This was demonstrated 100 years after Clemens died when an employee of a museum dedicated to him was found guilty of fraud. She was forced to repay taxes on the money she had stolen.

This week the US Internal Revenue Service (IRS) announced plans to start audits on dozens (its figure) of business aircraft involving personal use. It says these will be focused on aircraft used by large corporations, large partnerships and high-income taxpayers.

The agency is focusing on business deductions for aircraft expenses. These are allowed if an aircraft is used for business purposes. However, if the aircraft is also used for non-work reasons it can affect the company’s right to deduct some costs. The IRS says that record-keeping can be challenging.

“Personal use of corporate jets and other aircraft by executives and others have tax implications, and it’s a complex area where IRS work has been stretched thin,” said Danny Werfel, IRS commissioner, in a press release focused on corporate jets. “With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities.”

It is not just the IRS. The Federal Aviation Association is also strongly opposed to business jets flying under radar.

The IRS says it can invest more resources into investigations thanks to funds from the Inflation Reduction Act. It says it could hire extra tax inspectors to focus on aircraft if it finds companies have been over-claiming.

“We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law,” said Werfel.

While no one suggests that business jet owners should avoid paying the correct amount of tax they owe, the National Business Aviation Association (NBAA) and others have questioned the tone of this campaign.

“Today’s announcement by the IRS amounts to nothing more than an audit in search of a problem”

“Today’s announcement by the IRS amounts to nothing more than an audit in search of a problem, and an attempt to broadly paint with a negative brush the thousands of US companies of all sizes that rely on business aircraft to effectively compete in a global marketplace,” said Ed Bolen, president and CEO, NBAA. “It is difficult to understand why the agency is suggesting that these companies – some of the most respected, well-managed businesses in the world – are not in compliance with applicable tax laws.”

The NBAA points out that directors at publicly traded companies routinely approve how staff use aircraft. Some businesses also require key employees to fly on business aircraft for safety and security reasons.

“One cannot say with any certainty that flygskam [flight shame] and heightened IRS scrutiny of corporate jet usage are directly connected – Aerlex has represented clients in IRS audits of their business jet ownership that occurred long before Greta Thunberg came on the scene – but I cannot help but feel that the IRS is responding, in part, to all the attention that has been given to high-profile private jet owners in recent years,” says Stephen Hofer, president, Aerlex Law Group.

As anyone who has walked through the cloud of mint watermelon fumes left by a vaper knows, there can be smoke without fire.

As anyone who has walked through the cloud of mint watermelon fumes left by a vaper knows, there can be smoke without fire.In 2017 reporting following the so-called Paradise Papers leaks was very critical about aircraft imported into the Isle of Man (it also looked at other offshore transactions in less humid islands like Antigua, Barbados and others).

The Isle of Man Government proactively invited the UK Treasury to review the processes used by its Customs and Excise regarding VAT treatment of aircraft and yachts. Two years later, the UK Treasury said it had found no specific cases of wrongdoing but did make some recommendations about monitoring deals which have been accepted and incorporated.

“Business aircraft owners should consider auditing their previous deductions for compliance with the applicable tax laws, analysing the after-tax value of deductions against the potentially high cost and invasiveness of an IRS audit, and seeking advice from professionals involved specifically in business aviation taxes to avoid errors in deducting expenses for personal use of, and aircraft depreciation deductions pertaining to, their aircraft,” says David Mayer, partner, Shackelford, Bowen, McKinley & Norton.

“Put your IRS auditor’s hat on before the IRS auditor arrives at your door.”

Aerlex’s Hofer agrees. “Business jet owners would be well advised to take this as both an advance warning and a wake-up call. Now would be a very good time to re-examine your business jet ownership and usage, both at the corporate accounting and flight department levels. Consider taking a careful look at your record-keeping and accounting for your airplane, both retrospectively and prospectively,” he says. “Put your IRS auditor’s hat on before the IRS auditor arrives at your door. Do an internal audit of the deductions you’ve taken and are taking, the expenses you are booking, and make certain you are comfortable that what you’ve recorded would pass muster if the folks from the IRS actually do show up.”

There is a definite advantage in getting ready before the IRS knock on your hangar. To update another of Clemens’ famous tax sayings: There is never a convenient time for tax audits, colonoscopies or root canals.

*He changed his name to Mark Twain for tax reasons.

The post When the IRS comes knocking for business jets appeared first on Corporate Jet Investor.

The company said it is unique from other digital tax services as it can be integrated with a customer’s flight operations software. This means it can use flight expense data before it’s invoiced to automatically file taxes for corporate-owned aircraft, saving time and money.

Each tax statement on the platform allows customers to file for multiple business divisions under one umbrella, and trips can be classified as primarily personal or business (mixed-trip demo pictured). The software also explains each tax category and code so that flight departments can accurately report the company’s aircraft use and allow them to take on more business, according to MySky. The platform will automatically update to account for changes in tax code or rates.

