Taxation of aircraft financing in Germany

Transcription

1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Taxation of aircraft financing in Germany Briefing September Introduction German law does not define what leasing is nor is there a separate set of rules dealing with leasing in particular. For civil law purposes, a lease is generally treated as a special form of use agreement against consideration which is akin to a rental agreement but may also contain elements of a loan and other agreements which are defined by German statutory law. Practically, the most common forms of leases in Germany are operating leases and financial leases. 1.1 Operating lease Operating leases are usually treated as regular rental agreements under German law. They can be entered into for an indefinite period of time and may be terminated by both parties. The lessor normally bears the risks and rewards attached to the asset and is often also responsible for repairs, maintenance and insurance. Upon termination of the agreement, the lessee simply has to return the asset without any further obligation. 1.2 Finance lease By contrast, finance leases are typically structured in such a way that the lessee pays a certain amount on a regular basis to the lessor during a fixed term for the use of the asset. The agreement cannot be terminated during the fixed term, so that it represents a stable calculation base for the lessor. Typically, in these cases, the lessee bears the risks attached to the asset, in particular risk of loss, destruction, etc. As a result, it is the lessee who bears the investment risk. Depending on whether the lease payments during the fixed lease term cover the lessor s acquisition or production costs and his ancillary and financing costs, full pay-out agreements are distinguished from non full pay-out agreements.

2 2 Accounting principles German accounting principles are based on the German Commercial Code (Handelsgesetzbuch HGB). As the German Commercial Code does not contain specific rules for the accounting of leasing assets, accountants follow the tax rules set by the German Federal Ministry of Finance for the allocation of lease assets in the balance sheet. The tax rules for the allocation of leases are based on the principle of economic ownership (Section 39 General Tax Code Abgabenordnung AO). This means that economic assets are generally allocated to the legal owner. However, where someone other than the legal owner exercises effective control over an economic asset in such a way that he can, in practice exclude the owner from using the economic asset during the normal period of its useful life, the economic assets will be attributable to this person. For the interpretation of this general principle, the German Federal Ministry of Finance distinguishes between full pay-out leases (financial leases) and non full pay-out leases. A full pay-out lease (financial lease) requires the following: An agreement with a fixed leasing period during which ordinary termination is not possible; The lease payments during the fixed leasing period cover at least the acquisition or production costs, plus additional costs, including the lessor s refinancing costs. Where these requirements are not fulfilled, the German Federal Ministry of Finance assumes a non full pay-out lease. 2.1 Treatment of full pay-out leases (financial leases) Allocation of aircraft as between the lessee and lessor in the case of full pay-out leases (financial lease) Type of Lease Without renewal or purchase option With purchase option With renewal option Purchase price < Book value at sale Purchase price Book value at sale Additional lease payments < remaining book value (determined according to straight line method) Additional lease payments remaining book value (determined according to straight line method) Fixed lease period 40%-90% of useful life of aircraft* Lessor Lessee Lessor Lessee Lessor Fixed lease period < 40% or > 90% of useful life of aircraft Lessee Lessee Lessee * The useful life of aircraft is determined on the basis of tables issued by the Federal Ministry of Finance. The Federal Ministry of Finance assumes a useful life of years for aircraft. N.B. In cases of special leasing, i.e. where the asset has been designed specifically for the lessee s requirements and can reasonably only by used by the lessee, commercial ownership is generally ascribed to the lessee. 02 Norton Rose Fulbright September 2013

3 Where the commercial features of a lease do not exactly fit the criteria set out by the German Federal Ministry of Finance, economic ownership in general and in relation to aircraft in particular must be determined on a case-by-case basis. Unless indicated otherwise below, the allocation rules for assets in general can be applied to aircraft. Broadly, the key issue is who bears the risks and rewards of the leased aircraft. Criteria for the determination of the economic ownership are: whether or not the lessee has an option to acquire the aircraft for a fixed purchase price at the end of the lease term; who bears the risk of a total loss of the aircraft; whether the risks or rewards of a sale of the aircraft reside with the lessor or the lessee; who is responsible for the maintenance works during the lease term. 2.2 Treatment of non full pay-out leases over aircraft Decrees by the Federal Ministry of Finance deal with three types of non full pay-out leases which run over a fixed period of more than 40% but less than 90% of the useful life of a movable asset (here aircraft). The following lease terms normally should not affect economic ownership of the lessor: Obligation on the lessee to purchase the leased aircraft at a pre-determined price upon request of the lessor if the lease is not renewed at the end of the fixed lease period. Obligation on the lessee to reimburse a loss of the lessor if the aircraft is sold at the end of the lease period at a loss. If a gain is realised upon the sale of the aircraft, participation of the lessor in such gain of at least 25%. Termination of the lease by the lessee after the fixed lease period in which case lessee has to make a final payment to the lessor equivalent to the difference between lessor s total cost and payments made during the term of the lease. 90% of the sale proceeds realised by the lessor are credited against the final payment to be made by the lessee. Where the commercial features of a lease do not match the criteria above, economic ownership must be determined on a case-by-case basis (cf. criteria under 2.1). 2.3 Sale and lease back There are no specific accounting rules for sale and lease back transactions. Norton Rose Fulbright September

