Taxation plays a critical role in shaping aircraft rental strategies. Both lessors and lessees must navigate a complex landscape of local, national, and international tax regulations to optimize their financial outcomes. We explore how various tax considerations impact aircraft rental strategies, including the influence of sales tax, use tax, federal excise tax, and international tax treaties.

1. Sales Tax and Use Tax

Sales tax is typically levied by state or local governments on the sale of goods and services. In the context of aircraft leasing, sales tax can be applied to the purchase of an aircraft or to the rental payments made under a lease agreement.

The application of sales tax varies significantly by state. Some states, like Delaware and Oregon, do not impose a sales tax, making them attractive locations for aircraft transactions.

Certain states offer exemptions or incentives for aircraft leases. For example, Florida provides a sales tax exemption for aircraft that are leased to foreign lessees and are used primarily outside the state.

Use tax complements sales tax and is applied to the use of goods and services when sales tax has not been paid. For aircraft leases, use tax can be imposed on the rental payments. Lessees must be aware of the use tax obligations in the states where the aircraft is operated. Non-compliance can result in significant penalties and interest.

2. Federal Excise Tax

In the United States, the federal excise tax (FET) applies to commercial air transportation services. This includes certain aircraft leasing arrangements where the lessor provides a wet lease, supplying both the aircraft and crew.

The current FET rate for domestic flights is 7.5% of the amount paid for the transportation of persons or property, plus a segment fee for each passenger.

There are exemptions for certain types of operations, such as flights operated under Part 91 (general aviation) rather than Part 135 (commercial operations).

To minimize the impact of FET, some lessors and lessees structure their leases to qualify for exemptions or to reduce the taxable amount. For example, structuring a lease as a dry lease (without crew) can help avoid FET, as the lessee is responsible for providing the crew and other operational services.

3. Depreciation and Capital Allowances

Aircraft owners can benefit from tax depreciation, which allows them to deduct the cost of the aircraft over its useful life. This reduces taxable income and provides a significant tax shield.

In the U.S., the MACRS allows accelerated depreciation, enabling aircraft owners to take larger deductions in the early years of the asset’s life.

Recent tax reforms, such as the Tax Cuts and Jobs Act of 2017, have enhanced bonus depreciation rules, allowing for 100% expensing of new and used aircraft purchased before a certain date.

In some jurisdictions, similar to tax depreciation, capital allowances can be claimed on the cost of leased aircraft. These allowances reduce taxable income over time, benefiting both lessors and lessees.

4. International Tax Considerations

Double taxation treaties (DTTs) between countries aim to prevent the same income from being taxed in both jurisdictions. These treaties are crucial for cross-border aircraft leases.

Lease payments made to foreign lessors might be subject to withholding tax in the lessee’s country. DTTs often reduce or eliminate this withholding tax, making international leases more attractive.

Determining the tax residency of the lessor can affect the applicability of DTTs and the overall tax treatment of the lease payments.

5. VAT/GST Considerations

In many countries, VAT or GST is applicable to aircraft leases. These taxes are generally imposed on the supply of goods and services, including lease payments.

Some jurisdictions provide VAT exemptions for international flights or for aircraft used predominantly in international transportation. This can significantly reduce the tax burden on lease payments.

Businesses can often recover the GST paid on aircraft leases if the aircraft is used for business purposes. This recovery mechanism is essential for managing cash flow and reducing the effective cost of the lease.

Strategic structuring of lease agreements to take advantage of tax exemptions, incentives, and deductions is essential for minimizing tax liabilities and enhancing the overall profitability of aircraft rentals.

Sources

1. Helsell Fetterman. (2024). Navigating the Skies: Understanding Dry Lease Agreements in Aviation.
2. Shackelford, McKinley & Norton, LLP. (2024). Operational Control and Aircraft Leasing: What’s the Big Deal?
3. Essex Aviation. (2024). Aircraft Lease Agreements, Explained.
4. Azmi & Associates. (2024). Negotiating an Aircraft Lease Arrangement.
5. IATA. (2024). Aircraft Leasing Policy & Standards.
6. Federal Aviation Administration (FAA). (2024). Regulations and Policies.
7. International Civil Aviation Organization (ICAO). (2024). Chicago Convention and Annexes.
8. European Union Aviation Safety Agency (EASA). (2024). Regulations and Safety Standards.
9. Airservices Australia. (2024). Legal Framework and Compliance.