AVIATION - A GROWING FOCUS IN MALTA

Over recent years, Malta has witnessed growth in the aviation industry, attracting internationally renowned entities to set up operations in Malta. In turn, the country is responding with initiatives to continue growing and supporting this industry, with the ultimate aim of becoming a "one-off destination" in the aviation sector.

As part of its economic development strategy, Malta is supporting diverse sectors in the aviation industry, including, but not limited to, maintenance, repair and overhaul (MRO) operations, back-office setups, research and development, and the production of aircraft components.

THE MALTA FLAG - A PROVEN TRACK RECORD IN SHIPPING; A PROMISING FUTURE IN AVIATION

The Malta flag's attractiveness has already proven itself in the maritime industry, where the Maltese Shipping Register is the second largest in Europe and the eighth largest in the world. Recent initiatives to boost aircraft registration are indicative of the country's enthusiasm for the aircraft register to follow in the footsteps of the shipping register.

This is supported by the merger in 2010 of the previously independent entities responsible for civil aviation, maritime (including shipping, ports and yachting) and land transport, into a single Authority – Transport Malta. As a result of this merger, the shipping and aircraft registers fall under the jurisdiction of the same regulatory body, allowing for the transfer of knowledge and lessons learnt in the development of the Malta Flag.

A NEW LEGISLATIVE FRAMEWORK FOR AIRCRAFT REGISTRATION

During 2010, a new aircraft registration Act was issued, which consolidated the existing laws on registration and incorporated novel concepts, focusing not only on enhancing aircraft registration, but also the other sectors of the aviation industry.

Advantages of the new framework

1. Broader registration possibilities

A key innovation in the new framework is the widening of possibilities and eligibility criteria for registration of aircraft.

  • Applicants who may register aircraft include an owner of aircraft under construction, an operator of an aircraft under temporary title, such as a lease, and a buyer under a conditional sale or title reservation agreement. This allows purchasers and operators of aircraft to address financing and ownership issues in a legally certain manner prior to delivery.
  • Aircraft engines may be registered, rendering scope for engine financing opportunities.
  • Registrants of private aircraft are not subject to the qualifying requirements of aircraft used for "air services", which need to obtain a Maltese operating licence. If the aircraft is not used for air services, it may be registered by any aviation undertaking established in an OECD member state.

2. Concept of fractional ownership

Fractional ownership of aircraft is a relatively new concept. It represents a part share in an aircraft that entitles the holder to use the aircraft for a designated amount of time over a specified period. Fractional ownership can substantially cut the user cost of business aviation and grants more flexibility. In fact, it is cited as one of the key factors behind the growth of the business aviation industry in Europe (PwC report for the EBAA - The economic impact of business aviation in Europe, 2008).

3. Use of Trusts

In addition to fractional ownership, as a further vehicle allowing plurality of ownership, the Act also provides for the registration of aircraft under the terms of a beneficial trust. Where the registrant is a trustee, the Director General responsible for Civil Aviation will consider the beneficiaries of the trust to determine the eligibility of the trustee for aircraft registration. However, the information obtained will be subject to confidentiality.

4. Facilitation of finance and operating leases of aircraft

A key aspect at the heart of the changes to the aviation legislative framework is the facilitation of aircraft leasing, both through Malta's accession to the Cape Town Convention and the fiscal incentives applicable to lessors and lessees.

The ratification of the Cape Town Convention, the implications of which are further elaborated below, enables lessees to normally benefit from lower borrowing costs, besides providing lessors with preferential ranking (through registration of an international interest ranking prior to national security interests) and self-help repossession remedies in case of default.

In addition, there are a number of tax measures that are favourable to both lessors and lessees. No withholding tax is payable on lease payments where the lessor is not a tax resident. Furthermore, the Inland Revenue Department has issued guidance providing clear rules on the tax treatment of the finance charge, available tax deductions to aircraft finance lessors and capital allowances for lessees. These fiscal measures are outlined in further detail on page 8.

5. Registration of mortgages, with remedies in case of default

It is not uncommon for aircraft to act as a security for a debt or other obligation. The Aircraft Registration Act provides that all registered mortgages, to which a Maltese-registered aircraft may be subject, are not affected by the bankruptcy or insolvency of its mortgagor/owner occurring after the date on which the mortgage was created.