4 3 Income taxation 3.1 General considerations regarding investment structure There are various structural options for German aircraft lessor activity, which should be considered prior to an investment. The options primarily depend on whether or not the investor is resident in Germany: (a) Non-resident aircraft lessors Non-resident aircraft lessors can broadly choose between (i) a direct cross-border leasing investment and (ii) a concentration of the lessor s activity through a permanent establishment, a partnership or a company. (i) Direct cross-border leasing A direct cross-border lease of the aircraft to a German resident lessee is the easiest option to conduct business in Germany. The foreign investor engages in an ongoing lease relationship without having a fixed place of business such as a permanent establishment, a commercial partnership or a company in Germany. This form of investment is cost saving and is obviously attractive for short-term investors. (ii) German resident permanent establishment or German partnership Often, a stronger presence will be required in Germany for the fulfilment of German market expectations and administrative requirements. In many cases, fulfilling these requirements is only possible by establishing a permanent establishment, a partnership or a company in Germany. All forms give rise to a German taxation link and require tax registration in Germany and the fulfilment of German tax duties such as the filing of annual tax declarations. Therefore, these forms are only recommendable if the investment in Germany is medium to long-term and exceeds a minimal business in Germany. (A) German permanent establishment Establishing and liquidating a permanent establishment is easier than setting up or liquidating a partnership or company. However, the economic risk will be assumed solely by the foreign head office because a permanent establishment has no legal personality from a German law perspective. (B) German partnership A typical feature of partnerships such as a general partnership (offene Handelsgesellschaft OHG) or a limited partnership (Kommanditgesellschaft KG) is that one or more of the partners are general partners with unlimited liability. Therefore, there will always be one partner which can be a company whose business risk is not fully limited. Partnerships are treated as transparent for income tax purposes. Therefore, income tax is levied at the level of the partners. Special tax rules for partnerships (e.g. for loss utilisation or the recognition of contractual relationships between partner and partnership) which implement the transparency principle can bring an additional complexity to the taxation of partnerships. The transparency principle is not applicable for German trade tax purposes and does not release the partnership from tax registration and compliance duties. 04 Norton Rose Fulbright September 2013

5 (C) German company Companies such as a limited liability company (Gesellschaft mit beschränkter Haftung GmbH) or a stock corporation (Aktiengesellschaft AG) are separate legal entities. This gives investors the opportunity to limit liability to the registered share capital in order to limit their business risk. Furthermore, contractual relationships between shareholder and company are generally recognized for tax purposes provided they are at arm s length. Companies are also separate entities for tax purposes. Therefore, companies with a registered office or management in Germany have to register for tax purposes and are subject to corporate income tax (plus solidarity surcharge) and trade tax. (b) Resident aircraft lessors Resident aircraft lessors can elect to operate through (i) a German company or (ii) a German partnership. (i) German company The comments on German companies for non-resident lessors in Section 3.1 a (ii) (C) apply mutatis mutandis. The main disadvantage of the establishment of a German company is the potential German trade tax liability of the German company. (ii) German partnership As set out in Section 3.1 a (ii) (B) German tax law has special tax rules for the taxation of partnerships which can make handling of German partnerships complex. However, limited partnerships are often used as an investment vehicle for German retail investors (i.e. individuals invest jointly in an aircraft) as under certain circumstances German trade tax liability can be avoided. Furthermore, the partners can benefit from a special taxation regime for capital gains which exempts capital gains from German income taxation if the aircraft is held for at least 10 years. For the purposes of this overview, we will focus in what follows on direct cross-border leasing of non-german resident companies and investments structured via German companies as the most frequent forms of aircraft investments in Germany. 3.2 Corporate income tax general aspects German resident companies are subject to German corporate income tax on their worldwide income (unlimited tax liability, unbeschränkte Steuerpflicht). Profits of the company are subject to corporate income tax at a rate of 15% plus a solidarity surcharge (Solidaritätszuschlag) of 5.5% of the assessed amount of corporate income tax (yielding a compound corporate income tax rate of %). 3.3 General determination of income base Basically, there are seven classes of income to which German tax residents are subject. In the case of a company, this is broadly irrelevant because as a matter of statutory law, all income generated by a company is deemed to be trade income. Norton Rose Fulbright September

