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Arthur Flieger, Attorney at law Flieger Law Office bvba with the cooperation of Stijn Brusseleers, Attorney at law Flieger Law office bvba

 

VAT AND AVIATION – AN OPINION RELATING TO THE CONCEPT OF AIRCRAFT USED BY AIRLINES OPERATING FOR REWARD CHIEFLY ON INTERNATIONAL ROUTES – CHARTER AIRLINES – THE A OY CASE

 

I.
The Supreme Administrative Court of Finland referred to the Court of Justice a preliminary ruling of three questions concerning the interpretation of the Sixth Directive in connection with the VAT exemption applicable to the supply of aircraft to be used by airlines operating for reward chiefly on international routes.

In this case the company which acquired the aircraft is not an airline of the kind referred to the provision in issue, although
– it assigned the right to use the aircraft under a lease to another undertaking which does have that status.
– the airline in question is a charter airline- the company structure is rather complex linking the natural person who holds the shares in the company which owns the aircraft , the latter company and the airline itself.

The different contractual and corporate relationships surrounding the acquisition and use of the aircraft could possibly give rise to the suspicion of fraud, but that assessment falls exclusively to the national court and not to the community judiciary.

II. Facts
In 2002 and 2004 the Finnish company A Oy acquired two jet aircrafts from the same French manufacturer. A Oy was registered as the owner of the aircraft while B Oy, a company which operates an international charter airline, was registered as their user.

All of the share capital in A Oy is owned by a natural person. For its part, A Oy owns 25% of C Oy, while B Oy is 78% owned by C Oy.

The French vendor declared both transactions as intra-Community sales. The issue is that in Finland A Oy, who required the two jet aircrafts, did not declare the acquisition of the aircraft as intra-Community acquisitions of goods.

In 2003 and 2005 A Oy sold the aircraft to a Cypriot-registered undertaking at a price that was lower than the purchase price.

It occurs that under the contract concluded between the two companies B Oy was entitled to lease the aircraft from A Oy for its own commercial purposes and to invoice the latter company for the maintenance work on the aircraft and for flights. It seems that B Oy took care of management, maintenance and repairs, dealt with the ground staff and crew, was responsible for the necessary permits and corresponding documents and for the schedules, and also for marketing and selling under its own name the air transport services supplied by means of those aircraft. It also seems that B Oy operates a large number of other aircraft which form part of its fleet and which make international flights.

The competent tax office found that A Oy was not entitled to any reduction or to the refund of VAT.

The administrative Court in Helsinki dismissed the appeal brought by A Oy. The Court stated that the acquisition of the aircraft constituted a taxable intra-Community acquisition of goods which A Oy had failed to declare, and that A Oy did not operate on international routes within the scope of paragraph 70(1)(6) of the AVL. The same Court stated that A Oy acted in practice as the owner of C Oy, which was engaged in international oil product trading. A Oy appealed that decision to the Supreme Administrative Court of Finland claiming that it was not required to pay VAT on the acquisition of the aircraft because those aircrafts were used by an airline which operated for reward chiefly on international routes, namely B Oy. This case relates any space on the doubts as to the interpretation of the concept “airlines operating for reward chiefly on international routes” in Article 15(6) of the Sixth Directive.

III
In the procedure before the Court of Justice three questions were asked:

A. First question:
Is the concept “airline operating for reward chiefly on international routes” as mentioned in Article  15(6) of the Sixth Directive also referring to airlines operating chiefly on international charter routes?

Here the doubts as to the interpretation results of differences between the language versions of the Sixth Directive.

The majority of the language versions emphasise that the airline which uses the aircraft must operate chiefly on international routes, without any direct or indirect reference to whether that activity takes place via charter flights or scheduled flights.

One can also refer to the European Court of Justice Case law and especially one refers to the Cimber Air case, which is to our knowledge the only judgement to date concerning the exemption of Article 15(6) of the Sixth Directive. The case dealt with the problem of whether that exemption applies to the acquisition of aircraft used by airlines operating for reward chiefly on international routes but also operating domestic flights using those aircraft. In the actual A Oy case introduced before the European Court of Justice the Advocate General concludes that the concept “airline operating for reward chiefly on international routes” also refers to a commercial airline operating for reward chiefly on international charter routes for the requirements of companies and private persons.