Furthermore, there is enhanced protection for mortgagees who are empowered to perform the following:

  • Prohibit the creation of further mortgages on the aircraft, or the voluntary transfer of the aircraft, without the mortgagee's prior written consent, subject to this requirement being stated in the mortgage instrument.
  • Appeal to the Administrative Review Tribunal where the registration has been cancelled for unjustified reasons, or notwithstanding that effective action has been taken to remedy the complaint, the Director General has failed to withdraw the order to cancel.
  • In case of default, (i) lease the aircraft and receive the lease income; (ii) receive any payment of the price, lease payments and any other income generated from the management of the aircraft, or (iii) take possession of the aircraft or sell the aircraft.

The foregoing is without prejudice to any security rights and default remedies as may be applicable through the ratification of the Cape Town Convention. The Aircraft Registration Act allows entities holding interests in aircraft to register their interest with the competent authority under the Cape Town Convention on International Interests in Mobile Equipment.

6. Accession to the Cape Town Convention

The provisions of the Cape Town Convention on International Interests in Mobile Equipment and its Aircraft Protocol have been implemented in the new Act. Malta's ratification of the Convention allows persons involved in cross border secured financing and aviation leasing transactions to benefit from increased predictability and certainty of rights and remedies.

This is triggered by the registration of international interests in the International Registry, which creates priority ranking of security interests. An aircraft lessor under a leasing agreement, a conditional seller under a title reservation agreement or a chargor under a security agreement, may now register an international interest, in an airframe, engine or helicopter, in the International Registry for mobile assets.

Subject to special privileges, the general rule is that an international interest ranks prior to national security interests. There is also an option to file a prohibitory notice in the National Aircraft Register, which prohibits the registration of security interests in the register without the express consent of the creditor in question.

The Convention provides secure and readily enforceable rights in easily identifiable, high-value mobile equipment, such as aircraft, which are registered in Malta. These rights may be exercised in case of a debtor's or lessee's default by resort to 'self-help re-possession remedies', including taking possession or control of the aircraft, selling or granting a lease in the aircraft or collecting or receiving income or profits arising from the management or use of the aircraft.

Furthermore, upon the insolvency of the debtor (where Malta is the primary insolvency jurisdiction) the insolvency administrator or the debtor is required to give possession of the aircraft to the creditor by the end of 30 days or cure all defaults and agree to perform all future obligations under the relevant agreement.

As a result of the advantage of mitigating financial risk, interest rates charged are typically lower, resulting in reduced financing and leasing costs borne by purchasers or operators of aircraft in Malta. This reduction in borrowing costs is known as the Cape Town Discount.

7. Transparency of rights and interests in aircraft

The aircraft register has been changed to cater for increased visibility through the annotation of more details if requested to do so by the registrant or other person with the consent of the registrant.

FISCAL REGIME

Malta is a tax-efficient base for international business operations, providing interesting tax planning opportunities upon re-domiciliation to Malta of foreign companies conducting international aviation operations.

1. Income from aircraft used for international Transport

Income derived from the ownership/lease/operation of aircraft or aircraft engines used for international transport is considered to arise outside Malta for tax purposes, irrespective of the aircraft's country of registration or whether the aircraft calls at, or operates from, a Maltese airport.

This provides some interesting planning opportunities for entities carrying on business in the aviation industry:

  • It ensures that the leasing of aircraft/aircraft engines by non-residents to Maltese-resident lessees is not subject to Maltese income tax, whether by withholding or otherwise. This applies irrespective of the existence or otherwise of a double taxation treaty between the Malta and the country of residence of the lessor.
  • It opens up to Maltese-resident aircraft lessors/operators the planning points applicable under Maltese tax law in respect of foreign source income, whilst enabling them to make use of Malta's double tax treaty network where applicable. Thus, for example, subject to applicable conditions, aviation income receivable by a foreign incorporated, Maltese resident entity, is only subject to tax in Malta if remitted to Malta.
  • If a tax treaty applies, the profits derived from the operation of an aircraft in international traffic are taxable only in the Contracting State in which the effective place of management of the enterprise is situated (A.8 OECD MC).