“This is such an important resource for the US market,” said Ryan DeMoor, head of Aviation Tax, MySky and vice chair, Tax Committee, NBAA. “For too long, aviation tax has been limited by the arduous task of manual data entry which is subject to clerical errors and slower processing times.” He added that MySky will allow customers to report taxes “faster and more accurately”.

The company said it will begin customer onboarding using existing flight operations integrations. For customers whose operations are not yet integrated with the software, MySky will assist with data inputs to get started.

Back in March, Satcom Direct transitioned its Tax Reporting Service to MySky.

The post MySky launches software to automate tax reports #NBAA appeared first on Corporate Jet Investor.

The Global 500 has one of the most spacious cabins of any business jet.

The relevant facts are simple. On 30 December, 2003, Michael Brown, an insurance salesman who sold $10-$300 million life insurance policies to wealthy individuals for estate planning purposes, purchased a $22 million business aircraft in Portland, Oregon.

On the same day, Brown flew his newly-acquired aircraft to both Seattle and Chicago for business meetings. These flights allowed Brown to claim a bonus tax depreciation deduction on the aircraft of approximately $11.2 million in 2003.

In early 2004, a conference table and larger televisions were installed on the aircraft. The Internal Revenue Service (IRS) audited Brown and ultimately denied the bonus tax depreciation deduction that Brown claimed for the aircraft, on the theory that the aircraft was not “placed in service” because the conference table was not installed until 2004. The Tax Court agreed with the IRS and imposed a 20 per cent accuracy-related penalty.

A really expensive conference table

Brown’s aircraft had a typical interior seating configuration, but he wanted a conference table in the aircraft that he could “use for business,” and “needed it for his mission.” Accordingly, the Tax Court determined that: “The conference table was now a necessity.” Brown also wanted the standard 17 in display screens replaced with 20 in screens, so that he could make better PowerPoint presentations to potential clients and other insurance agents. Brown contracted for these interior modifications in December 2003, and the work was performed in early January 2004.

Brown claimed bonus tax depreciation of almost $11.2 million on the aircraft as an expense for his insurance business for 2003. Upon audit, the IRS disallowed that deduction, and the Tax Court agreed that Brown could not properly claim bonus depreciation on the aircraft for 2003 because the aircraft was not “placed in service” that year since the conference table was missing and the larger display screens had not yet been installed.

The “placed-in-service” requirement for Bonus Depreciation

The bonus depreciation sought by Brown would have allowed him to deduct 50 per cent of the aircraft’s purchase price, but only if the aircraft was acquired and “placed-in-service” in 2003. The Treasury Regulations state that “[p]roperty is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function.” The IRS argued that the aircraft was not in a condition or state of readiness and availability for a “specifically assigned function,” which was to operate as Brown deemed necessary for his insurance business, because the conference table and larger display screens were not installed until 2004.

Brown testified at trial that the conference table and larger display screens were “needed” and “required.” The Tax Court found that the aircraft was not available for its intended use until those modifications were made because Brown “needed” these “seemingly minor touches.” In post-trial briefs, Brown downplayed the significance of the improvements, and argued that they had “nothing to do with the [aircraft’s] assigned function of transporting him for his business.” The Tax Court treated this argument as “post-trial framing [that] just doesn’t square with the trial testimony” and determined that the aircraft was not “placed in service” in 2003, and imposed hefty penalties and interest.

Tax penalties

Surprisingly, the Tax Court imposed a 20 per cent accuracy-related penalty. Brown argued that the tax penalty should not apply because he relied on “substantial authority,” which was the “express language of the Internal Revenue Code,” and that he told others “that he needed to use the [aircraft] in his business before the end of the year to claim bonus depreciation.”

The Tax Court was unpersuaded, in part because Brown did not offer Treasury Regulations or pertinent case law to support his “substantial authority” position until late in the case. The Tax Court ruled that Brown’s subjective belief that he relied upon “substantial authority” was irrelevant because whether “substantial authority” exists is an objective standard involving an analysis of the law and its application to the relevant facts. Therefore, the Court found that Brown did not establish “substantial authority” to claim the bonus depreciation deduction for 2003 and upheld the accuracy-related penalty.

Lessons learned

The teachable moments from this case are many:

Private aircraft are a “suspect” class of business asset. Judge Holmes’ legal opinion, which is readable and entertaining, is sprinkled with populist commentary. Brown wanted to “upgrade [his] ride” which would “entitle him to a ‘giant’ bonus depreciation allowance” and “the very rich *** are different from you and me.” Tax auditors and judges tend to view private aircraft as an unnecessary luxury, but a business jet is a business tool, and a taxpayer’s representative needs to educate a taxing authority on the business value of private aircraft. Judge Holmes’ legal opinion recognized that a private aircraft gave Brown a huge advantage over his competitors, and that Brown lost a business opportunity (and $8 million commission) because of Brown’s inability to immediately fly to a potential client. However, this understanding did not tangibly remove the private jet “stigma” that colored the case. The “giant” bonus depreciation allowance for the aircraft was poorly received by the Court, even though Congress wanted Brown to buy a new business asset to stimulate the economy, and encouraged Brown to do so by allowing accelerated tax deduction. It is ironic that Brown bought the aircraft for bonus depreciation, which Congress wanted him to do, but the Tax Court denied it.

