According to a recent opinion by the Advocate General (AG) of the Court of Justice of the European Union (CJEU), the scope of the VAT exemption for the supply and lease of aircraft should be broadened. If the CJEU decides to follow the AG's opinion, the application of this VAT exemption is likely to be available more often than is currently the case.
In the latest indirect tax newsletter published by KPMG Meijburg & Co, tax lawyers, two tax advisors specialized in EU VAT, Rahiela Abdoelkariem and Andy van Esdonk commented: "Such a favorable outcome will result in less VAT throughput and therefore an increase in working capital and an improvement of the cash flow position".
Abdoelkariem and van Esdonk refer to the case pending at the CJEU concerning the company "A Oy" that acquired aircraft in Finland. The aircraft were leased to another company "B Oy", which operates an international charter airline. The Finnish tax authorities issued VAT assessments to A Oy, because the company did not report VAT on the acquisition of aircraft in Finland, and because the tax authorities felt that the company was not entitled to recover this acquisition VAT.
According to the tax advisors of KPMG Meijburg & Co, the facts of the case show that A Oy considers that it did not have to report VAT on the acquisition as it was entitled to apply the VAT exemption.
The 2004 CJEU judgment in the Cimber Air case (C-382/02) laid down the conditions for the VAT exemption. In this judgment, the CJEU confirmed that the supply and lease of aircraft are VAT exempt if used by airlines chiefly operating for reward on international routes.
KPMG Meijburg & Co continues: " this 'qualifying airline test' differs across EU Member States. Even within EU Member States we experienced local tax inspectorates may hold opposite views.
The AG recognizes that the VAT exemption has never been tested before in this context. Referring to the questions raised by the Supreme Court of Finland, she concludes that the VAT exemption should be available if the company purchasing the aircraft is not a qualifying airline, but leases the aircraft to a qualifying airline. The AG is of the opinion that the objective of the VAT exemption is to provide international transport with relief from VAT until final consumption. She also argues that the principle of neutrality in competition requires aircraft purchased by a qualifying airline or by a lessor to be treated equally."
The VAT exemption should also be available if the lessee is a charter airline rather than an airline with scheduled routes. According to the AG, the 'qualifying airline test' also covers charter airlines. She argues that the national or international nature of the activities chiefly carried on by the airline prevails over a specific charter or scheduled use of aircraft.
Abdoelkariem and van Esdonk say this is an important opinion for the aircraft industry and other industries owning or operating business aircraft. Companies that may be affected include aircraft manufacturers, leasing companies, airline operators, intermediaries, banks and businesses with company jets and suppliers provisioning such aircraft.
Tax authorities across the EU may only allow the VAT exemption if a qualifying airline purchases aircraft. According to the tax advisors, if the CJEU follows the AG's opinion, these tax authorities should adopt a less restrictive position on the application of the VAT exemption, allowing it to be applied more often than is currently the case.
"If you are a customer, the VAT exemption does not trigger VAT on aircraft supplies and leases, subject to the conditions set out above. This negates the necessity of setting aside funds for any VAT due. This may result in less VAT throughput, an increase of working capital and therefore improve your cash flow position. The VAT exemption is also important if a business cannot fully or partially recover input VAT. This may also be the case if the private use of aircraft results in an input VAT recovery correction. If you are a supplier, your customers may request that you apply the exemption on aircraft supplies and leases."