Aircraft Leasing Companies
Since the birth of Guinness Peat Aviation (“GPA”) out of Shannon in 1975, Irish leasing expertise has developed enormously and Ireland now boasts a portfolio of the world’s biggest aircraft financiers, lessors and operators. The industry has grown to the extent that 9 of the world’s 10 largest aircraft leasing companies are located in Ireland, with over 30 similar companies in operation throughout the country; Dublin in particular is widely recognised as a world leader in the aviation finance industry, industry leaders located here include GECAS, SMBC, Aer Cap, ILFC, AWAS, Avolon, ICBC, CIT, Orix and Lease Corporation International.
Ireland has found favour as an on-shore low tax jurisdiction; this is particularly the case among those structuring aircraft leasing transactions as it offers a number of substantial advantages to the aircraft leasing industry, among which are:
- a low rate of corporation tax of 12.5% for trading profits;
- extensive exemptions from dividend withholding tax on the extraction of profits;
- no withholding tax on lease rental payments;
- no withholding tax on interest payments paid to an EU Member State or a double tax agreement jurisdiction;
- no stamp duty on relevant documents;
- an ever increasing network of double tax agreements; and
- our Section 110 regime which can be incorporated into the financial structure of many aircraft transactions.
The standard rate of corporation tax on trading income in Ireland is 12.5%, however, in practice in many cases Irish tax deductions will substantially reduce or eliminate taxable profits in Ireland altogether. The reference to “trading income” is key as the Irish corporation tax treatment of an aircraft lessor is dependent upon the lessor being considered to be carrying on a trade for Irish tax purposes. The importance of this is clear in that non-trading income is currently taxed in Ireland at the rate of 25%, whereas Irish trading income is currently taxed at the rate of 12.5%. To be considered as trading, the company must be carrying on a business activity from which the income derives, as opposed to merely owning an asset that produces income, e.g. an aircraft lease. The question of whether a trade is being carried on or not is primarily a question of fact and consequently any determination in this regard will depend on the facts in each particular case. The Irish tax authorities (the “Revenue”) are of the view that the control of the trading activities at an operational level must occur in Ireland and be carried out by employees or directors of the company, present in Ireland and having the requisite skill and expertise. In considering whether a particular transaction or operation amounts to a trade which would qualify for the 12.5% rate the Revenue will have regard to the following factors:
- the commercial rationale for the proposal;
- whether any real economic value is added in Ireland;
- whether there are employees or directors in Ireland with sufficient skill levels to indicate that the trade is actively being carried on by the company;
- in the case of a single lease transaction, the Revenue will look at the activity of the group as a whole in order to determine if a trade is being carried on;
The fact that a company does not have employees or activities does not in itself preclude trading status as activities may be outsourced provided it is clear that the Irish company through its board of directors is responsible for the control of the outsourced business and for the policy and strategic direction of the company. A lessor will be entitled to deduct any revenue expenses incurred “wholly and exclusively” for the purposes of its trade where that lessor is carrying on a trade. As a consequence, interest payments made by the lessor may therefore be deductible. Such a lessor may claim tax depreciation/capital allowances in relation to any capital expenditure which it incurs in connection with the purchase of aircraft which it owns and which are leased out, provided that the burden of wear and tear in relation to the aircraft lies with the lessor in circumstances where the lessee is carrying on a trade. Annual tax depreciation/capital allowances are granted at the rate of 12.5%, which translates into an eight year period of write-down irrespective of the anticipated life of the aircraft.
Double Tax Agreements
Ireland has signed double tax agreement with 70 countries, the details of which are set out at Schedule 1 hereto, 68 of which are in effect, and several more are in the course of negotiation at the time of writing including those with Jordan, Azerbaijan and Tunisia. Ireland also plans to initiate negotiations for new agreements with other countries during the course of 2014. Under these treaties, withholding tax on lease rentals, interests, royalties and other payments paid to Irish resident companies is either reduced or eliminated. Withholding Tax Lease rental income on aircraft leases are not subject to withholding tax in Ireland with the result that rental payments can be paid gross from Ireland. Dividend withholding tax does exist in Ireland, however, there are extensive exemptions available with the consequence that dividends and other such distributions are likely to be paid free of Irish dividend withholding tax, in the case of an Irish company which is owned by an international parent. Interest payments made to a foreign lender attract Irish withholding tax applies in the absence of an exemption. Interest may be paid free of withholding tax to a company which is tax resident in an EU Member State or another country with which Ireland has a double tax agreement, provided that the undernoted conditions are met:
- the interest is not paid in connection with a trade or business carried on by the lender through an Irish branch or agency; and
- such Member State or country generally taxes interest receivable by companies from foreign sources on the terms of the relevant treaty exempt the interest from Irish tax.
