Cyprus VAT Aircraft Leasing Scheme (VALS)

A Comprehensive Guide to the Cyprus Aircraft Leasing Scheme

The Cyprus VAT Aircraft Leasing Scheme (VALS) was established in 2015 by the Cyprus Tax Authorities as a strategic move to position Cyprus as an attractive aviation hub. Aimed at High Net Worth Individuals, the scheme offers a considerable reduction in VAT for private aircraft registration – down to an effective rate as low as 3.8%. This has marked Cyprus as a competitive jurisdiction within the European Union for private aircraft registration.

Understanding the Leasing Scheme

The VALS applies to private aircraft owned by a Cyprus VAT registered company. This company leases the aircraft to any physical or legal person who is established or permanently resides within the Republic of Cyprus and is not engaged in any business activity concerning the aircraft.

The leasing agreement is a contract where the lessor, the owner of the private aircraft, allows the lessee to use the aircraft for a certain consideration. The Cyprus Tax Authorities have introduced fixed rates based on the aircraft’s maximum takeoff weight and engine type, eliminating the need for travel logs as proof of usage.

The place of supply rules as per article 56 of the EU VAT Directive and the use and enjoyment provisions of article 59a(a) applied through the Cyprus VAT Laws serve as the basis for this scheme.

Conditions for Reduced VAT Rates

For the VALS to apply, the following conditions must be met:

a) The lessor must be a Cyprus resident and VAT registered company. This implies that a newly established Cyprus company must be registered with the VAT Authorities in Cyprus and get a VAT number.

b) The aircraft should fly to Cyprus within two months from the date the lease agreement comes into effect.

c) The value of the aircraft must be ascertained via the purchase documentation or an independent valuation, as required by the VAT Department.

d) The maximum takeoff weight and engine type are determined as per the constructor’s certificate.

e) The lessee must contribute a minimum initial contribution of 40% of the aircraft value. This is subject to VAT at the reduced effective rate based on the aircraft specifications.

f) Lease payments must be monthly, and the lease agreement should not be shorter than 3 months (91 days) or longer than 60 months.

g) Over the length of the leasing agreement, the lessor must make a profit of no less than 5% of the aircraft value. This means that the total value of the lease agreement should be the purchase value of the aircraft plus an additional minimum 5% margin.

h) The final payment under the option to purchase the aircraft by the lessee cannot be less than 2.5% of the aircraft value. This final payment is always subject to the standard VAT rate (19% as of 13/01/2014).

Application Process

Before the scheme can be implemented, an application and written approval from the Commissioner of Taxation are necessary. The following certificates must be submitted alongside the application:

a. Noise Certificate
b. Type Certificate (Manufacturer)
c. Certificate of Airworthiness
d. Airworthiness Review Certificate

Despite the application, the aircraft is not required to be registered in Cyprus. It may be registered on the register of any national aviation authority globally. Upon approval from the Cyprus VAT Authorities, a VAT paid certificate will be issued to the lessee if they have exercised the option to purchase. The Cyprus Customs Department will issue a T2L certificate upon settlement of the 40% initial contribution required under the VALS scheme.

Aircraft Usage and VAT Charges

The fixed rates established by the Cyprus Tax Authorities are shown in the following table and indicate the percentage (%) of use within the EU airspace, based on aircraft type and maximum takeoff weight. For private aircraft used exclusively within Cypriot airspace, the leasing is subject to VAT under the standard rate of 19%.

In conclusion, the Cyprus VAT Aircraft Leasing Scheme is a significant incentive for individuals and businesses to register their private aircraft in Cyprus. It reduces the VAT burden on the aircraft’s acquisition and use, providing economic benefits and encouraging the growth of the Cyprus aviation sector. However, careful planning and structuring are required to ensure all the conditions are met and the maximum benefits derived.

TABLE SHOWING THE VAT % BASED ON USE WITHIN EU AIR SPACE

Aircraft Type	Weight on Take Off	Percentage of Use Within EU	Effective Tax Rate	VAT %
Piston	Light: 1kg – 3,000kg	100%	100% of the consideration x 19%	19.00%
	Small: 3,001kg – 5,700kg	80%	80% of the consideration x 19%	15.20%
	Medium: 5,701kg – 15,000kg	60%	60% of the consideration x 19%	11.40%
	Large: Over 15,001kg	40%	40% of the consideration x 19%	7.60%
Turbo	Light: 1kg – 3,000kg	55%	55% of the consideration x 19%	10.45%
	Small: 3,001kg – 5,700kg	45%	45% of the consideration x 19%	8.55%
	Medium: 5,701kg – 15,000kg	35%	35% of the consideration x 19%	6.65%
	Large: Over 15,001kg	25%	25% of the consideration x 19%	4.75%
Jet	Light: 1kg – 3,000kg	50%	50% of the consideration x 19%	9.50%
	Small: 3,001kg – 5,700kg	40%	40% of the consideration x 19%	7.60%
	Medium: 5,701kg – 15,000kg	30%	30% of the consideration x 19%	5.70%
	Large: Over 15,001kg	20%	20% of the consideration x 19%	3.80%

Operational Example

Consider a jet aircraft with a maximum take-off weight of 16,000 kg. As per the given table, a jet of this weight falls under the “Large” category, hence the effective tax rate would be 20% of the standard VAT rate of 19%, equating to 3.8%.

Suppose the initial value of the aircraft is €60,000,000. A lease agreement is made for the maximum allowable period under the VAT scheme, which is 60 months. At the commencement of the lease agreement, the lessee will pay 40% of the aircraft’s value, and the balance will be payable over the remaining 59 months. Additionally, a purchase option value is set at 2.5% of the initial value (€1,500,000), and a profit margin of 5% must be maintained for Corporate Income Tax purposes.

Let’s break down the VAT due:

VAT due upon payment of the 40% at the beginning of the lease period is calculated as (40% * €60,000,000 * 3.8%), resulting in €912,000.

VAT due on all the regular monthly installments is calculated as (60% * €60,000,000 * 3.8%), amounting to €1,368,000.

VAT due on the additional 2.5% spread over the regular monthly installments is calculated as (2.5% * €60,000,000 * 3.8%), which equals €57,000.

So, the total VAT due on the lease scheme is €912,000 (initial VAT) + €1,368,000 (VAT on installments) + €57,000 (VAT on purchase option), amounting to €2,337,000.

The effective VAT rate for this transaction would be (Total VAT / Initial value of aircraft) * 100, which equals (€2,337,000 / €60,000,000) * 100 = 3.895%. Thus, the effective VAT rate for this transaction is approximately 3.895%.

Without the leasing scheme, the VAT would be applied to the full value of the aircraft at the standard VAT rate of 19%. So, the total VAT without the leasing scheme would be (€60,000,000 * 19%) = €11,400,000.

As calculated in the example, with the leasing scheme, the total VAT paid would be €2,337,000.

Therefore, the total saving due to the leasing scheme would be (€11,400,000 – €2,337,000) = €9,063,000.

In conclusion, by opting for the leasing scheme, the lessee can potentially save approximately €9,063,000 in VAT payments. This calculation highlights the potential financial advantages of the leasing scheme for companies operating large aircraft within EU airspace.