The EU VAT Directive provides for a VAT exemption for the supply, modification, repair, maintenance, chartering and hiring of aircrafts used by airlines operating for reward chiefly on international routes, as well as the supply, hiring, repair and maintenance of equipment incorporated or used therein (article 148(e) of the VAT Directive). Following questions from a Finnish Administrative Court (FAC) regarding the application of this VAT exemption, the Court of Justice of the European Union (CJEU) clarified the scope of this VAT exemption in its ruling of 19 July 2012 (case C-33/11 A Oy).
In 2002 and 2003, the Finnish company A Oy bought two jet aircrafts from a French supplier. A Oy was listed as the owner of the aircraft, while B Oy was designated as the user of the aircraft. B Oy organised international charter flights and ensures maintenance and management of the aircraft. B Oy invoiced A Oy in that respect for the costs of maintenance work on the aircraft and for flights. B Oy was also allowed to hire the aircraft from A Oy for its own commercial purposes.In 2003 and 2005, A Oy resold both jet aircrafts to an entity in Cyprus.
The FAC took the view that the purchase of the aircraft was a VATable intra-Community acquisition to be reported by A Oy, since A Oy did not operate flights for reward on international routes but merely acted as the owner of the aircrafts. The FAC was also of the opinion that B Oy did not operate flights chiefly for reward on international routes since the aircrafts were only used for personal transportation needs. A Oy appealed against this decision by arguing that the acquisition should be VAT-exempt since the aircrafts were purchased by A Oy and entrusted to B Oy, an airline operating for reward chiefly on international routes. In this regard, the Finnish court asked the CJEU to clarify the VAT exemption for aircraft supplies.
Firstly, the CJEU ruled that there is no objective reason for treating airlines operating on international routes differently for VAT purposes, even if one of them operates mainly by providing charter flights while the other provides scheduled flights or when the aircraft concerned is used either for charter flights or for scheduled flights. According to the CJEU, the purpose of the VAT exemption for aircraft supplies is to provide an exemption for the supply of aircraft when they are intended chiefly for use on international routes. Following the principle of fiscal neutrality and in order to eliminate distortion in competition as a result of differing treatment for VAT purposes, the VAT exemption for aircraft supplies should apply to scheduled flights as well as charter flights.
Further, the CJEU ruled that the VAT exemption for aircraft supplies must apply if the supplied aircraft will be used by an airline which operates for reward chiefly on international routes (i.e., both where such qualifying airline acquires the aircraft directly as well as the situation where another operator does so with the aim of assigning the right to use the aircraft to that qualifying airline), provided that at the time of the transaction the intended use by of the aircraft by the airline is known.
Finally, the CJEU ruled that it does not matter if the operator who acquired the aircraft disposes of the aircraft to an individual who uses the aircraft chiefly for his own business and/or private purposes, provided that the airline can also use it for other international flights. The only criterion for determining the applicability of the exemption is whether an aircraft is used by a qualifying airline. As long as the acquiring company can prove that the aircraft is genuinely intended and will be effectively used for commercial exploitation by a qualifying airline, any partial use of the aircraft for private purposes will not be of any significance.