When the Exemption Does Not Apply

When the Airline Condition Fails

The exemption is available only where the recipient qualifies as an airline holding an Air Operator's Certificate (AOC). If the lessee is not a certified airline, for example, if it is a private company leasing an aircraft for corporate use, the supply falls outside the exemption. The transaction is therefore subject to VAT at the standard rate.

When the "For Reward" Condition Fails

To qualify for the exemption, the aircraft must be operated for reward, meaning it is used for commercial purposes. Recreational or private operations fall outside the scope of the relief. Accordingly, where an aircraft is leased to an entity using it primarily for private business or leisure travel, VAT must be charged on the supply. 

When International Transport is Not Chiefly Involved

The exemption is designed to support airlines engaged chiefly in international transport. In practice, this means that at least 50-60% of the airline's operations should be international. Where an airline operates primarily domestic routes or fails to meet this threshold, the exemption does not apply, and VAT becomes chargeable. 

Short-Term Leasing

Special rules apply to short-term hire of aircraft (30 days or less). In these cases, the place of supply is where the aircraft is actually made available to the customer. If the aircraft is delivered in Malta, Maltese VAT is chargeable, even if the aircraft is later flown internationally. 

Non-Airline Entities in Leasing Chains

As explored in Part 2, aircraft are often leased through SPVs and intermediaries. Where a supply is made to an entity that does not itself qualify as an airline, that transaction will generally be taxable, even if the aircraft is eventually used by an exempt airline downstream. Each step must be assessed separately, and exemptions cannot be extended across the entire chain. 

Why It Matters

These scenarios highlight that exemptions in aviation VAT are the exception, not the rule. The burden of proof rests with the supplier to demonstrate that the conditions are satisfied. Where they are not, the supply is subject to VAT at the standard rate, a cost that can materially affect cross-border leasing and operating structures.

Conclusion

The VAT exemption for aviation supplies is a valuable relief, but it is far from automatic. If any of the key conditions (airline status, operation for reward, chiefly international transport, or place of supply) are not met, VAT becomes chargeable. For airlines, lessors, and intermediaries, understanding these distinctions is critical. The difference between exemption and liability often lies in how precisely transactions are structured and documented. 

At Grant Thornton Malta, we combine technical expertise with industry insight to help clients navigate the complexities of aviation VAT. Whether assessing eligibility, structuring leasing arrangements, or ensuring compliance across jurisdictions, our team provides the clarity and confidence needed to keep your operations airborne and compliant. Contact us today to see how we can support your business.