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The Leasing of Yachts and Aircrafts: Tax Implications for the Lessor and the Lessee

The Leasing of Yachts and Aircrafts: Tax Implications for the Lessor and the Lessee

The Maltese Inland Revenue Department has issued specific guidelines with respect to the tax implications of lease arrangements, involving yachts and aircrafts, where the lessor is not a finance leasing company or when the period of the lease is for less than four years. A finance leasing company is defined under the Finance Leasing Rules (L.N. 39 of 2005) as a company duly licensed as a ‘financial institution which has its objects expressly limited to that of being engaged solely in the business of granting finance leases and in such other acts and activities as are necessary for the conduct of the said business’.

Leasing of Yachts
Where the lease is deemed by the Commissioner of VAT to be in line with guidelines issued by the VAT Department from time to time, the tax implications applicable for each year throughout the duration of the lease are as follows. (The current VAT guidelines prescribe that the leasing agreement shall be between a Maltese company and a Maltese/foreign company/person, the lease installments are payable every month for not more than 36 months and the lessee has the option to purchase the boat at the end of the lease period).

Tax Implications for the Lessor
The lessor is subject to tax on the Annual Finance Charge. This is the difference between the total lease payments less the capital element (the cost of the yacht), divided by the number of years covered by the lease agreement. Tax is charged at the normal tax rates applicable to the lessor.

Should the lessee opt to purchase the yacht on the termination of the lease, the consideration received by the lessor is deemed of a capital nature and is not subject to tax.

Tax Implications for the Lessee
The lessee is allowed certain deductions in computing the taxable income generated from the use of the yacht, namely the finance lease payments, any yacht repairs and maintenance expenses and the insurance paid in relation to the yacht. In addition, the lessee is entitled to deduct capital allowances in respect of the yacht. Capital allowances are annual deductions for wear and tear of plant and machinery and are calculated by dividing the cost of the asset by the number of years prescribed under the pertinent rules. In the case of yachts, the cost price of the yacht is depreciated over ten years.

Finance Leasing of Aircrafts
The following tax implications apply to the finance leasing of aircrafts.

Tx Implications for the Lessor
The lessor is subject to tax on the Annual Finance Charge, which is the difference between the total lease payments less the capital element (the cost of the aircraft), divided by the number of years covered by the lease agreement. Tax is charged at the standard  tax rates applicable to the lessor.

Should the lessee opt to purchase the aircraft on the termination of the lease, the consideration received by the lessor is deemed of a capital nature and is not subject to tax as long as the lessor does not trade in the buying and selling of aircrafts.

Tax Implications for the Lessee
The lessee is allowed certain deductions in computing the taxable income generated from the use of the aircraft, being the finance lease payments, any aircraft repairs and maintenance expenses and the insurance paid in relation to the aircraft. In addition, the lessee is entitled to deduct capital allowances in respect of the aircraft as follows:

  •  Aircraft Airframe: 6 years
  • Aircraft engines : 6 years
  • Aircraft engine or airframe overhaul: 6 years
  • Aircraft interiors and other parts : 4 year

By Elaine Buttigiegs

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