For purposes of the “placed-in-service” requirement, a business aircraft is a travel tool, not a conference room. However, the Tax Court determined that the “specifically assigned function” of Brown’s aircraft was not transportation, but flying conference room. The Tax Court reached this conclusion because of Brown’s own testimony. The Tax Court’s decision was wrong because the aircraft’s primary business purpose was passenger transportation, which it could do in 2003, and therefore the aircraft could perform its specifically assigned function. As a secondary matter, the aircraft could itself serve as a location for meetings, but the aircraft’s failure to fully satisfy this secondary (or dual) purpose did not mean that the aircraft was not “placed-in-service” when it was fully functional for passenger air transportation services.

Be careful what you say. Brown’s testimony in this case did him in. He narrowly defined the “specifically assigned function” of his business aircraft as a meeting place and a conference table was a “necessity.” As such, the Tax Court could find that the aircraft was not “placed in service” in 2003 because there was no conference table, which was “necessary” to the aircraft’s “specifically assigned function” as a conference room.

Vigorously defend against penalties. The Tax Court imposed a 20 per cent accuracy-related penalty on Brown for his failed claim that the aircraft was “placed-in-service” in 2003. In Brown’s opening written brief to the Court, he did not aggressively argue “substantial authority” for his bonus depreciation deduction by citing the Code, Treasury Regulations, and referring the Tax Court to favorable, applicable case law. Brown may have avoided the tax penalty if he strongly argued that he acted with “reasonable cause and in good faith” by showing the Court that he relied on his tax advisor’s advice or provided some credible proof that he was aware of relevant, supporting case law when he filed his 2003 income tax return.

Substantiate business use of aircraft with records. In order to deduct business aircraft expenses, the aircraft’s business use needs to be documented with adequate records showing (1) the expense amounts, (2) the time, date, distance traveled and place of travel, (3) the business purposes of the expense, and (4) the business relationship to the taxpayer of persons using the aircraft or for whom the aircraft was used. Brown’s records for his business aircraft use were inadequate. The Court wrote that “something doesn’t quite smell right” with Brown’s records and questioned whether the 2003 flights at the end of December were real business trips.

Tax Court decisions happen within a context. On its own, this adverse decision and the penalties are a stretch by the Tax Court. However, this was only one of many tax problems that Brown had. The IRS also determined that Brown underpaid his taxes by over $30 million (for 2001 through 2006), and the IRS sought an additional $10 million in penalties. These other tax issues were settled between the IRS and Brown, and only the bonus depreciation issue remained for the Tax Court to decide. Those other tax issues, in which the IRS alleged that Brown claimed fraudulent consulting-fee deductions, used nominees to conceal ownership and control of entities from the IRS and created false documents in an attempt to support illegitimate deductions, most likely influenced the decision against Brown on the bonus depreciation, even though those issues were resolved and not directly related to the aircraft.

Tax cases move slowly, while interest accrues. The tax year at issue in this case was 2003, but the Tax Court’s decision was not issued until 2013. Contentious tax disputes with the IRS can take years to resolve, during which time interest can accrue against the taxpayer if the taxpayer loses and did not deposit money with the IRS equal to the amount of tax that the IRS claimed is due.

Conclusion

This case is a cautionary tale for business aircraft owners taking delivery at the end of the tax year. Prior to year end, the aircraft should be used for documented, legitimate business flights. If there are any desired improvements for the aircraft that have not been completed prior to the delivery, hold off on contracting for, or making, those improvements until after the aircraft is in a condition or state of readiness and availability for its specifically assigned function of passenger flight services (not flying conference room).

[divider]

Originally published in The Metropolitan Corporate Counsel.

For more information, please contact Gary I. Horowitz at 703.905.2845 or ghorowitz@wileyrein.com

The post The $11.2 million business jet conference table appeared first on Corporate Jet Investor.

The case held that the zero-rate of VAT can apply to the purchase of a corporate jet aircraft which is used both by its ultimate owner (for private use) and is chartered to third parties, provided certain conditions are met. This is clearly good news for potential aircraft owners who are considering making their aircraft available for private hire on international routes, and who have the flexibility in relation to the marketing and management of private charters.

The particular structure in the case was as follows: An individual, X, was the 100 per cent owner of Company A, a Finnish company. Company A purchased two aircraft which it dry-leased to a company which organised international charter flights (Company B).

Company A held some of the shares in Company B. Whilst some third parties charted the aircraft it appears that most of the charters were in fact taken up by X. The original purchase of the aircraft was treated as zero-rated for VAT purposes by Company A and no Finnish VAT was charged or accounted for on the purchase. This was the basis that the aircraft fell within the exemption within the VAT directive for aircraft operated for reward by airlines operating chiefly on international routes.

