Selling an aircraft: Location, location, location

13 Aug 2024

As we all know, selling an aircraft is a complex process. To help provide clarity to anyone involved in this procedure our tax team have created a short series of articles explaining the VAT and Customs implications. Drawing upon their experience from many years in practice they have created a guide to the most common do and don’ts for selling an aircraft.

This first article focusses on the key issue of where to sell the aircraft, what impact the location has on both seller and buyer and what you should consider before deciding on a jurisdiction to close a sale.

Why is the territory the aircraft is sold in so important?

From a VAT perspective, EU and UK VAT law focusses on where an asset – in this case the aircraft – is sited at the point of sale. As VAT can be triggered by transactions, the location of the aircraft will determine which country’s VAT laws apply. For example, if the aircraft is in France at the time of the title transfer, then French VAT laws will apply to the sale, equally if the aircraft is to be sold while sited in the UK, UK VAT laws will apply.

From a Customs import status perspective, if the aircraft has been imported into UK or EU territory by the seller, it could face losing its import status when the title is transferred to another party. Consequently, the new owner must either re-import the aircraft (if it is to be used in the same territory again) or consider whether the Customs relief regime of Temporary Admission can be used instead.

Why does it matter which country’s VAT rules apply?

Firstly, some countries do not have a VAT; the Channel Islands do not as they are not part of the UK for VAT purposes unlike the Isle of Man. Where the jurisdiction does not have such a tax system, the sale is potentially free from VAT and other tax obligations, although other local taxes or Customs requirements may still apply, for example the Island of Jersey has a Goods and Services Tax (GST) system. It is important to check such details thoroughly before finalising a jurisdiction to transact in.

Secondly, the jurisdiction chosen will not only affect whether VAT applies to the sale, but also whether the seller must register for VAT locally to account for that VAT. Having to register locally for VAT when the seller may not have any other activities in that territory can be both time-consuming and administratively burdensome. From the purchaser’s perspective, trying to reclaim VAT in a territory where they are not already established and VAT registered can prove difficult and slow which affects cash flow. Prior planning regarding sale location can help eliminate this headache from the transaction.

Registration for VAT is approached differently in various EU member states and jurisdictions. For example, where the sale is a one off transaction that is zero rated for VAT (such as a sale to an airline or “qualifying” AOC), some jurisdictions may permit the seller to apply to be exempted from registering for VAT on the basis that there is no VAT to account for, and the seller is not making any other “plus VAT” sales in that territory. Equally some jurisdictions or EU member states will insist on a VAT registration for the seller regardless of whether there is any VAT to pay or not. How long obtaining a VAT registration will take can vary significantly depending on the country of application.

Certain jurisdictions have special rules to permit VAT free sales under certain circumstances. In the UK it is possible to sell an aircraft VAT free providing it is in a UK Customs Warehouse without any requirement for the seller to register for VAT or to account for any VAT on the sale. This can also permit tax-free back-to-back sales, thus protecting all the sellers in the chain from any VAT consequences. However please be aware that some EU member states, for example, insist on an aircraft being formally exported from the jurisdiction prior to this, for Customs purposes.

In Switzerland it is possible to sell an aircraft VAT free in the local equivalent of the Customs regime known as Inward Processing. However, the Swiss tax rules require that this can only be done where there are actual works to be completed while the aircraft is in the Customs regime and checks are performed to ensure this is adhered to.

In summary, it is crucial to consider where the aircraft will be located when the transaction closes, considering the impact on both the seller and purchaser well in advance of finalising the arrangements will save you time, money and headaches.

Author: Greta Kemper, Tax Director, Martyn Fiddler

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