2. Tax refund on distributed profits

Aircraft leasing and other profits derived by Maltese incorporated and Maltese resident entities from international air transport operations is taxable at the corporate rate of 35%. However, on distribution of these profits, the imputation system applies with qualifying shareholders being entitled to a refund of 6/7ths of the tax suffered on the distributed profits, subject to satisfying the statutory conditions.

3. Taxability of lessors and deductibility of lessees

In case of operating leases, the lessor is taxable on the profits derived from such leasing income. If the lessor maintains the burden of wear and tear, capital allowances are able to be offset against such income. In finance leases, the lessor is chargeable to tax solely on the interest element of the lease, with no deduction being available for capital allowances. Lessees may claim a deduction for lease payments in case of an operating lease, as well as capital allowances if the burden of wear and tear falls on them. In finance leases, lessees may deduct the interest element of the lease, repairs and maintenance, insurance and capital allowances.

4. Minimum depreciation periods

Aircraft airframes, engines and associated overhaul are written off for tax purposes over a period of not less than six years, whilst interiors and other parts are written off over a minimum period of four years.

5. Private use is not a taxable fringe benefit

L.N. 292 of 2010, the Fringe Benefits (Amendment) Rules 2010, provide that the private use of an aircraft by an individual who is not resident in Malta and who is an employee of an entity whose business activities include ownership, leasing or operation of aircraft/aircraft engines used for international transport of passengers/goods shall not be considered a fringe benefit and is therefore not taxable as a fringe benefit.

6. Tax credits to Maintenance, Repair or Overhaul (MRO) operations

Malta grants tax incentives, in line with the EU Framework on Regional Aid, to companies which are involved in the maintenance, repair or overhaul of aircraft, engines or associated equipment, in the form of a tax credit. The extent of the tax credit depends on the level of investment which such company has made during the year or in prior years, and whether the company is considered to be a small, medium or large enterprise.

7. Double taxation agreements

Malta has an extensive network of double taxation treaties with a large number of countries and is continually seeking to extend this network. A list of the countries with which treaties are currently in force is set out in the table on page 10.

8. Currency of tax payments/refunds

Companies incorporated in Malta are permitted to denominate their share capital in any convertible currency, and that currency is then used for the payment of taxes due and, for any tax refunds that may be due.

9. VAT

The supply of aircraft for use by airline operators for reward, chiefly for international transport of passengers/goods, is exempt from VAT. The same principle applies for intra-community acquisitions/importation of aircraft. There is no exemption in the case of aircraft acquired for non-business purposes.

... BUT WHAT ABOUT QUALITY AND SAFETY?

Safety and quality are at the forefront for Transport Malta's Civil Aviation Directorate.

As the national regulator, Transport Malta is responsible to ensure a high level of safety in aviation and to establish and manage an aviation safety oversight system. Safety oversight is there to ensure that the minimum safety-related standards and recommended practices of the International Civil Aviation Organisation (ICAO) and the more stringent requirements set out by the European Union, are effectively implemented.

The Maltese aviation register has already projected itself as a flag of confidence, rather than convenience. Although the recent developments in legislation include a number of attractive measures and incentives for increasing aviation business, there is no room for compromise on safety and quality. As part of the process in registering an aircraft, Transport Malta performs inspections to ensure that an aircraft complies with safety and other regulations. There is also ongoing monitoring by Transport Malta of the operator's activities and its aircraft's continuous airworthiness.

Malta operates under a strict safety regulation regime in accordance with the standards set out by the European Aviation Safety Agency (EASA). EASA requirements tend to be more detailed than ICAO standards and often impose higher standards. Malta' safety record in aviation is excellent and it is held in the highest regard by the US Federal Aviation Administration (FAA) and the ICAO1.

Malta has attracted some quality investors in the aircraft maintenance sector, providing the necessary assurance to potential investors that Malta is capable of servicing the sector. Aviation maintenance is a strictly regulated field of engineering. Workshops and trainers need to be approved and training can only be provided under licence. Over recent years, a local college has invested heavily in aviation maintenance workshops, enabling it to become an approved EASA Part 147 aviation maintenance training organisation. With the required management structure, a number of qualified lectures and examiners, all the training, examination and quality assurance in place, this local college can provide the market with adequately trained personnel in aviation maintenance.

Footnote

1. Steering Committee by the Ministry for Infrastructure, Transport and Communication , 'Establishing a successful Maltese Aviation Register'

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.