The Finnish tax authorities took issue with the structure on the basis that the majority of the use of the aircraft was by the private individual who had the ultimate ownership of the aircraft and that this was not the type of transaction to which the exemption should apply. In particular, they argued that the chartering arrangements entered into by Company B and Company A were insufficient to be treated as those of an airline or, failing that, that the activities did not constitute operation on international routes. They also argued that, even if Company B met the requirements of the exemption, Company A (to whom the sale was made) did not and that the Court could not look through to the end user.

However, in a victory for the taxpayer, the European Court of Justice (the Court) ruled that the structure was capable of qualifying for the exemption.

The case hinges on the long-standing definition in the VAT directive of an exempt sale of an aircraft where the end user of the aircraft is “an airline operating for reward chiefly on international routes”. Naturally, uncertainty has pervaded as to whether that definition applies only to scheduled operators (or also to operators offering charter flights) and whether sales to intermediary leasing companies (e.g. Company A above) which will lease the aircraft to an airline are zero-rated.

The Court held that the concept of an airline “operating for reward chiefly on international routes” includes both scheduled and charter flights and that a company arranging private charter arrangements which were chiefly on international routes was just as capable of qualifying for the exemption as a flag-carrying commercial airline. It also held that the exemption applies to supplies of aircraft to intermediaries provided it can be shown that the end user is an airline operating for reward chiefly on international routes. Despite the Court’s ruling that sales to intermediaries can be zero-rated, uncertainty still remains as to how much information is required to evidence the presence and status of an end user. Purchasers will of course want to ensure that the end user (Company B) is capable of fitting the definition of “an airline operating for reward chiefly on international routes” and should note that a delay in making arrangements with an end user could by extension delay their recovery of VAT. The level of information required is likely to vary from state to state and is unlikely to be the subject of a central decision from the EU.

The Court held that the management company does not need to be responsible for paying for the maintenance of the aircraft, but that all costs can be met by the owning entity, which is favourable for owners as the management company will not need to be seen to be aggressively profit orientated. Despite the favourable judgment in A Oy some unresolved areas of uncertainty remain. HMRC has in the past sought to argue that (in the absence of any other business interests) a company undertaking the role of A does not carry on a business, but merely holds an investment, that investment being the lease to B. The impact of this would be that A cannot register for VAT and consequently would be precluded from recovering VAT. This is significantly more restrictive than the position under European Community law whereby any person carrying out an “economic activity” can register himself for VAT. UK aircraft owners should seek advice on this point.

Finally, although the decision appears to make it clear that this type of structure will qualify for the exemption, this is subject to the EU doctrine of abuse of law. This means that artificial structures which are set up purely to avoid tax may well not benefit from this decision. The question of whether arrangements are so artificial that they would fall within this doctrine is something that potential purchasers will need to consider when establishing their chartering arrangements.

Overall, this decision provides clarity on a number of issues which had been the cause of uncertainty in aviation transactions within the EU and this is to be welcomed. New arrangements may therefore be able to benefit from structures similar to that in the case in order to reduce the VAT costs that can otherwise be significant. However, purchasers will need to be careful that the arrangements they establish are not so artificial as to fall outside the scope of the judgment.

The post Can private charter arrangements help reduce VAT on corporate jet transactions? appeared first on Corporate Jet Investor.

The tax

The tax is a per passenger tax:

€100 for each flight to or from the Italian territory of less than 1500 km.

€200 for each flights to or from the Italian territory in excess of 1500 km.

For calculation purposes, flight distance between point of departure and point of arrival (regardless of technical stop-overs) is calculated by reference to the great circle route plus 95 km. The tax is due on “aerotaxi flights”, defined as
passengers flights where the aircraft is chartered for its entire capacity on an exclusive basis.

The tax is due by each passenger to the operator, who is then obliged to pay it. For Italian law purposes (art. 743 of the Navigation Code) “aircraft” is defined as any flying machine dedicated to air transportation of passengers and/or goods.

Oddly, given the practical implications, the tax is expressed to be payable from April 29th 2012 (date when law 44/2012 came into force). For the period April 29th – June 30th, the tax is payable by July 31st 2012.

When is the tax paid

Time of payment of the tax by the operator depends on the aircraft country of registration:

For EU registered aircraft and aircraft registered in the European Economic Area (EU member States plus Iceland, Liechtenstein and Norway) the tax is paid by the end of each month by reference to the flights carried out in the previous month.

For aircraft registered in other countries the tax is payable, for each flight, prior to departure from the Italian territory or within the day following the date of arrival on the Italian territory.

How is the tax paid

The tax is paid via the F24 form, typically used in Italy for tax payment purposes.

Non-Italian operators can pay the tax via euro bank transfers as follows:

• Beneficiary:
“Bilancio dello Stato al Capo 8 – Capitolo 1224”

• IBAN
IT48 A010 0003 2453 4800 8122 4000

• BIC:
BITAITRRENT

• Payment description: (i) operator name; (ii) number of passengers; (iii) flight type (A for flights of less than 1500 km, B for flights in excess of 1500 km); (iv) date of flight  day/month/year)

The post Italy introduces passenger tax on chartered flights appeared first on Corporate Jet Investor.

