VAT Alert: Zero-Rating and Leasing to Airlines

By Julian Hickey


The Court of Justice in Re A Oy C-33/11 has decided that supplies of aircraft can be VAT exempt (or zero-rated) by intermediaries where the end user is an airline operating for reward chiefly on international routes, and that international routes includes not just regular flights but also charter flights. The decision will apply across the EU.

A key issue for aviation intermediaries (such as operating or finance lessors) is identifying when the supply of aircraft to such a recipient can be exempt from VAT in the European Union.

Under the EU VAT Directive the supply of any aircraft which is used by an “airline operating for reward chiefly on international routes” is treated as an exempt supply with VAT recovery (referred to as zero-rating in the UK), which includes the leasing of such aircraft.

If zero-rating is not available then the standard rate of VAT applies where a supply is treated as being within an EU Member State (e.g. in the UK a VAT charge of 20% arises). Zero rating means that no VAT arises on the supply of the aircraft but the supplier can recover VAT on associated costs.

In the UK (and some other Member States) a “look through” test is applied to a supply chain involving the supply and leasing of an aircraft.  This means that it does not matter if the recipient of a supply (e.g. a lessor purchasing an aircraft) is not itself an airline provided that the ultimate end-user is an “airline operating for reward chiefly on international flights”. Any seller or lessor of an aircraft who applies zero-rating on a “look through" basis will require contractual protection such as warranties/certificates from a purchaser/lessee as to the end-use in order to ensure entitlement to apply zero rating.  Until the judgment in A Oy look-through treatment was not available in all Member States, e.g. Italy, Germany and Poland.  

The Court has also decided that the VAT exemption can apply where an operator operates chiefly international charter flights.

What does the case mean for the aviation sector within the EU?

1. Zero-rating on the sale of aircraft to an intermediary non-airline (such as a finance/operating lessor) where the aircraft is purchased for exclusive use by an airline operating for reward chiefly on international routes.

2. Zero-rating on supplies to an airline operating for reward chiefly on international routes (which includes either regular or charter flights).

3. Appropriate evidence should be obtained that the ultimate end-user is a qualifying airline.

Please contact a member of Bird & Bird’s International VAT Team if you have any queries on this alert.

About the Bird & Bird VAT Team

We are one of the few law firms in the world that is able to offer an extensive team of specialists in international VAT and indirect taxes across Europe, the Middle East and Asia. We have access to experts in this area covering all of our 23 offices with experience of supporting major transactions, providing strategic VAT planning and helping you to achieve compliance within this area of increasingly changing legislation.

Our team have experience from both the industry and the fiscal authorities as well as extensive practical skills of accounting practices, supply chain processes and the different VAT rules in each country.