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This Month's Roundtable - The Answers
Aircraft Leasing
The Finance (No.2) Act 2023 contained a number changes that aim to give clarity around areas including capital allowances and the calculation of profits for both lessors and lessees. Can you outline the changes and the implications for aircraft leasing companies operating from Ireland?

Marine Opperman, Manager, Corporation Tax, Deloitte: Finance (No.2) Act 2023 contains a number of changes to the corporation tax treatment of leases, which are relevant not only to leasing companies but also to other trading companies that lease assets in a capacity as lessee. With respect to the implications for aircraft leasing companies operating from Ireland specifically, there are broadly three main categories of changes to be aware of that could impact the calculation of taxable profits.
Marine Opperman
Marine Opperman

The first requires some context: A large driver for some of the changes to existing law through Finance (No.2) Act 2023 follows confirmation from Irish Revenue that they were essentially terminating all of their historic leasing practices at the end of 2023. Where these practices were not codified in law, Finance (No.2) Act 2023 was expected to codify practices to be retained. A significant implication flowing from this is how lessors determine their trading status for the purposes of qualifying for the Case I 12.5% corporate tax rate. Moving away from historic practices may be of particular significance for single aircraft owning entities (SAOEs) and finance companies in aircraft leasing groups. While the newly updated Tax and Duty manual on leasing (effective from 1 January 2024) does not specifically preclude such entities from being considered trading, general case law principles should be applied to the specific facts and circumstances to determine if trading status can be supported. Therefore, lessors should review their existing asset owning and financing deployment structures (including existing cash pooling and internal financing structures) to determine if trading status can be supported or if amendments are required. In this regard, the new Qualifying Financing Company regime introduced should be borne in mind as a further alternative for structuring the flow of cash and finance within a leasing group.

Secondly, changes have been made to S.403 TCA 1997 which apply from 1 January 2024. S.403 TCA 1997 provides, broadly, that capital allowances on leased plant and machinery may only be set off against certain categories of income and profits (known as the “leasing ring fence”). Finance (No.2) Act 2023 expands the scope of items included in the ring fence by adding certain financing and other activities (“lease adjacent activities”) and by introducing the concept of a new and wider “leasing business group”.

These generally are welcome expansions and are relevant also to the design of a revised internal financing / cash pooling structure in aircraft leasing groups in the post 2023 environment. It should be noted that the new S.403 TCA 1997 also brings about additional CT1 disclosure requirements.

Lastly, Finance (No.2) Act 2023 aims to codify a number of changes around the taxation of finance leases with several changes to, amongst others, S.76D and S.299 TCA 1997. Historically, under generally prevailing practice lessors earning income from assets leased out via finance leases where the lessor did not claim capital allowances on the asset were subject to tax only on the accounting interest margin charged to the profit and loss account. The amended legislation now codifies that practice but adds a number of additional requirements (including additional disclosure requirements in the CT1) that apply from 1 January 2024, some of which are onerous. Finance lessors would be well advised to take note of these important changes and their impact not just on new leases, but also existing finance leases.

Finance (No.2) Act 2023 includes also other changes which could impact the calculation of taxable profits for Irish aircraft lessors not discussed above and therefore lessors should review these changes with their tax advisors as soon as possible.

Ted O’Byrne, Tax Consultant, Maples Group: This article highlights recent Irish tax changes relevant to the aviation leasing industry. The Irish aviation leasing industry has grown to the point that an Irish-leased aircraft takes off from a runway around the world every two seconds. Ireland’s attractiveness to investors can be attributed to a competitive tax regime, a comprehensive double tax treaty network as well as its skilled workforce within the financial services sector. Any tax changes are significant and will impact this complex ecosystem.
Ted O'Byrne
Ted O'Byrne

The first change to highlight is not entirely legislative. It is a change in Irish Revenue practice. Traditionally, Irish aviation lessors would seek to obtain the benefits of Ireland’s 12.5% trading tax rate. Trading presupposes there is some activity conducted in Ireland and a trading model involves employees, office space and key economic decisions and actions being located in Ireland. However, one of the features of aviation, is the use of “special purpose vehicles” which would only undertake a small number of functions. There are companies which may hold a single aircraft on lease, or which would be used to provide funding to other group companies. Such structures are common to facilitate bank lending and isolate risk. Historically, Irish Revenue would accept that each such entity was trading, provided it was part of an active trading group. However there has been a gradual change in approach from Irish Revenue. The trading status of such entities must now be much more closely scrutinised with the role of entity, it’s resources and activity levels being judged on a standalone basis. If there is not sufficient activity then the entity will not be trading. It will be taxed under Ireland’s less favourable corporate tax rules for passive income and taxed at 25%.

Entities which are just involved in a single lease should consider their treatment. In particular, if the active management of the lease is outsourced to a third party, such as an Irish based servicer, there is a need to clearly demonstrate that this servicer is under the control of the board, and that the board has a high level of involvement in the activities.

Where an entity is used as a group finance company, there appears to be a clear intention to remove trading status from such entities if they do not have sufficient activity. The most recent Irish Finance Act (Finance (No.2) Act 2023 (the “Act”)) introduces a new concept of a “Qualifying Financing Company”. This provides for specific tax treatment (and therefore certainty) for companies engaged in intra-group financing. However, interest deductibility limited to third party debt and a number of other conditions must be met. This has led to significant restructuring requirements for groups which had relied on tax advice which was based on the old practice-based approach.

The Act introduces other legislative changes. Firstly, in relation to finance leases, there has been a change which impacts historic treatment. Previously, Irish Revenue allowed finance lessors to be taxed on their finance margin, rather than their gross revenue, where the lessee claims capital allowances (tax depreciation) on the aircraft. The Act puts this treatment on a statutory footing. The Act introduces additional changes relating to spreading of revenue evenly over the life of the lease irrespective of the accounting treatment. All of these changes could impact existing groups and structures and require some level of review as they will likely be questioned as part of an annual audit for 2024.

The major alternative to trading structures is the Irish “section 110 regime”, which is so called because of section 110 of the Irish Taxes Consolidation Act 1997 which it operated under. Although the treatment of section 110 companies is currently part of the general review of the taxation of Irish investment products, the model has remained unaffected by the recent changes for aviation lessors. While subject to its own specific anti-avoidance provisions, it remains a viable option for lessors who do not have substance.

The Act also introduced new Irish withholding tax measures on payments of dividends, royalties and interest payments to zero tax jurisdictions or EU non-cooperative jurisdictions where those payments are made to associated entities. This has particular relevance for aviation structures where an ultimate holding company can be based in such a jurisdiction.

Finally, the Act has also transposed the EU Global Minimum Tax rules into Irish domestic law. This may have implications for some of the larger leasing structures as it applies to entities and groups with more than EUR750 million of annual revenues. This can result in the imposition of a minimum tax rate of 15% on certain groups.

Overall, lessors should be consulting with their advisors on these changes and where appropriate, considering the potential impact and where appropriate, restructuring to mitigate unwanted effects. Ireland remains an excellent jurisdiction within which to base aircraft leasing platforms, however, it has taken steps to legislate for initiatives such as the Global Minimum Tax and to remove certain historic practices in an effort to sustain the regime for the coming decades.

Finally, and by way of note, the implementation of the Pillar Two minimum effective rate from 2024 is another development that will have to be carefully considered by those companies falling within the scope of Pillar Two. In particular, those companies claiming the PDE will need to consider how such dividends are assessed and treated under the Pillar Two rules.

This article appeared in the March 2024 edition of the Irish Tax Monitor.