With effect from 1 January 2010 leases of aircraft to an Irish aircraft leasing company were subject to Irish VAT. Leasing services supplied by an Irish established lessor to a non-EU established lessee or a lessee established in another EU Member State are outside the scope of Irish VAT. The Irish lessor will not charge VAT on the lease rentals and should be entitled to a refund in respect of any Irish VAT incurred. In circumstances where a lessor might be established in a jurisdiction outside of Ireland the VAT liability arising on the lease to the Irish lessee must be self-accounted for. The Irish lessee must register for Irish VAT and will account for the VAT liability through its VAT return to the Revenue. This will involve cost for the Irish lessee as it will be entitled to claim immediate recovery of the VAT arising on the lease of the aircraft to it on the basis that the Irish lessee will itself be leasing the aircraft onward to an airline.
Irish transfer pricing rules came into effect from 1 January 2011. The rules will apply to trading transactions between associated persons, meaning effectively companies under common control or a company controlled by the other party to the transaction. In circumstances where the rules apply they impose arm’s length pricing to increase any understated taxable trading receipt or to reduce any excessive deductible trading expense. The rules do not apply to a small or medium sized enterprise (‘SME’), the question of whether or not an Irish company is an SME is determined on a group level and regard will be had to employee numbers and the company financials. In order to be constituted an SME the group must have fewer than 250 employees and either a turnover of not more than €50 million or assets of not more than €43 million. From the perspective of Irish aircraft leasing transactions, the scope of the rules is such that they should only be relevant in limited cases.
There is no stamp duty payable on instruments for the sale or transfer of aircraft or any interest therein; in addition no stamp duty is payable in respect of a lease of an aircraft or any moveable property. Security documentation which may be entered into in connection with a lease transaction is not subject to Irish stamp duty, regardless of the location of the aircraft.
Customs duties are not relevant with regard to an aircraft lessor unless the aircraft, spare parts or engines are physically brought into the Irish jurisdiction. In circumstances where this does occur, an exemption is generally available on the basis of an “end user authorisation”.
Legal Environment Courts
Ireland is a common law jurisdiction, like the United Kingdom, and thus is a familiar legal regime internationally and within the aviation industry as many transaction documents are governed by English or New York law. Irish leasing companies frequently enter into transactions governed under the laws of these jurisdictions’ and these are likely to be accepted and recognised within Ireland and by the Irish courts under the relevant regulations, for example enforcement of judgments between the EU member states is regulated by the Brussels I Regulation.
Ireland is a founding signatory of the Cape Town Convention and the headquarters of the International Registry of Mobile Assets (the “International Registry”) is based in Dublin,Ireland. The Cape Town Convention is regarded as a significant development in international asset- based finance and is designed to overcome the problem of obtaining secure and readily enforceable rights in aircraft and other movable equipment. The International Registry provides a priority system of registration to users registering a variety of interests. A user can obtain priority search certificates for any aircraft object and check which states are contracting states for the purpose of the Cape Town Convention. These certificates are now commonplace and are sought in connection with most aircraft transactions.
Securitisation/ Structured Finance Regime
Section 110 of the Taxes Consolidation Act 1997, the Irish tax provision that facilitates securitisation and structured finance, has been extended to allow qualifying companies falling within its ambit to hold plant and machinery, which includes aircraft and aircraft parts. This welcome development should assist Irish aircraft securitisations and should also provide another option for structuring leasing activities. Transactions involving a Section 110 company may be structured to be tax neutral. While the Section 110 company tax rules provide that a “qualifying company” will be subject to Irish corporation tax at a rate of 25% on its taxable profits, such taxable profits can be eliminated with appropriate structuring. It is important to note that although the qualifying company must notify the Revenue Commissioners if it wishes to be treated as a Section 110 company, no special tax rulings or tax authorisations are required in Ireland in order for the Section 110 company to achieve this tax neutral status. Furthermore, no minimum taxable profits are required to be left in Ireland.
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