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.