The Korkein hallinto-oikeus (Supreme Administrative Court of Finland) has referred to the European Court of Justice for a preliminary ruling on three questions concerning the interpretation of the VAT exemption applicable to the supply of aircraft to be ‘used by airlines operating for reward chiefly on international routes’.

An opinion given by the Advocate General yesterday in the European Court of Justice supports work we have been doing with BBGA and EBAA on the interpretation of the VAT regulations relating to the definition of a “qualifying aircraft”.  In very simple terms, qualifying aircraft can be imported at 0% VAT by an “airline”.

The opinion states that:

1 – The term “airline” is not limited to scheduled airlines and will include business and private jet operators (contrary to the opinion of HMRC!). The consistent approach has been that those with an air operators certificate should be recognised as an airline and this opinion supports that view.

2 – The fact that an owner is transported by the airline does not affect the VAT status, provided the airline is using the aircraft in its business (i.e. the aircraft is not used exclusively for the private use of the owner and is available for charter).

The opinion of the Advocate General has been sent to the European Court of Justice and it is hoped the ECJ will follow the essence of his opinion when they make their ruling.

The post VAT: Opinion of the Advocate General’s Import by airlines appeared first on Corporate Jet Investor.

Foreign
registered aircraft can now be parked in the country for up to 45 consecutive days
– excluding maintenance time – rather than the 48 hours originally set out. The Parliament has also halved the rate that helicopters pay.

State
aircraft, rescue aircraft and helicopters, historic aircraft, and aircraft
dedicated to scheduled and non-scheduled commercial flights do not pay the tax.
However,
operators will need to pay a passengers’ tax on chartered flights, with flights
of less than 1500 km (810NM) being charged at €100 per passenger and journeys
greater than 1500 km charged at €200 per passenger.

The following tables show how the new rates will affect fixed-wing aircraft and helicopters:

Fixed-wing aircraft
 

Helicopters:

“This
passengers’ tax was introduced as a last minute amendment to offset supposedly
lower tax income from the aircraft tax,” says Franco Campomori, partner at
Campomori – Aviation and Law. “In reality, no traffic analysis or consultation
was carried out and concerns are that it will generate a much higher tax income
than the one that it was supposed to offset, while creating a direct damage to
the business aviation industry.”

The
European Business Aviation Association (EBAA) says business aviation flights
have fallen by 10 per cent since the tax came into effect at the end of
December.

“We
operate very expensive aircraft but when we talk about the corporate market,
the margins are very small,” says Brian Humphries, president of EBAA. “We
cannot bite this change and we need to make authorities understand that.”

The tax will be collected from the registered
owner, the beneficiary or the lessee. The technicalities regarding actual
payment are to be detailed in a separate regulation to be issued within 60 days
of the approving legislation coming into force.

Aoife
O’ Sullivan of Gates & Partners says: “The tax is farcical. It is not a
luxury market. We do on every average three to four sales a month and every one
of them is a corporate buyer.”

The post Italy approves luxury tax on aircraft appeared first on Corporate Jet Investor.

The issues currently being discussed in parliament are as follows:

• An extension of the allowance period for non-Italian registered aircraft from 48 hours to 45 days.

• A tax rate reduction for aircraft having a MTOW below 6000 kg (above that, rates would remain the same).

• A helicopter tax rate increase of 50% (instead of 100%).

• Exemption for historical, kit and light sport aircraft.

• The introduction of a “user fee” tax on chartered flights of €100 per passenger for flights of less than 1500 Km and of €200 per passenger for flights in excess of 1500 km. The details of such new tax are still being discussed and defined in detail.

All of these points are still under discussion and definitive outcomes are still unclear.

The post Tax on private aircraft under review in Italy appeared first on Corporate Jet Investor.

The tax

The tax was introduced in December 2011 in the context of the Italian emergency budget and is expressed to apply also to non-Italian registered private aircraft having spent more than 48 consecutive hours on Italian territory.

Private aircraft are defined to include all aircraft other than State aircraft, aircraft dedicated to commercial flights, air work aircraft, FTO’s aircraft, aero clubs aircraft, newly built aircraft until sold and rescue aircraft.

The tax is to be charged at the following annual rates (by reference to MTOW): 1) up to 1.000 kg., euro 1,50 per kg; 2) up to 2.000 kg., euro 2,45 per kg; 3) up to 4.000 kg., euro 4,25 per kg; 4) up to 6.000 kg., euro 5,75 per kg; 5) up to 8.000 kg., euro 6,65 per kg; 6) up to 10.000 kg., euro 7,10 per kg; 7) above 10.000 kg., euro 7,55 per kg. For helicopters, the tax is doubled per Kg. The tax is due and payable by the registered owner, the beneficial owner or the lessee.

