Aircraft Leasing in Ireland for Chinese Lessors - The Irish Tax Regime
25 Mar 2011
Ireland is one of the leading locations in the world for all forms of aircraft finance and leasing activities. This is due to the very favourable tax environment including, in particular, a low 12.5% rate of corporation tax on trading profits, coupled with beneficial tax depreciation and interest deductibility rules, and access to an extensive network of treaties which can eliminate foreign tax on lease rentals.
This update also highlights an alternative efficient corporation tax treatment introduced in 2011 which may be applicable to lessors in certain cases. Ireland also has a long and successful tradition in the aviation industry with the required skills, knowledge and expertise located in Ireland.
Ireland has signed double tax treaties with over 60 countries. The network of treaty partner countries is set out in the Appendix. The treaties protect an Irish based lessor from double tax in their international operations and often allow a foreign lessee make lease rental payments to an Irish lessor free from foreign withholding tax. This ability to eliminate or reduce foreign withholding tax on lease rentals is critical to the commercial success of a lessor leasing to multiple jurisdictions.
To fall within the Irish tax regime and benefit from Ireland's treaties, a company must be resident in Ireland for tax purposes. Tax residency is primarily determined by the "central management and control test". Management and control relates to the decisions of fundamental importance to the business of the company as opposed to the day to day administration of the company. In practice, the board of directors should meet in Ireland and have some Irish resident directors on the board in order to achieve Irish tax residence. Ultimately, the residence of the company for tax purposes is a question of fact and it will, in each case, be necessary to demonstrate that the central management and control of the company is located in Ireland.
Irish Corporation Tax Treatment - Option 1
Ireland has two rates of corporation tax - a 12.5% rate and a 25% rate. In order for the 12.5% rate to apply, the income must be attributable to a trade carried on in Ireland and not attributable to passive income.
Generally trading means the carrying on of business or the engaging in activities on a regular basis with a view to realising a profit. In analysing whether a company is carrying on trade, it is important to demonstrate that the company has the necessary "substance" in Ireland. The Irish Revenue Commissioners, in considering if an activity constitutes the carrying on of a trade, look to see whether there is real value added in Ireland to indicate that the trade is actually being carried on in Ireland and do accept that certain activities can be outsourced. We will be happy to discuss your particular fact pattern with you to explore whether the 12.5% corporation tax rate would apply.
An Irish trading company is entitled to deduct any revenue expenditure incurred "wholly and exclusively" for the purposes of the trade. Therefore, interest payments are generally tax deductible for an Irish trading company. Interest payments made to a non-EU 75% parent can be recharacterised as a nondeductible distribution. However, there is an exclusion from this recharacterisation where the interest is paid by a trading company to a treaty resident company and an election is made by the trading company.
A lessor can also claim a tax deduction (referred to as "capital allowances") in respect of capital expenditure incurred by it on the acquisition of aircraft (provided that the burden of wear and tear of the aircraft falls on the lessor). The rate of capital allowance available is 12.5% of the capital expenditure on a straight line basis over a period of eight years.
The financing expense and tax depreciation should generally further reduce the effective tax rate of the Irish owner / lessor substantially.
In the case of "lease in/ lease out" structures, where a foreign lessor leases through an Irish company to a foreign lessee, generally the Irish company will only be taxed on the margin it earns.
Extraction of Profits
A central component of Ireland's tax policy is to facilitate international investment. This means that there are a wide range of exemptions from Irish withholding tax on dividends and interest paid by an Irish company and in respect of capital gains realised by a foreign shareholder on a disposal of Irish shares. In particular, dividends and interest paid to a company resident in a tax treaty partner country should generally be tax exempt.
Irish Corporation Tax Treatment - Option 2
There is a specific Irish tax regime, typically used in securitisation and structured finance transactions, applicable to Irish companies established in accordance with Section 110 of the Irish Taxes Consolidation Act. The regime has been in existence for over 20 years and effectively allows for corporation tax neutral treatment of Irish companies which hold and-or manage "financial assets" (e.g. shares, bonds and other securities). Investors hold their interest through securities or notes issued by the Section 110 company. The Irish Finance Act 2011 has extended the class of financial assets to "plant and machinery". In our view, this is very significant and will allow this favourable "tax neutral" regime to be used for securitisations involving aircraft and potentially also by lessors engaged in certain aircraft leasing operations.
Value Added Tax
From 1 January 2010 leasing services supplied by an Irish established lessor to a non-EU established lessee, or a business 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.
Leasing services supplied to an Irish established lessee will be subject to Irish VAT. Where the lessor is established outside of Ireland, the Irish lessee must self account for the VAT arising. The Irish lessee will be required to register for VAT in Ireland and make a VAT return to the Irish Revenue Commissioners. The Irish lessee will be entitled to claim a deduction for the VAT arising to it. This VAT accountability should not therefore result in an absolute cost for the Irish established lessee.
Any instrument that documents the purchase of title to an aircraft or part of an aircraft or an interest in an aircraft is not liable to Irish stamp duty.
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