6 The taxable income of a company is based on the commercial profit or loss shown in its German GAAP financial statements albeit with certain adjustments for corporate income tax and trade tax purposes. The company is not required to physically set up a specific tax balance sheet; it must, however, prepare a reconciliation of taxable income which reflects tax adjustments. In broad terms, items which are deducted in the financial statements (salaries, office rents, other business expenses) are also deductible for tax purposes. The following adjustments are particularly noteworthy: Dividends received by a German corporate shareholder are generally 95% corporate income tax and trade tax exempt, if the shareholder holds shares in the distributing company of at least 10% as of the beginning of its fiscal year. Capital gains derived from the sale of shares are basically also 95% tax exempt. Interest deductions are subject to the applicable interest ceiling rules. The use of losses is subject to certain restrictions. (a) Depreciation of aircraft From a German tax perspective, only the economic owner of the aircraft is entitled to depreciate the aircraft over its expected useful economic life. The German tax authorities issue depreciation tables for the expected tax life of movable assets and assume a useful economic life of 14 years for aircraft with a maximum flight weight up to 20 tons and 12 years for aircraft with a maximum flight weight above 20 tons. Depreciation of movable assets must use the straight-line depreciation method. With effect from 1 January 2011, the declining balance method is no longer available for the depreciation of movable assets. (b) Interest ceiling rules Generally, under the interest ceiling net interest expenses, i.e. interest charges in excess of interest earned are deductible only up to 30 percent of EBITDA (i.e. earnings before interest expenses, regular depreciation and amortization less any interest income generated) in an assessment period. If the interest earnings of the business exceed the interest expenses, the interest ceiling does not apply. By contrast, remaining nondeductible interest can be carried forward to the following year and then be deducted. There are three exemptions from the deduction restrictions provided by the interest ceiling (it is sufficient if one of the following conditions is fulfilled): Exemption limit of 3 million: The interest ceiling is not applicable if the total net debt interest (i.e. interest expenses less interest income) of the business in the assessment period amounts to less than 3 million. Stand-alone clause: The interest deduction restrictions do not apply to stand-alone businesses (i.e. businesses which do not belong to a group or only partly belong to a group ). The term group is defined very broadly in sec. 4 h para. 3 German Income Tax Code (Einkommensteuergesetz EStG). A business belongs to a group if it can be consolidated with one or several other businesses in accordance with the applicable reporting standards usually the International Financial Reporting Standards (IFRS) or if its financial and business policies are governed by another entity (corresponding to IAS 27, which, however requires a legal agreement). 06 Norton Rose Fulbright September 2013

7 For companies the stand-alone clause applies only where the company establishes that remuneration on the shareholder debt accounts for no more than 10 percent of its net expenses. Shareholder debt is assumed where the company is financed via a loan granted by (i) a substantial shareholder (shareholding of more than 25 percent), (ii) an affiliated person or (iii) a third party having recourse against a substantial shareholder or an affiliated person. Equity ratio comparison: In relation to businesses belonging to a group, the interest ceiling is not applicable if it can be shown on the basis of the financial statements for the preceding year that the equity ratio of the business according to its individual financial statements is the same or higher than the equity ratio of the group in the consolidated financial statements (so called escape clause ). In principle, the equity ratio has to be determined in accordance with IFRS, alternatively, the commercial law of a Member State of the European Union or (with certain restrictions) in accordance with US-GAAP. The equity ratio is generally defined as the ratio of equity to balance sheet total and may be subject to certain adjustments for goodwill, tax reserves, book values of shares in subsidiaries, etc. The escape clause for businesses forming part of a controlled group applies only if the remuneration on shareholder debt accounts for no more than 10 percent of the net interest expense. Interest expense on loans received from substantial shareholders and affiliated persons are only counted for this purpose to the extent they are shown as liabilities in the fully consolidated accounts of the relevant corporate group. In addition, secured bank loans do not count towards the 10 percent threshold where the security is provided solely by a member of the controlled group. (c) Loss utilisation restriction (i) Treatment of tax losses Tax losses which cannot be set off in the current year may be carried back one year up to an amount of 1 million. To the extent losses exceed 1 million or cannot be fully set off against the previous year s income, they can be carried forward. Losses carried forward can be set off without restriction against profits only up to an amount of 1 million per year. Losses in excess of this amount may be set off only to the extent of 60 % of taxable income in the current period. There are no time limitations on the use of loss carry forwards. (ii) Rules regarding forfeiture of tax losses carry forward A direct or indirect change of control in a company can trigger a partial or full forfeiture of tax losses carried forward. If more than 25% of the shares in a company are (directly or indirectly) transferred to a purchaser or group of related purchasers, the tax losses carried forward by the company will be partially forfeited. If more than 50% of the shares are (directly or indirectly) transferred to a purchaser or group of related purchasers, the tax losses carried forward will be fully forfeited. The forfeiture will not be triggered to the extent the company has sufficient hidden reserves (difference between the tax book values of the assets of the company and the fair market value of the shares/assets). These principles also apply for trade tax purposes. Norton Rose Fulbright September