The implementing regulation

The purpose of the implementing regulation was to specify further how and when the tax will be payable.

The tax is payable by reference to the duration of the certificate of airworthiness and therefore payable in principle at the time of issue/renewal of the certificate of airworthiness.

With regard to aircraft having a valid certificate of airworthiness at the time of the entry into force of the legislation (December 6th, 2011), the tax is payable within 90 days of the legislation coming into force (therefore, beginning of March 2012) by reference to a period which extend from 6th December 2011 until expiry of the certificate of airworthiness.

With regard to aircraft whose airworthiness certificate will be issued/renewed before 31 December 2012, the tax is also payable within the above 90 days period.

The tax is paid by means of an Italian tax form known as F24 (requiring an Italian fiscal code and bank account) or by bank transfer for those not being able to utilize the tax form or not having an Italian fiscal code. The implementing regulation has provided the relevant tax codes and payments instructions for actual payment.

What has not been addressed

There is no useful indication, in the implementing regulation, whether for non-Italian aircraft, the tax could be deemed determined and due by reference to the actual time spent on the Italian territory in excess of the 48 hours allowance period. Legal challenges and formal requests of clarification (tax ruling) to this effect are likely to follow, to try to mitigate the impact of the tax on non-Italian owners, non-permanently based in Italy. What the implementing regulation has also failed to address is when the tax will payable by non-Italian private aircraft owners that will spend more that 48 consecutive hours on Italian territory after the initial 90 days period (i.e. after beginning of March 2012). Formal clarifications in this regard are also likely to be solicited.

[/ismember]

The post Italian tax on private aircraft: An update appeared first on Corporate Jet Investor.

Airline partnerships

Last year saw Lufthansa strike a deal with NetJets Europe to (re-)establish a service, known as Lufthansa Private Jets, to offer first-class and business-class passengers flying long-haul the add-on service of continuing their journey within  Europe by private jet. One such added-on benefit for Lufthansa passengers will be the ability to book flights in NetJets aircraft with as little as ten hours’ notice. Other carriers are thought to be considering doing the same, whether by forming similar partnerships or by establishing their own businesses by acquiring private jets themselves.

Without doubt, such add-on services have advantages for both the customers (who get a seamless, premium service from the start to the end of their journey) and the airlines (who tap into a potentially lucrative market with regular demand). However, it remains to be seen whether the airline partnership model is a viable one. Lufthansa and NetJets Europe’s previous attempt at a similar partnership had its difficulties (though the recession towards the end of the last decade could not have helped), and some doubt whether this type of partnership will ever be more than a small part of a private jet operator’s business. One problem may be the availability of slots at the “hub” airports such as London Heathrow, Charles De Gaulle and Orly, which may result in such services having to operate from regional airports instead.

Increase in private jet finance and ECA involvement (and a new ASU)

After a turbulent few years during the economic downturn towards the end of the last decade, 2011 saw a slow but steady increase in lenders looking again at the private jet market, albeit in a much more conservative manner. Notably:

Whilst it is to be commended that lenders are returning to the private jet market, the increased costs and more onerous conditions involved mean that gaining access to finance can still be daunting for some of the more challenging credits.

The upturn has, in part, had to do with many financial institutions that disappeared from the market during the economic downturn coming back into the market, as well as manufacturers being more willing to assist customers in finding finance. However, a key development in private jet finance has been the (re-)entry into the business aviation market of the export credit agencies (“ECAs”), such as Export Development Canada, COFACE and US Ex-Im, in response to the severity of the credit drought in the market. This development has been most notable in emerging markets.

With ECA involvement in the private aviation market increasing, it is also worth noting that February 2011 saw the signing of the revised Aircraft Sector Understanding on Export Credits for Civil Aircraft (the “2011 ASU”), which applies to all types of official state support for export credits. The 2011 ASU sets out the most favourable terms permitted for aircraft financing transactions supported by the export credit agencies of members of the Organisation for Economic Cooperation and Development, as well as Brazil. The new rules are intended to “encourage competition among exporters based on quality and price of goods and services exported, rather than on the most favourable officially supported financial terms and conditions”. In essence, the new rules aim to level the playing field and narrow the pricing gap between transactions backed by ECA support and those offered by commercial lenders.

Perhaps the most important change in the 2011 ASU is the increase in the minimum premium rate to be paid by the borrower in an ECA-backed financing. However, one of the key features of the 2011 ASU, with regard to the Convention, is the inclusion of a single, maximum discount on the minimum premium rate of 10 per cent. For category 2 and 3 aircraft, this represents an unchanged position from that under the 2007 Aircraft Sector Understanding (the “2007 ASU”). However, for category 1 aircraft, the maximum Cape Town discounts under the 2007 ASU varied between 5 and 20 per cent, depending on the credit rating of the buyer/borrower/operator/lessor (depending on the structure). To qualify for the new Cape Town discount under the 2011 ASU, the following conditions must be satisfied:

• The buyer/borrower/operator/lessor must be in a state that has ratified and appropriately implemented the Convention and its Aircraft Protocol;·

• That state must have made the qualifying declarations (for example, as to insolvency repossession, self-help default remedies and IDERAs (Irrevocable Deregistration and Export Request Authorisations);·

• That state must also appear on the then current version of the “Cape Town List” to be maintained pursuant to the 2011 rules.

