International Passenger Transport
One of the most visible and frequently encountered areas where VAT applies in aviation is passenger transport.
Under Maltese VAT law, specifically item 4(1) of Part One of the Fifth Schedule to the VAT Act, “the international transport of persons, the transport of luggage and services related to the international transport of passengers” are treated as an exempt with credit supply.
This exemption is in line with Article 148 of the EU VAT Directive (Council Directive 2006/112/EC). In practice, this means that when an airline transports passengers from Malta to Italy, no VAT is charged to the customer, provided the airline holds a valid Air Operator Certificate (AOC). The AOC is essential because it proves that the operator is authorised to carry out commercial air transport services.
It is also important to stress the scope of the exemption. The exemption only applies in the case of international transport. Domestic flights or services that fall outside these conditions are subject to VAT at the standard rate.
The Bigger Picture
At first glance, international passenger transport may appear relatively simple under VAT rules, either it qualifies for exemption, or it doesn't. But aviation rarely operates in such a straightforward manner. Airlines often do not own their aircraft and instead rely on a variety of leasing arrangements that determine whether VAT applies, and if so, how.
And here is where the complexity truly begins.
Is the supply of an aircraft a supply of goods, or is it a supply of services?
How does VAT treatment change depending on whether the lease is "dry" or "wet"?
And when, if at all, does the exemption extend to leasing transactions?
The supply of an aircraft is generally treated as a supply of goods, although when operational services such as crew or maintenance are included, it can be considered a supply of services. The distinction between a dry lease (aircraft only) and a wet lease (aircraft plus crew and services) is therefore crucial, as it can influence the VAT treatment. Furthermore, the VAT exemption that applies to international passenger transport may extend to leasing transactions, but only if the lessee is a certified airline operating for reward and chiefly on international routes.
Conclusion
Navigating VAT in aviation isn't just about knowing the rules, it's about understanding how they apply in a constantly moving, cross-border environment. Whether you are an airline operator, lessor, or service provider, the complexity of VAT treatment in international transport and leasing structures can be daunting.
At Grant Thornton Malta, our experienced VAT team is here to help you make sense of it all. From interpreting the latest guidelines to advising on dry and wet lease arrangements, we support aviation businesses in identifying the correct VAT treatment for their operations. Wondering whether your leasing structure qualifies for exemption? Or if your supply is considered a service or a good? We'll guide you through it, so you can focus on what you do best, while we take care of the rest.
Coming Next Week:
In Part 2 of our series, we'll dive deeper into Aircraft Leasing and Leasing Chains, exploring how different leasing models impact VAT treatment across jurisdictions. Stay tuned!