8 3.4 Cross-border-issues (a) German sourced income If a company is not resident in Germany, it is subject to limited tax liability (beschränkte Steuerpflicht), if and to the extent that it realises income from German sources specified in the German Income Tax Act. As long as the lessor maintains no German fixed place of business or provides any other services in connection with aircraft leasing, the mere lease of aircraft does not create a permanent establishment of the lessor in Germany. Lease rentals derived from an aircraft lease by a non German resident company are only subject to German corporation tax if (i) the lessor operates through a German permanent establishment or (ii) the aircraft is registered in the German Aircraft Register or (iii) if and to the extent that the aircraft is used in Germany and economic ownership resides with the lessor. (b) Capital gains Capital gains resulting from the sale of an aircraft are treated as income in the ordinary course of business. In the case of non-german resident companies the capital gains are subject to German corporation tax if (i) the lease is carried out through a German permanent establishment or (ii) the aircraft is registered in the German Aircraft Register. (c) Withholding taxes Lease payments made by a resident German lessee to a non-resident lessor are not subject to German withholding tax. Former provisions that imposed German withholding tax on lease rentals were repealed with effect from 1 January Please note that in the case of cross-border leases a double taxation treaty between the lessor s state of residency and Germany may provide distinct taxation rules for German-sourced income. Thus, one should always check in these cases (i) whether a double taxation treaty is applicable and (ii) what the specific implications for German-sourced income are. 3.5 Trade tax Trade tax is generally imposed on all business activity exercised in Germany. Irrespective of their specific activities, companies are deemed to generate business income. (a) Determination of trade income Trade income tax base is broadly the same as for corporate income tax purposes. However, it is modified by certain add-backs and deductions. As far as leasing is concerned, the most important issues in this connection are: Add-back regarding costs for long-term debt; and Add-back regarding lease and rent payments. To the extent add-backs are made in this respect, they increase the trade tax base and are therefore subject to trade tax. It is therefore crucial that the effects of both issues are addressed. The add-backs include inter alia 25% of the sum of (i) loan remuneration (e.g. interest expenses paid by the lessee) and (ii) 20% of lease expense in connection with an aircraft lease. 08 Norton Rose Fulbright September 2013

9 The add-back only applies to the extent payments exceed an exemption amount of 100,000. (b) Treatment of trade tax losses No loss carry back is available for trade tax purposes. Trade tax losses (Gewerbeverlust) can be carried forward and deducted from future trade income. The restrictions for corporate income tax also apply to trade tax. Up to a limit of 1 million, losses carried forward may be fully set off against earnings trade tax income. Beyond this limit, losses carried forward may be set off against no more than 60% of the trade income in the current period. There is no time limit for the use of losses carried forward. (c) Determination of applicable tax rate The trade income tax base is multiplied by a basic tax rate (Steuermesszahl) of 3.5%, resulting in the so called base amount (Steuermessbetrag). The relevant multiplier (Hebesatz) for each local municipality is applied to the base amount. These multipliers typically range between 200 to 490%, i.e. a factor of 2.0 to 4.9, yielding a tax rate of 7.0 to 17.15%. (d) Cross-border-issues As a German trade tax liability requires a trade business in Germany, the income of a non-resident lessor is only subject to German trade tax, if the lessor maintains a German permanent establishment and the aircraft is allocated to such German permanent establishment. 3.6 Formal proceeding Any income derived from a lease in Germany must be declared in an annual income/ corporation tax declaration of the lessor and in an annual trade tax declaration if the lessor is subject to German trade tax. In principle, this applies also to a non-resident lessor who realises income from German sources. 4 VAT 4.1 General All entrepreneurs (individuals as well as companies and partnerships) who are independently engaged in a trade business with the objective of earning income are subject to German VAT. VAT liability arises irrespective of citizenship, residence, principal place of management or place of invoicing or payment. Any person who leases an aircraft in Germany would be considered as an entrepreneur for German VAT purposes. The standard German VAT rate is 19%. 4.2 Registration requirements Any entrepreneur making taxable supplies in Germany is obliged to register for VAT purposes. This also applies if the entrepreneur is not resident in Germany. A single tax reference number is usually ascribed to an entrepreneur for all taxes including VAT. On application, a VAT identification number is issued for each registered entrepreneur. Norton Rose Fulbright September

