School of Aviation Finance. International Tax Issues Impacting the Aviation Leasing Industry. Brian Leonard, Partner, PricewaterhouseCoopers

Transcription

1 School of Aviation Finance International Tax Issues Impacting the Aviation Leasing Industry Brian Leonard, Partner, PricewaterhouseCoopers

2 International tax issues impacting the aviation leasing industry

3 Introduction Brian Leonard Ireland Tax Partner T: +353 (0) M: +353 (0) E: 3

4 Agenda 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 4

5 Permanent establishment 1 5

6 Permanent establishment overview What is a Permanent establishment ( 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 may be taxable in that foreign jurisdiction May give rise to local filing requirements How is a PE determined? Local domestic rules Treaty rules OECD guidelines 6

7 PE treaty analysis 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 7

8 PE non treaty analysis Non-Treaty Countries Key Points Minimal activities can cause lease rental income and gains to be subject to tax in that jurisdiction 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 8

9 Leasing activities and PE risk Specific activities Holding meetings with Lessees, presence of employees in country Originating / negotiating deals in country Presence of an aircraft/engine in country Use of aircraft or engines in country PE risk for Lessor Signing a non-binding letter of intent ( LOI ) in country Signing an acceptance certificate at the time of delivery in country A combination of these activities may increase the risk of a PE 9

10 Leasing activities and PE risk (cont d) OECD Model Convention Commentary The mere leasing of equipment Supplying personnel who merely operate / maintain the equipment under the direction, responsibility, control of Lessee Will not constitute a PE 10

11 Safeguards against creating a PE In Practice: Sign all documents outside Lessee jurisdiction Generally, Lessor should minimise presence in Lessee jurisdiction Originate, negotiate and conclude contracts outside Lessee jurisdiction 11

12 Withholding taxes 2 12

13 Withholding taxes Lease rental payments Lessor Apply withholding tax? Lessee Associated lease rental / maintenance payments Considerations: Rate of WHT Base (gross lease rentals / grossed up payments ) Application to associated lease rental payments Gross up clauses (local issues) Secondary liability for Lessor Associated lease rental payments: maintenance reserves security deposits 13

14 Impact of lease characterisation on withholding tax analysis Operating lease? Lease Agreement How is it viewed in local jurisdiction? Finance lease? Factors to consider: Purchase options? Automatic transfer of title at lease termination? Form of document? Term of lease? Classification for accountancy purposes? Hire purchase? 14

15 Domestic exemptions/rulings Specific domestic exemptions Specific local rulings General exemptions / rulings Considerations: Use of aircraft airline/ aircraft operating in international / domestic routes Payments to havens/ blacklisted countries Local anti-avoidance rules - Non-owner Lessor / intermediate Lessor Local beneficial ownership requirements - Lessor tax resident certificate 15

16 Double tax agreements 3 16

17 Double tax agreements Lessor Double Tax Agreement Lessee Appropriate article? WHT rate (reduced / eliminated)? Filing requirements / preapprovals? Anti avoidance / beneficial ownership issues? Leasing hub comparison 17

18 Appropriate articles 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 income (Article 21) 18

19 Taxation of international traffic (Article 8) The term means 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 Durban Taxed in place of effective management (Article 8) Cape Town 19

20 Taxation of business profits (Article 7) Lease rentals Maintenance reserves Domestic tax charge and/or withholding tax Liability restricted to profits attributable to PE Some treaties have broader definition of PE 20

21 Taxation of interest and royalties (Article 11/12) Taxation of Interest Interest means income from debt claims of every kind.. (Article 11) Sensitivities relate to finance leases, hire purchase and conditional sales Taxation of Royalties OECD Model carves out lease income from definition of royalties in Model Convention In order to make sure that it would fall under the rules for taxation of business profits Differing definitions of royalty under various treaties 21

22 BEPS 4 22

23 BEPS Action Plan 23

24 Indirect taxes (VAT) 5 24

25 Importation of aircraft Lessor Lessee Considerations: Typically Lessee is responsible for 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 Lessor? Use of agents/ registration requirements Intra EU v Non-EU 25

26 Lease rentals Considerations: Lease rentals Lessor Lessee Other payments under lease Does VAT apply? Rate & basis? How are supplemental rents categorised? Exemption/zero-rate Exemption applicable to: Airline/aircraft/engine Domestic v international Passenger/cargo/freight Is the Lessee required to self-account? Primary/secondary/joint liability for the Lessor? Registration requirements for Lessor? VAT deductibility Is leasing of aircraft/engines a VATable activity for the Lessor? Are airline/transport activities a VATable activity for the Lessee? 26

27 Sales and novations 6 27

28 Multiple jurisdictions Seller country of residence Buyer country of residence Lessee jurisdiction / Country of registration Location of aircraft 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 28

29 Timeline LOI Execute SPA Conditions precedent collection Deliver to Buyer Buyer / seller approval Buyer / seller / lessee agree novation agreement Execute bill of sale 29

30 Allocation of tax 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) 30

31 Foreign income taxes Seller Considerations: 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 31

32 Foreign income taxes.cont d It is also necessary to consider whether any relief would be available under a double taxation treaty. The availability of relief will depend on the specific treaty Capital Gains Article Sale of aircraft operated in international traffic Taxing rights allocated to jurisdiction of seller Business Profits Article Consider factors that give rise to a PE (mere presence of aircraft / signing of documents, presence of people, etc.) Taxable if seller has a permanent establishment Any associated administration requirements if treaty relief available? 32

33 Transfer taxes Taxes such as VAT, sales tax or consumption taxes can lead to - Significant deal costs - Vary widely from country to country Where these taxes apply it is important for the seller to gain an understanding of: the amount of the tax who should pay the tax (i.e. the seller or purchaser) if the purchaser should pay the tax, is there a secondary liability for the seller what are the administration and registration requirements can either party recover the tax (e.g. a VAT input credit, etc.) 33

34 Novation and assignment of leases Lessee Seller Lease Agreement Considerations: Aircraft may be sold while on lease to airline Necessary to novate or transfer the lease from the Lessor to the purchaser (new Lessor) Involvement of Lessee in the process Typically neither the purchaser or seller attribute any value to the novation/assignment Assignment of a lease can result in tax charges in some countries Purchaser 34

35 Practical issues if both parties are non-resident In many instances, the aircraft may be located in a country where neither the seller nor purchaser are resident. Charge to tax arises however, many practical issues can arise, for example: - What is the collection mechanism for the tax? - How can the foreign tax authorities enforce a charge to tax (e.g. place a lien on the aircraft?) - Might there be a requirement to set up tax registrations or submit a return? - Is it possible for a foreign company to register for tax in that jurisdiction? 35

36 Structuring a leasing transaction 7 36

37 Structuring a leasing transaction Shareholder / Investors No WHT (interest/dividends) Loan or Share Capital Efficient CT (rate, depreciation, interest) Lessor No WHT (domestic law/treaty/anti avoidance) Finance or operating Lease Lessee 37

38 Typical Irish Structures Non-Trading Platform - Case IV 25% Trading platform Case I 12.5% Section 110 Super QIAIF 38

39 Summary 1. Key Leasing Tax Themes 2. BEPS 3. Structuring a leasing transaction 39

40 Thank You! 40