International Tax Issues Impacting the Aviation Leasing Industry - - PowerPoint PPT Presentation

International Tax Issues Impacting the Aviation Leasing Industry Brian Leonard, Partner, PricewaterhouseCoopers

School of Aviation Finance

Interna tiona l ta x issues im p a cting the a v ia tion lea sing ind ustry

20 January 2016

www.pwc.ie

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Introd uction

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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

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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

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Perm a nent esta blishm ent

1

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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

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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?

Individual treaty analysis should be carried out

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

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PE – non trea ty a na ly sis

Non-Treaty Countries

Key Points

Article 5 of the OECD Model Tax Convention sometimes referred to in determining the existence

• f a PE

Minim al activities can cause lease rental income and gains to be subject to tax in that jurisdiction Individual analysis of the non-treaty position and basis upon which a PE could be created/ taxed should be carried out

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Lea sing a ctiv ities a nd PE risk

Sp ecific a ctiv ities

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 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

PE risk for Lessor

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Lea sing a ctiv ities a nd PE risk … (cont’d )

OECD Model Convention Com m entary

The m ere leasing of equipm ent

Supplying personnel who m erely

• perate / m aintain the equipm ent

under the direction, responsibility, control of Lessee

Will not constitute a PE

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Sa fegua rd s a ga inst crea ting a PE In Practice:

Sign all docum ents

• utside Lessee

jurisdiction Generally, Lessor should m inim ise presence in Lessee jurisdiction Originate, negotiate and conclude contracts outside Lessee jurisdiction

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W ithhold ing ta xes

2

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W ithhold ing ta xes

Lease rental paym ents

Apply withholding tax?

Lessor Lessee

Associated lease rental / m aintenance paym ents

Associated lease rental paym ents: m aintenance reserves security deposits

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

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Im p a ct of lea se cha ra cterisa tion on w ithhold ing ta x a na ly sis

How is it viewed in local jurisdiction? Lease Agreem ent Operating lease? Finance lease? Hire purchase?

Factors to consider:

• Purchase options?
• Automatic transfer of title at lease termination?
• Form of document?
• Term of lease?
• Classification for accountancy purposes?

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Dom estic exem p tions/ 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

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Double ta x a greem ents

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Double ta x a greem ents

Lessor Lessee

• Appropriate article?
• WHT rate (reduced / eliminated)?
• Filing requirements / preapprovals?
• Anti avoidance / beneficial ownership

issues?

• Leasing hub comparison

Double Tax Agreem ent

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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)

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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 Durban Cape Town

Taxed in place of effective management (Article 8)

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Ta xa tion of business p rofits (Article 7)

Dom estic tax charge and/ or withholding tax

• Lease rentals
• Maintenance reserves
• Liability restricted to profits attributable to PE
• Some treaties have broader definition of PE

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Ta xa tion of interest a nd roy a lties (Article 11/ 12) Taxation of Interest

“Interest means income from debt claims

• f 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

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BEPS

4

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BEPS Action Pla n

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Ind irect ta xes (VAT)

5

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Im p orta tion of a ircra ft

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

Lessor Lessee

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Lea se renta ls

Lessor Lessee

Considerations:

• 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?

Lease rentals Other paym ents under lease

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Sa les a nd nov a tions

6

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Multip le jurisd ictions

Seller countr y of r esid ence Lessee jur isd iction / Countr y of r eg istr a tion Buy er countr y of r esid ence Loca tion of 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

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Execute SPA

Tim eline

Buy er / seller a p p rov a l Buy er / seller / lessee a g ree nov a tion a g reem ent Conditions precedent collection

Deliver to Buyer

Execute bill of sale

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LOI

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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)

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Foreign incom e ta xes

Seller Purchaser

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?

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Foreign incom e ta xes….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

Business Profits Article

Consider factors that give rise to a PE (mere presence

• f aircraft / signing of documents, presence of people,

etc.) Taxable if seller has a permanent establishment

Capital Gains Article

Sale of aircraft operated in international traffic Taxing rights allocated to jurisdiction of seller

• Any associated adm inistration requirem ents if treaty relief available?

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Tra nsfer ta xes

• Taxes such as VAT, sales tax or consum ption 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.)

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Nov a tion a nd a ssignm ent of lea ses

Seller

Lease Agreem ent

Purchaser Lessee

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

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Pra ctica l issues if both p a rties a re non-resid ent

• 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 m echanism 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?

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Structuring a lea sing tra nsa ction

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Structuring a lea sing tra nsa ction

Shareholder / Investors Lessee Lessor

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Loan or Share Capital Finance or operating Lease No WHT (interest/ dividends) Efficient CT (rate, depreciation, interest) No WHT (domestic law/ treaty/ anti avoidance)

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Ty p ica l Irish Structures

Non-Trading Platform - Case IV 25% Trading platform – Case I 12.5% Section 110 Super QIAIF

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Sum m a ry

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

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Tha nk You !

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