10 4.3 VAT exemption for supplies of goods and services to international airlines Under the German VAT Act, supplies of goods and services to approved international airlines are exempt from VAT. Airlines which are resident in Germany have to be included in a list of approved international companies published by the German tax authorities. According to the official guidelines to the German VAT Act, non-resident airlines are assumed to be international airlines for German VAT purposes. 4.4 VAT treatment of acquisition of aircraft Unless the exemption under 4.3 is applicable, a transfer of the aircraft is subject to German VAT if the effective transfer takes place when the aircraft is on German soil. Whether or not the aircraft is registered in the German Aircraft register, is not relevant. VAT is levied on the purchase price at a rate of 19%. 4.5 VAT treatment of leasing For the VAT treatment of leasing services, it is crucial whether or not economic ownership is transferred by the lessor to the lessee at the beginning of the lease term. For the determination whether or not economic ownership of the aircraft is transferred, income tax/ accounting principles are generally applicable. (a) Economic ownership resides with the lessor The place of supply for a lease by the lessor to the lessee is normally where the lessee is resident. Where the lessee is resident in Germany, German VAT is charged in addition to the net rentals during the lease term. The German VAT amount on an agreed single net lease rental normally becomes due on the 10th day of the month following the agreed payment date of the corresponding lease rental by the lessee. The lessee normally gets a tax credit for input VAT paid (unless he conducts a business that is not eligible for full credit such as banking, insurance, etc.). Where a non-german resident lessor leases aircraft to a German resident lessee and the exemption under 4.3 does not apply, the reverse charge mechanism would be triggered. If the lessee is entitled to a refund of input VAT, his payment obligation under the reverse charge mechanism can be set off against the refund claim. (b) Lessor transfers the economic ownership to the lessee The transfer of economic ownership at the beginning of the lease term is considered as a supply of the aircraft by the lessor to the lessee. According to the current view of the tax authorities, the tax base for calculating VAT is equal to the aggregate amount of the rent payable (including (i) rent for a renewal period in the case of a renewable option and (ii) agreed purchase price in the case of a purchase). The entire German VAT amount is triggered at the end of the month when the aircraft delivery takes place, if (i) the aircraft is located in Germany at the time of the delivery and (ii) the transaction is not subject to a VAT exemption. The German VAT normally becomes due on the 10th day of the month following the aircraft delivery. (c) Sale-and-lease-back transactions Where economic ownership (i.e. all economic risks and rewards attached to an asset) resides with the seller (and the lessee) throughout the sale-and-lease-back-transaction, a supply and repurchase of the aircraft effectively is seen to take place for German VAT purposes so that the whole arrangement should normally qualify as mere financing by the buyer to the seller. Financing is VAT exempt if certain formal requirements are fulfilled. 10 Norton Rose Fulbright September 2013

11 (d) Penalties Penalties payable for a breach of contract are normally not subject to VAT. 5 Customs duties and transfer taxes 5.1 Customs duties and import VAT Customs duties and import VAT are applicable in accordance with European Union principles. The import of an aircraft by a lessor from a place outside the European Union into the European Union can trigger customs duties and import VAT. Potential import taxes and compliance with European Union importation requirements should therefore be reviewed prior to importation of the aircraft. 5.2 Transfer taxes There are no specific transfer taxes such as stamp duties, registration taxes etc in connection with aircraft leasing in Germany. However, costs (charges of the German Aircraft Register and legal fees for advisers) in connection with the registration of the aircraft in the German Aircraft Register may arise. Norton Rose Fulbright September

12 nortonrosefulbright.com Contacts If you would like further information please contact: Munich Igsaan Varachia Partner Norton Rose Fulbright LLP Tel Dr. Andreas Berberich Senior associate Norton Rose Fulbright LLP Tel Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world s pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ( the Norton Rose Fulbright members ) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Norton Rose Fulbright LLP NRF /13 (UK) Extracts may be copied provided their source is acknowledged.