Despite continuing economic uncertainty going into the New Year, it is hoped that the developments over the last twelve months will continue to help the private jet market recover in the near future. Growing interest from non-traditional markets, such as China, in providing finance to the private jet and helicopter market, may provide further impetus to the recovery.

Continuing expansion of Cape Town Convention

The Cape Town Convention (the “Convention”) continues to expand in scope, with 44 states now having contracted to be a part of it. 2011 saw ratifications from nine countries (Belarus, Brazil, Cameroon, Kazakhstan, Latvia, the Russian Federation, Tajikistan, Togo and Turkey), with the Convention entering into force in six of those. The Convention entered into force in Belarus earlier this month and is expected to enter into force in Brazil in March and Togo in April.

Whilst the Convention applies to aircraft (including helicopters) and aircraft engines that meet certain size and power requirements (provided that certain other criteria for application of the Convention have been fulfilled), the position as regards helicopter engines is more complicated. Current industry practice suggests that helicopter engines are considered a separate “aircraft object”, and therefore covered by the Convention, when not attached to a helicopter but do not need to be registered when attached to a helicopter. As a result, our recent experience is that Cape Town registrations have been made against helicopter engines by some. Lenders, when financing a helicopter, may therefore still wish to consider conducting appropriate searches at the International Registry to see whether anyone else has registered an interest over a helicopter’s engine(s).

It is hoped that the benefits of both the expansion of the Convention and the adoption of the 2011 ASU will be felt, by increasing access to finance, and on better terms. However, while the global economic climate remains fragile, this may take some time to come to fruition.

New VAT rules on the supply of aircraft

It is by now well known that as part of the UK government’s March 2010 budget the rules relating to the VAT on the supply of aircraft were changed. The change came in response to a successful challenge from the European Commission on the basis that the UK’s old rules did not correctly implement Article 148 of the VAT Directive by allowing for the zero-rating of aircraft that were neither used by airlines, nor used on international routes, which was considered contrary to the purpose of the VAT Directive. The changes were initially scheduled to come into force in September 2010, however, industry concerns led to the government agreeing to a two-month consultation on the changes and a delay in the implementation date to 1 January 2011.

With effect from 1 January 2011, the definition of a “qualifying aircraft” in UK legislation was changed (with the exception of aircraft used by a State institution) to “any aircraft which is used by an airline operating for reward chiefly on international routes“. The previous definition treated an aircraft as “qualifying” if it weighed not less than 8,000kg (a definition which captured a good number of private jets, contrary to the purpose of the VAT Directive). The new definition tracks the wording of the VAT Directive and now puts the focus onto the airline rather than the aircraft.

The new definition of “qualifying aircraft” can be split into three limbs.

First, the aircraft in question must be operated by an “airline”. Under the Value Added Tax Act 1994 (the “VAT Act”) an airline is “an undertaking which provides services for the carriage by air of passengers or cargo or both.” Guidance from HM Revenue & Customs (“HMRC”) has indicated that in order to be an “airline” such an undertaking (whether a sole proprietor, partnership, corporate body or even a VAT or corporate group) must own, lease or hire at least one aircraft (seemingly regardless of whether or not such an undertaking holds an Air Operator’s Certificate (“AOC”), which gives the holder the right to offer flights to the public as, whilst a company holding an AOC can be an “airline”, it does not need to own, lease or hire an aircraft and, therefore, may not be an “airline” within the VAT Act).

The second limb, that the airline must be “operating for reward” is more straightforward. HMRC guidance states that, provided the airline is providing either passenger or freight transportation (or both) on scheduled or unscheduled flights (or a mixture of both) in return for consideration for that supply, it will be considered to be “operating for reward” (whether or not it is operating for profit).

The third limb is that the airline must operate aircraft “chiefly on international routes”. An “international” route is any route that is not a domestic route within UK airspace (the usual boundary of which is twelve nautical miles from the coast). Routes between (i) the UK and the Channel Islands and (ii) the UK and oil rigs outside the twelve mile limit are international routes, though routes to and from the Isle of Man are not, according to HMRC.  The main problem, however, is the concept of “chiefly”. The ECJ case of Cimber Air (C382/02) found that chiefly could primarily be determined by the turnover of the respective operations but did not rule out other tests (which can be either applied in conjunction with or separate from the turnover and with each other). Examples of other tests can include number of flights undertaken, number of seats sold, number of passengers/volume of freight flown and a function of the distances travelled.

