January 2016 PwC 15
Double ta x a greem ents 3 20 January 2016 PwC 16
Double ta x a greem ents Double Lessor Tax Agreem ent Lessee • Appropriate article? • WHT rate (reduced / eliminated)? • Filing requirements / preapprovals? • Anti avoidance / beneficial ownership issues? • Leasing hub comparison 20 January 2016 PwC 17
Ap p rop ria te a rticles Taxation of international traffic (Article 8 ) Taxation of business profits (Article 7) Taxation of interest (Article 11) Taxation of royalties (Article 12) Taxation of other incom e (Article 21) 20 January 2016 PwC 18
Ta xa tion of interna tiona l tra ffic (Article 8 ) The term m eans any transport by aircraft operated by a resident of a contracting state except when the aircraft is operated solely between places in the other contracting state (Article 3) London Taxed in place of effective management (Article 8) Durban Cape Town 20 January 2016 PwC 19
Ta xa tion of business p rofits (Article 7) Dom estic tax charge • Lease rentals and/ or withholding tax • Maintenance reserves Liability restricted to profits attributable to PE Some treaties have broader definition of PE 20 January 2016 PwC 20
Ta xa tion of interest a nd roy a lties (Article 11/ 12) Taxation of Royalties Taxation of Interest OECD Model carves out lease income from “Interest means income from debt claims definition of royalties in Model Convention of every kind… ..” (Article 11) “In order to make sure that it would fall under the rules for taxation of business Sensitivities relate to finance leases, hire profits” purchase and conditional sales Differing definitions of royalty under various treaties 20 January 2016 PwC 21
BEPS 4 20 January 2016 PwC 22
BEPS Action Pla n 20 January 2016 PwC 23
Ind irect ta xes (VAT) 5 20 January 2016 PwC 24
Im p orta tion of a ircra ft Considerations: • Typically Lessee is responsible for Lessor import under lease agreement – importer of record • Lessor remains legal owner • Lessee responsible for import VAT, customs and other import taxes? • Customs authorities detain aircraft/ engine until import taxes paid? • Rate and basis where exemption doesn’t apply • Consider exemptions (e.g. International transport) • Primary/ Secondary / joint liability for Lessee Lessor? • Use of agents/ registration requirements • Intra EU v Non-EU 20 January 2016 PwC 25
Lea se renta ls Considerations : • Does VAT apply? Lessor • Rate & basis? • How are supplemental rents categorised? • Exemption/ zero-rate • Exemption applicable to: Other Airline/ aircraft/ engine Lease paym ents Domestic v international rentals under Passenger/ cargo/ freight lease • Is the Lessee required to self-account? • Primary/ secondary/ joint liability for the Lessor? • Registration requirements for Lessor? • VAT deductibility Lessee • Is leasing of aircraft/ engines a VATable activity for the Lessor? • Are airline/ transport activities a VATable activity for the Lessee? 20 January 2016 PwC 26
Sa les a nd nov a tions 6 20 January 2016 PwC 27
Multip le jurisd ictions Buy er countr y of r esid ence Seller countr y of r esid ence Lessee jur isd iction / Loca tion of Countr y of r eg istr a tion a ir cr a ft • Multiple jurisdictions and taxes to consider • Key is to sell in clean transfer location to ensure transfer taxes do not arise • Transfer of title when aircraft in good tax jurisdiction 20 January 2016 PwC 28
Tim eline Conditions LOI precedent Execute Deliver to collection SPA Buyer Buy er / seller a p p rov a l Execute bill of Buy er / sale seller / lessee a g ree nov a tion a g reem ent 20 January 2016 PwC 29
Alloca tion of ta x risk • Contractual position – Generally the Seller is liable for taxes in their country of incorporation / residence (and may take PE Risk) Buyer is liable for other taxes (e.g. transfer taxes) 20 January 2016 PwC 30
Foreign incom e ta xes Considerations: Seller • Domestic law: Is an income tax charge applicable and why? (e.g. PE Risk / source income) When does a charge arise? - Delivery and signing bill of sale - Transfer of funds - Execution of documents How is the charge computed? Filing requirements? Who is liable to pay the tax? Purchaser 20 January 2016 PwC 31
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