The Malta Independent 21 May 2024, Tuesday
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Why Malta needs to expand options in aviation sector

George M Mangion Friday, 8 March 2024, 10:18 Last update: about 3 months ago

Tax practitioners may remember the hype created 14 years ago, when the MFSA launched new laws and regulations linked to the aviation department at Transport Malta, all paved the way for a nascent private jet registrations sector with exciting opportunities for investors.  

How did we fare today after so many conferences (locally and abroad) funded by private law and assurance firms to promote the sector?  We have a good standing among the Med basin but there has been a lull in registrations of Air Operator Certificates (AOCs) since the resumption of international business post-pandemic.

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Suffice to mention that the latest Central Bank's Business Conditions Index indicates that last month's annual growth in business activity fell marginally below its long-term average.  Malta's gross domestic product (GDP) growth is expected to moderate by the end of 2026, according to the latest Central Bank of Malta estimates. 

To be more specific, GDP is expected to grow by 4.4% in 2024, edge down to 3.6% in 2025 and to 3.3% by 2026.  In the productive sectors, price expectations rose among retailers and in the construction sector, but fell strongly in the services sector and in industry.  Malta continues its journey towards a more sustainable and technology-driven future, the collaborative efforts between the Malta Development bank and commercial banks are poised to play a pivotal role to invest bumper profits for the holy grail of aircraft financing.  Are local banks headed by the Central Bank acting as a catalyst and gateway for transformative change to launch fintech, sophisticated funds/REITS industry, aircraft financing and leasing operations?  In truth, the post -pandemic efforts have now landed on infertile ground and we must hit the ground running.  Yes, Malta offers an array of incentive tax niceties yet in light of competition, these are in need of a root and branch overhaul.  In this regard, so far under existing Malta's remittance basis of taxation, income deemed to arise outside Malta will be exempt from Maltese tax.

This benefit, together with the benefits on the operation of aircrafts in international traffic contained in Malta's double taxation agreements, the favourable VAT treatment for both finance leases and operating leases, accelerated tax depreciation rates, reduced income tax rate of 15% for highly-qualified persons within the industry, and an exemption from fringe benefit tax for individuals who are non-Maltese residents. The latter must be employed by an aviation company whose business activities include the ownership, leasing or operation of aircrafts used for international transport of passengers or goods, all these laws provide an attractive opportunity for aviation industry players to set up their residence in Malta.  For instance, how did our competitors fare once travel restrictions were lifted last year?  Yes, Ireland's pole position in the aviation business is indeed influenced by its extensive network of double taxation agreements, which play a significant role in facilitating cross-border business and assuring investors of equitable treatment of profits in the private jet sector.  Double tax agreements, also known as double tax treaties or tax conventions, are bilateral agreements between two countries designed to prevent double taxation of income and provide clarity on the tax treatment of cross-border transactions.  Ireland offers better options to investors given the nature of luxury private jet travels is volatile and high risk. Private jets are known to have a high carbon footprint per passenger compared to commercial flights.  As awareness of climate change grows, there is increasing pressure on the aviation industry to reduce emissions.  

High-net-worth individuals and corporations are becoming more conscious of their environmental impact, which may lead them to seek more sustainable travel options or reduce the frequency of private jet use.  There is a growing trend towards corporate social responsibility (CSR) and environmental, social, and governance (ESG) criteria which will become compulsory next year.  Companies and individuals are increasingly expected to demonstrate a commitment to sustainability, which can influence travel choices.  

To address these challenges and enhance the growth of its own luxury travel sector, Malta could consider a number of fiscal and administrative reforms.  These include the need to develop or promote carbon offsetting schemes that allow private jet operators and their clients to invest in environmental projects that compensate for their carbon emissions.  Implement a balanced approach to environmental taxation that encourages reductions in emissions without unduly harming the aviation sector.  This could include tax breaks for companies that meet certain environmental standards. 

Given that the airport has been successfully privatized, government can still encourage owners to invest in airport infrastructure to support more efficient aircraft operations, reducing fuel burn during taxiing, take-off and landing.  In addition to its extensive double taxation agreements, Malta offers a favourable corporate tax regime, skilled engineering staff, strong legal and regulatory framework. 

All these can pave the way together with the necessary financial clout from MDB "deep vaults" to attract companies offering aircraft leasing and financing.  This dual approach could help Malta become a more attractive destination for private jet registration and operations, balancing economic growth with sustainability.  Several factors may have contributed to the slower creation of a facility in Malta to provide competitive aviation finance, aircraft leasing, and a faster expansion of the number of AOCs registered by large private jet companies.  

Some of these factors may include low level publicity by Transport Malta for promotion of the sector. Aviation looks like a Cinderella, while in a dramatic twist to attract top international film productions, the Tourism ministry has in a short period of 4 years already expensed about €160 million in gala shows, refunding cash for local film expenses, and launching promotional film festivals. 

Observers complain that the treatment of aviation finance and leasing transactions, may not have been as competitive or attractive as in other jurisdictions.  Perhaps practitioners may unite and discuss with Transport Malta, a holistic plan to introduce tax incentives and legal frameworks that make Malta more attractive for aviation finance and leasing operations.  It is true that organic growth within the aviation industry has put a lot of pressure on the resources within the Civil Aviation Directorate. Its personnel will need to be beefed up, to service expected rise in AOCs registrations combined with new aircraft financing opportunities expected to hit the island. 

 

gmm@pkfmalta.com

 

George M Mangion is a Senior Partner with PKF Malta

 


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