Guernsey’s 2-REG Aircraft Registry – the tax angle
Partner | Tax Deloitte LLP
Guernsey’s introduction of its Aircraft Registry, the 2-REG, in December 2013 provided another excellent opportunity to shine the spotlight on Guernsey and to showcase what it has to offer international clients looking for bespoke solutions and excellent standards of service. As has been pointed out in many articles since the launch, Guernsey continues to be attractive because it offers innovative and fully serviced wealth management and financial services solutions to individuals and corporates from all over the world from the full range of financial, legal, accountancy and fiduciary providers.
However, so far, not much has been said about tax. Is there a tax angle?
Of course! Clients who wish to establish a vehicle to hold their aircraft, regardless of where that aircraft is registered, may choose a Guernsey incorporated company and therefore take advantage of the benign tax regime which applies. Guernsey’s corporate tax regime, known as Zero 10, has a general rate of company tax of 0% with a narrow intermediate rate of 10% applying to certain banking activities as well as the income of regulated fiduciary activities and certain types of insurance business. Income from local property and regulated utilities is taxed at 20%.
A company established to own an aircraft would be subject to 0% tax on any income. If the company was owned by non-residents and did not have any employees, its tax filing position would be very simple with no tax computations or accounts required but rather an annual “tick box” return filed online. In addition, the company's shareholders could waive the requirement for an audit which would further reduce costs.
Other attractions of Guernsey's tax regime include the fact that there is no capital gains tax, capital transfer tax, inheritance tax, VAT or GST. Furthermore, dividends, interest and royalties can all be paid from the company to a non-resident with no requirement to deduct Guernsey tax.
Those who wish to relocate to Guernsey will find the personal tax regime equally appealing with a 20% rate of income tax capped at a maximum of £220k per annum (or £110k for non-Guernsey source income only) – highly attractive for its simplicity.
But is it all as simple as that?
From a corporate tax perspective a key consideration is to ensure that the company preserves its Guernsey residence status for tax purposes and does not inadvertently find itself subject to corporate taxes in other countries. To the extent that the company generates any income, it is important to ensure that the central management and control, as well as the general running of the company, takes place in Guernsey, ideally with the appointment of directors who are resident in Guernsey and therefore able to make any decisions regarding the company in Guernsey.
A key point to bear in mind with the 2-REG (in common with other similar registries) is that 2-REG registered aircraft are prohibited from being operated for commercial air transport purposes, which means that the aircraft cannot be used for the carriage of passengers or cargo in return for payment. Hence aircraft registered in Guernsey will typically be used by individual owners and their families or by companies in order to transport their employees. As such, the way the aircraft is used is unlikely to have an impact from a corporation tax perspective unless there is a question around a tax deduction for the lease/depreciation cost of the aircraft and of course the ultimate sale of the aircraft could be significant for corporation tax purposes. In contrast, the VAT regime works quite differently and presents some additional considerations!
Where an aircraft is registered and whether or not VAT has to be paid are two separate questions. Non-Guernsey based, Guernsey-registered aircraft will not be subject to any greater or lesser amount of VAT as a result of registering in Guernsey. Guernsey does not have VAT or GST and therefore registering an aircraft in Guernsey or importing an aircraft into Guernsey will not in itself result in VAT being payable in Guernsey. If a Guernsey-registered aircraft is purchased outside of Guernsey or is imported into a country other than Guernsey then VAT may be payable, depending upon the rules of the country in which it is purchased or into which it is imported.
VAT usually applies depending on very specific “place of supply rules” which need to be analysed to understand where the sale or lease is treated as taking place for VAT purposes. For supplies of goods, such as the sale of an aircraft, this is typically linked to the physical location of the aircraft when it is sold but if this is outside the EU and the aircraft then flies into the EU, VAT may be due on importation. Leases of aircraft may be supplies of goods or services depending on the terms and duration of the lease – so again, other VAT rules may need to be considered.
The VAT analysis of aircraft transactions can be complex but the next few sections set out the basic rules.
VAT is a European tax which is based on a single piece of law, called the Principal Directive, which, broadly speaking, governs the way VAT is implemented within national law. As such, when, for example, analysing the VAT implications of a transaction which takes place in the UK, it is important to refer to the UK’s VAT Act. However, when considering more widely how transactions are treated across the EU, it is helpful to refer to the Directive, as well as considering the national legislation and practices of the member state(s) involved. VAT is not a tax on profit but applies to the gross transaction value (sales proceeds, lease charge). If VAT is incurred, for example on the purchase of the aircraft or importation into the EU, the VAT may be recoverable by the recipient if they are registered for VAT in the EU and if they can demonstrate the VAT has been incurred for a business purpose. In addition, there is a relief from VAT for certain aircraft (essentially a 0% VAT rate) but this only applies to those aircraft “used by airlines operating for reward chiefly on international routes”. As already noted, the Registry will not permit an aircraft to be registered if it is carrying out commercial air transport operations and so it is highly unlikely that any 2-REG aircraft will benefit from the VAT zero rating.
If an aircraft owned by a non-EU resident is flown into the EU, the aircraft can remain there for up to six months with no VAT liability arising due to the Temporary Importation regime. If a more substantial presence is required, and if the aircraft is being used and flown in and out of the EU, then VAT may be due on importation. If the company is using the aircraft within a business (for example, flying employees as part of their job) it should be possible to ensure that such VAT charged is recoverable. This means that VAT-registered owners permanently importing a Guernsey-registered aircraft into the EU to use for business purposes should be able to recover any VAT incurred. If the owner of the aircraft to be imported is not VAT-registered, or if the aircraft is not being imported into the EU for business purposes, then VAT will be payable. Certain EU member states allow for an aircraft that is to be used for both business and pleasure to be imported into the EU via that member state if VAT is paid in relation to the proportion of the use that will be for pleasure.
As indicated above, the VAT place of supply rules are a minefield and the analysis can be complex to determine where a sale or lease takes place for VAT purposes; it is therefore prudent to take specialist advice in relation to each particular aircraft.
Although not relevant to the 2-REG, other rules to watch with aircraft surround the VAT treatment of chartering. The rules can change depending on whether the charter is for more or less than 30 days, the nature and size of the aircraft, who is the operator and who is the customer! Furthermore, the rules are sometimes different even within the EU!
Any transactions with third parties should involve careful consideration of the possible impact of VAT, as at rates averaging 20% that apply to the value of the asset (not the gain) it could be a significant cost to mismanage.
What about duty?
Guernsey has a special “hybrid” status being within the EU customs union, allowing goods to move around free of duty, but outside the EU for VAT purposes. This can provide advantages although only to the extent that the physical movement of the goods is to or from Guernsey. The rate of customs duty for most aircraft is typically 0% according to the customs tariff applied across the European Union. However, care needs to be taken where goods are transported on board the aircraft as these could be subject to customs or excise duty on importation. Furthermore, duty rates outside the EU could be higher and so specific advice should be sought depending on where the aircraft will be used.
Guernsey has raised its profile as a highly transparent and co-operative regime at an international level with a tax regime that is attractive to clients wishing to establish asset-holding structures. The registration of an aircraft on the 2-REG allows an owner to enjoy the highest standards of safety oversight, customer service and convenience without any tax disadvantage. However, international tax and VAT rules are complex and the rates can be high and therefore it is essential that comprehensive and bespoke tax and VAT advice is sought in order to avoid any inadvertent costs arising.