Cyprus is the most attractive European jurisdiction for private aircraft leasing with reduced VAT rate. The Cyprus private aircraft leasing scheme presents a robust platform for aircraft lessors and lessees to engage in cost-effective and tax-efficient leasing activities. The Cyprus private aircraft leasing scheme is designed to incentivise aircraft leasing activities. The purpose of this framework is to determine the percentage of time a private aircraft spends within the air space of the EU, based on the aircraft size and type and thus apply VAT according to this percentage. The guidelines issued by the Cyprus VAT authorities regarding the registration of private aircrafts make Cyprus the most attractive European jurisdiction in this sector reducing the effective VAT rate for private aircraft registration through the use of the Private Aircraft Leasing Scheme.
Application of the Scheme
This regulatory framework applies to a private aircraft owned by a Cyprus VAT registered company which is leased to any physical or legal person established or permanently resident or ordinarily resident in the Republic of Cyprus an which is not engaged in any business activity. The definition of “permanent establishment” is defined in article 11 of the EU Regulation No. 282/2011 of the 15th March 2011 and the definition of “permanent residence” and “ordinarily resident” are stipulated in article 12 and 13 respectively of the said Regulation. The lessor is typically a special purpose vehicle (SPV) established for the leasing purpose.
Taxation
Cyprus boasts an extensive network of double tax treaties (DTTs), which helps to reduce withholding taxes on lease payments made to foreign lessors. The DTT network of Cyprus opens doors for lessees to source aircraft from various jurisdictions, while still benefiting from reduced withholding taxes. This enhances the attractiveness of Cyprus as a leasing jurisdiction. Cyprus also offers one of the lowest corporate tax rates in the European Union, making it a tax-efficient jurisdiction for aircraft leasing activities. Profits derived from leasing activities are subject to corporate tax at favourable rates.
Private Aircraft Leasing Agreement
For the purpose of this framework, a Private Aircraft Leasing Agreement is an agreement based on which the lessor i.e. the owner of the private aircraft contracts with the lessee for the use of the aircraft i.e. leases the aircraft to the lessee for a specified consideration. Additionally, this agreement can at the end of its leasing period offer the possibility to the lessee to proceed with the purchase of the private aircraft at a percentage of the initial price. The final purchase is strictly an option, which can be executed at the end of the period of the Private Aircraft Leasing Agreement for separate consideration. The scheme allows lessees to structure their leases in a flexible manner, accommodating various lease terms and conditions.
Calculation of the Use of the Private Aircraft within EU air space
The provision of this service for Cyprus VAT purposes is a taxable transaction and the lease of a private aircraft is subject to the standard VAT rate i.e. 19% provided that the leased aircraft is used within the air space of the EU. It is generally accepted that there are objective difficulties in calculation of the time that an aircraft is used within the EU air space and the time in which it carries out flights outside the EU air space. Hence, for the purpose of the Private Aircraft Leasing Scheme, there is no longer a need to keep records i.e. log books as to the time the aircraft is used within the EU. Instead, for this purpose, the relevant percentage for the lease will be calculated based on the aircraft size and type i.e. piston, turbo or jet aircraft) per the Table below. It must be noted that used European aircrafts accompanied by a T2L issued by a Member State and which do not hold evidence of submission of VAT are subject to import VAT at Customs in Cyprus.
TABLE of Applicable VAT Rates
PISTON-ENGINE AIRCRAFT
MAXIMUM TAKE-OFF WEIGHT | Percentage (%) of use within EU | Effective VAT Rate (%) |
Large: over 15,001kg | 40 | 8,89 |
Medium: between 5,701kg – 15,000kg | 60 | 12,79 |
Small: between 3,001kg – 5,700kg | 80 | 16,68 |
Light: between 1kg – 3,000kg | 100 | 20,58 |
TURBOPROB AIRCRAFT
MAXIMUM TAKE-OFF WEIGHT | Percentage (%) of use within EU | Effective VAT Rate (%) |
Large: over 15,001kg | 25 | 5,97 |
Medium: between 5,701kg – 15,000kg | 35 | 7,92 |
Small: between 3,001kg – 5,700kg | 45 | 9,86 |
Light: between 1kg – 3,000kg | 55 | 11,81 |
JET AIRCRAFT
MAXIMUM TAKE-OFF WEIGHT | Percentage (%) of use within EU | Effective VAT Rate (%) |
Large: over 15,001kg | 20 | 5,00 |
Medium: between 5,701kg – 15,000kg | 30 | 6,94 |
Small: between 3,001kg – 5,700kg | 40 | 8,89 |
Light: between 1kg – 3,000kg | 50 | 10,84 |
Ancillary Conditions and Criteria for application of the Scheme
To apply the above treatment for VAT purposes all of the following conditions must be satisfied.
