Selling an aircraft: Tax clauses in contract

23 Aug 2024

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

In the third of the series, we move on to discuss the importance of considering potential tax liabilities before finalising the sale and purchase  agreement.

We often become involved in a sale and purchase late on in the process, and asked to analyse and assist with potential liabilities that might arise from a transaction that has already been set in motion. Difficulties can arise when what was envisaged at the time of signing the Asset Purchase Agreement (and the terms contained within it) are no longer sufficient to cover all tax bases at the time of closing the sale. This is particularly true when the parties have agreed a location for the closing of the sale which might now generate an unforeseen tax liability.

We would always recommend that parties talk to their tax advisors before finalizing the drafting of the Asset Purchase Agreement (APA). In all cases VAT and additional taxes must be considered carefully to ensure the intended consequences are reflected in the documentation. The allocation of the liability for any VAT on the sale should be clearly stated, although the seller should still be aware that any tax authority will look in first instance to the seller to account for the correct VAT, and will consequently assess the seller – not the buyer – for any tax adjudged incorrectly charged.

In addition to considering the VAT treatment and customs implications of a closing jurisdiction, the import status of the aircraft must also be considered. For example, if an aircraft has been UK or EU imported, the closing jurisdiction will usually determine whether the aircrafts current import status can be retained. Therefore, the decision process for a suitable closing jurisdiction will not just be determined by VAT and customs implications, but by the parties preferences regarding keeping the aircrafts import status.

When a closing jurisdiction has been chosen, it is important to consider any additional VAT risks that should be covered. For example, as explained in our previous article, there are various conditions to comply with to ensure no VAT is due on a VAT export sale. All steps to be taken and evidence to be provided by both parties should be clearly documented in the APA, ensuring all requirements are clearly understood.

Contracts should be drafted in a sufficiently broad way so that it can outline how both parties will work together to respond to any challenges to tax treatment by the relevant tax authorities.

In conclusion, considering tax consequences in advance, prior to finalizing the APA can really simplify matters. Seeking professional tax advice helps mitigate risk by ensuring all factors are considered, and VAT and Customs implications and subsequent requirements are fully understood in advance. Avoid the risk of becoming compromised further down the line.

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