In the wake of the subprime crisis, banks are not lending as readily as previously experienced. This has resulted in airlines entering into sale and leaseback transactions. In such a transaction, an airline buys a plane from the manufacturer and then sells it to the lessor, who leases it back to the airline. A typical lease runs up to 10 years and provides good financial visibility for the airlines. However, if the aircraft is located in a Belgian airport, parties have to be wary of the VAT pitfalls associated to such transactions. Indeed, the sale and lease of aircraft is generally a taxable transaction for VAT purposes. It is only to the extent that certain requirements are met, that an exemption may apply. Moreover, as we will see below, compliance with specific Belgian formalities to comply with in Belgium are also essential for the exemption to apply.
The VAT Directive exempts the supply of aircraft used by airlines operating for reward, chiefly on international routes. However, when the aircraft is standing in a Belgian airport at the time of signature of the bill of sale, the sale is deemed located in Belgium. In order for the exemption to apply in Belgium, certain formalities have to be complied with in addition to satisfying specific conditions.
Similar to the VAT Directive, Belgium exempts the sale of aircraft that are used or destined to be used by a foreign or Belgian airline carrier whose main activity is the international transport of passengers and/or goods for reward. This brings us to the key issue. According to the administration, “the use by” a qualifying airline entails that the purchaser actually “is” one. As a consequence, the sale of an aircraft to a leasing company does, in principle, not qualify for the exemption. However, based on an administrative practice, the leasing company still remains eligible for the exemption. This practice does not extend to a two-step transaction, for instance if the leasing company then enters into a similar transaction with respect to the same aircraft.
For example, if an Irish leasing company purchases an aircraft from a Belgian airline company to lease it back to the Belgian company immediately after the sale is concluded, the VAT exemption may apply. However, if such leasing company sells the aircraft to another leasing company on sale and leaseback and it is then leased on to the Belgian airline carrier, the exemption would not be available.
The formalities that must be carefully respected are: (i) the sending of an order form to the seller that mentions mandatory information in order to allow the tax administration to verify that the conditions for the exemption are met; and (ii) the sending of an invoice to the purchaser containing the same mandatory data. A preceding sales agreement also qualifies as an order form if it contains the same mandatory data. Non-compliance with these formalities triggers 21% of VAT over the sales price of the aircraft – the formalities are therefore also conditions for the exemption to apply.
The lease of an aircraft will generally not be subject to the Belgian VAT rules because the triggering factor is (currently still) the residency of the lessor, and aircraft leasing companies are usually located in Ireland, Asia or the United States. For lessors resident within the European Community, the VAT provisions of the Member State in which the lessor is a resident, will be applicable. For lessors outside the European Community, the Belgian VAT rules will apply if and to the extent that the leased aircraft is effectively used in Belgium. But even then, the exemption should apply if all conditions and formalities (similar to those applicable for the sale) are met. It is important to note that as of 1 January 2010, the Belgian VAT rules may be applicable pursuant to the amended localisation rules provided by the 2008 VAT Directive. Lessors will then have to carefully watch the Belgian formalities to exempt their leasing services.