i. A lease agreement must exist between a Cyprus VAT registered company and any physical or legal person established or permanently resident or ordinarily resident in the Republic of Cyprus and which is not engaged in any business activity.
ii. The private aircraft must fly to Cyprus within 2 months from the commencement of the lease agreement. Any time extension for the above timeframe can only be given by the Tax Commissioner. Such extension can not in any case exceed the time in which the right to purchase the aircraft is exercised.
iii. The initial contribution from the lessee to the lessor must be at least 40% of the aircraft’s value payable at the inception of the lease agreement.
iv. Lease agreements are required to have monthly instalments and the lease period cannot be less than 3 months i.e. 91 days or exceed the period of 60 months.
v. The lessor is expected to have a total profit from the lease agreement that cannot be less than 5% of the aircraft’s original value. At the time that the lease agreement commences the total amount of lease payments on which VAT is calculated is increased by half of the calculated profit i.e. by 25%.
vi. The final payment at the end of the lase agreement as a result of which the ownership of the aircraft is essentially transferred to the lessee can not be less than 2.5% of the aircraft’s value and which constitutes part of the total profit from the agreement. Such final payment for acquiring the aircraft is subject to the standard VAT rate applicable in the Republic of Cyprus at the time i.e. 19%.
vii. A prior written approval from the VAT Commissioner is required for the above percentages to apply in accordance with the applicable percentages on which VAT will be imposed baed on the extent of use of the aircraft within the EU air space.
Hence, an application must be filed to the VAT Authorities accompanied by the lease agreement and the following ancillary documents supporting the purchase price and value of the aircraft:
a. For new aircrafts, the original or certificate purchase invoice and the original or certified purchase agreement.
b. For used aircrafts, the recent independent valuation from a professional valuer as well as the initial purchase invoices and/or purchase agreement. If there is no independent valuation available then more evidence must be submitted with which the Commissioner can determine and confirm the value of the aircraft.
It remains at the discretion of the Commissioner to reject any submitted documents for this purpose or request from the lessor additional details regarding the use of the aircraft.
Along with the submission of the application, the following must ancillary documents must also be submitted concerning the aircraft:
a. Noise Certificate
b. Type Certificate from Manufacturer
c. Certificate of Airworthiness
d. Airworthiness Review Certificate
Importantly, the private aircraft can be registered under any Aircraft register in the world and not necessarily under the Cyprus Aircraft Register.
It is also noteworthy that regardless of the relevant tables determining the use of the aircraft within the air space of the EU, if any private aircraft is used exclusively and solely within the air space of the Republic of Cyprus, its lease is considered to be a taxable transaction and it is taxed at the standard rate applicable in the Republic of Cyprus and is calculated on the total value of the lease.
Certificate for VAT Payment
If the lessee opts to purchase the aircraft at the end of the lease period, a certificate will be issued by the VAT Authority confirming full VAT payment as the total of the VAT due has been settled.
Certificate T2L
Once the owner of the aircraft pays VAT on the commencement of the lease i.e. 40% on the value of the aircraft), the lessor an import the aircraft into Cyprus and the Director of the Department of Cyprus Customs and Excise Office will issue a T2L Certificate. Whereas, in the event that the owner-lessee does not pay any VAT on the monthly lease instalments, the Cyprus Tax Department will charge VAT on the total value of the lease instalments.
While the Cyprus private aircraft leasing scheme offers substantial benefits, there are practical considerations to keep in mind, including ensuring compliance with both Cyprus's aviation and tax regulations, as well as any relevant international standards. The Cyprus private aircraft leasing scheme presents a robust platform for aircraft lessors and lessees to engage in cost-effective and tax-efficient leasing activities.
With its advantageous tax regime, extensive DTT network, and VAT benefits, Cyprus remains an appealing destination for private aircraft leasing. However, a successful implementation requires careful planning, compliance with regulations, and expert advice to navigate the intricacies of the scheme effectively. As the aviation and tax landscapes evolve, staying informed about any updates to the scheme becomes paramount for those looking to capitalise on its benefits.