Whether private aircraft can be treated as “qualifying” aircraft (under the new definition) is debatable and is currently unclear. Traditionally, a private aircraft is not owned by the company which holds an AOC but, rather, owned by a company which itself is owned by the individual who wishes to use the aircraft. The aircraft is then operated pursuant to a management or operating agreement by another company which holds an AOC (but does not necessarily own, lease or hire an aircraft).  HMRC’s current view is that an aircraft management company, even if it holds an AOC, is not operating as an “airline” for VAT purposes. It is possible that this view may change or may even be challenged in the near future. We are aware that, due to the uncertainty prevalent in the UK, the Isle of Man has been used as a location for the operation of private aircraft using a similar model to that previously used in the UK, seemingly with the consent of the Isle of Man tax authority.  It is not yet known how HMRC view these arrangements and whether efforts will be made to align the approach taken by HMRC and their Isle of Man counterparts, given both are applying identical legislation.  Only time will tell.

Onset of the EU ETS

For many aircraft operators, 2011 will have been a countdown towards the implementation of the EU Emissions Trading Scheme (“EU ETS”), the compliance period of which, for aviation at least, commenced on 1 January 2012. Monitoring plans and baseline data will need to have been submitted, and emissions will need to have been reported, long before now. However, operators will need to have had their emission reports verified by an accredited independent verifier by 31 March 2011 and the verification process for compliance in 2012 should already be well under way.

A number of entities, including Eurocontrol, have established support programs or expanded their existing portfolio of management services to support aircraft operators prepare for the onset of the EU ETS and its procedural requirements. Services include monitoring flight data, calculating CO2 emissions and managing production of the annual report.

Whether or not the EU ETS is implemented according to plan, a number of questions remain unanswered as to how the scheme will operate going forward. What will happen to allowances “owned” by an operator that enters into administration or liquidation? Will a merged airline retain all allowances afforded to both airlines pre-merger? Can allowances be encumbered and granted as security and will such security be valid and enforceable against a liquidator? Can any such allowances be revoked by the relevant regulator? These are critical issues which both lenders and operators will need to consider and which will need to be monitored during the early implementation and compliance period of the scheme. Guidance on these issues would be welcomed by the market.

Owners of private jets (be they corporates or high net worth individuals) usually engage a specialist third-party operator to arrange crew, insurance, catering, flight planning, parking of aircraft, administration etc. Lenders will need to consider and seek advice on whether or not the EU ETS applies to such a third-party operator. EU ETS may not apply if:

• The operator does not hold an operating licence issued by an EU member state; or

• The operator either:  (a) does not operate in the EU; or (b) operates in the EU but in relation to aircraft other than the relevant leased or financed aircraft.

In such circumstances, a lender may wish not to include EU ETS compliance provisions. However, in some circumstances, a lender may wish to limit subleasing rights so that the airline would either require the lender’s consent to sublease the aircraft or it would be a condition to subleasing that EU ETS requirements would be complied with by the relevant operator. Also, if the operator changes the nature of its operations, the EU ETS provisions may become applicable.

As airlines/operators are allocated to individual member states by the EU Commission (either the member state which granted that airline’s/operator’s AOC (if it has one) or, otherwise, based on its aviation emissions in 2010), lenders may need to seek advice on which member state will have responsibility for the relevant airline/operator which is operating an aircraft subject to a finance or operating lease. Once that has been determined, the lender will need to discuss with its advisers as to the appropriate provisions to be inserted into the lease or finance documents.

These may include:

• Events of Default if the airline/operator is or becomes (or is deemed to be) a “defaulting operator” pursuant to the EU ETS legislation, or if the airline/operator fails to pay any charges applicable to the EU ETS legislation;

• Covenants that the airline/operator will comply with the EU ETS legislation to the extent applicable to the leased/financed aircraft and the rest of its fleet;

• Provisions that notification needs to be given to the relevant regulator should any of the lessor, finance parties or owner of the relevant aircraft changes; and

• Provisions in any lease or sublease similar to the above, together with a provision giving the lessor the ability to monitor charges incurred by any permitted sublessee or operator.

Despite the preliminary ruling of the Court of Justice of the European Union in December 2011, which confirmed that the EU ETS Directive infringes neither (i) the principles of customary international law at issue in the case nor (ii) the Open Skies Agreement between the US and the EU, opposition continues against the EU ETS from numerous quarters, notably from the US and China. The opposition view continues to be that, as a global industry, any measure must be taken at a global level and the EU ETS, in its current form, simply imposes a regional scheme on third countries.

Airlines for America, the newly-branded US airline industry body, whilst “complying under protest”, has said that it is reviewing its legal options. Retaliatory threats – from trade wars, action against Airbus’ manufacturing operations in China, the possibility of taxing European carriers and blocking access to certain routes – have been mooted. The threat of separate legal action from the Chinese aviation industry (through the China Air Transport Association, “CATA”) looms on the horizon. In the meantime, CATA has said that its members would not co-operate with the scheme. However, at present, the EU is standing firm on its plans. The aviation industry hopes that, in the midst of this storm, ICAO (the International Civil Aviation Organisation) comes up with a global solution soon. The aviation sector is holding its breath. This one could fly for a while.

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