B. Second question:
1.
Here the Court of Justice will have to verify whether the exemption provided for in Article 15(6) of the Sixth Directive applies only to the supply of aircraft which takes place directly to airlines operating for reward chiefly on international routes or whether it also applies when the acquisition is made by another operator which does not itself operate on international routes but which assigns the right to use the aircraft to such company.

The purposive interpretation of the exemption leads the conclusion that the exemption must apply if the aircraft is to be used by an airline which operates for reward chiefly on international routes both where that airline acquires the aircraft directly and where another operator does so with the aim of assigning the right to use to the former. It’s the principle of neutrality in competition, which bolsters that conclusion (Sixth Council Directive 77/388/EEC of 17 May 1997 on the harmonisation of the laws of the Member States relating to turnover taxes – Common System of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1; ‘the Sixth Directive’).

The more restrictive case-law laid down in Velker and Elmeka does not present an obstacle as such to the above-explained principle ( Case C-185/89 ( 1990 ) ECR I-2561, Joined Cases C-181/04 to C-183/04 to C-183/04 (2006) ECR I-8167).

In the present case, there is no doubt that the exemption in Article 15(6) is applicable to the hiring of the aircraft by B Oy from A Oy because the hirer is an airline which puts the aircraft to the use required in that provision.

This all is clearly based on the confirmation that the exemption in Article 15 pursues an objective of a functional nature, intended to exempt the entire chain of transactions related to international transport until the point of final consumption.

The functional nature is difficult to reconcile with the subjective element as such, which is defended by the Commission and the Finish Government.

2.
The principle of neutrality in competition is also confirmed by the requirements of the principle of fiscal neutrality inherent in the common VAT system.

According to existing case-law, the common system of VAT is governed in particular by two principles:
a. each supply of goods and services effected for consideration by a taxable person is subject to VAT. ( case C-97/06 NAVICON (2007 ) ECR, I – 8755, § 4 )
b. in accordance with the principle of fiscal neutrality, economic operators carrying out the same transactions may not be treated differently in relation to the levying of VAT. In reality, as academic writers have pointed out, those two views reflect the two main aspects or applications of the principle of fiscal neutrality.
( In that connection, see Martinez Muñoz, Y., ‘El principio de neutralidad en el IVA en la doctrina del TJCE’, Revista española de Derecho Financiero, 145, January-March 2010, p. 182. See also Guichard, M., “L’Esprit des Lois” communautaires en matière de TVA: du principe de neutralité’, Revue de Droit Fiscal, No 36, Année 2001, p. 1205, and Vanistendael, F., ‘Neutrality and the limits of VAT’, selected issues in European tax law, 1999, p.13 )

It should be stressed that the principle equality means, in general, that similar situations should not be treated differently unless such different treatment is objectively justified. Its expression in VAT matters precludes, in particular, treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes.

Moreover, if the use of the aircraft concerned is immaterial and all that matters, as regards entitlement to the exemption, is the activity carried on by the acquiring undertaking, in other words: if for the purposes of eligibility for the exemption it is sufficient that the aircraft is purchased by an airline operating for reward chiefly on international routes, it is perfectly possible to envisage a situation where such a difference in treatment occurs between two companies which, ultimately, are operating as intermediaries in the purchase of an aircraft. Thus, for the example, a financial institution which purchases an aircraft in order to lease it to an airline would not benefit from the exemption but the exemption could be granted to an airline in order to lease it to another airline. The financial institution and airline A would be carrying out transactions which are, to all intents and purposes, comparable but are nevertheless subject to different tax rules which, in the case of the financial institution, are more detrimental as a result of an erroneous subjective interpretation of the exemption ( In that connection, it should be recalled that, according to settled case-law, ‘the identity of the manufacturer or the provider of the services and the legal form by means of which they exercise their activities are, as a rule, irrelevant in assessing whether products or services supplied are comparable’. See Joined Cases C-453/02 and C-462/02 Linnweber and Akitidis ( 2005 ) ECR I-1131, paragraphs 24 and 25, and Turn-und Sportunion Waldburg, paragraph 34.)

One can say that the objectives of the exemption and the principle of neutrality of VAT mean that there must be a purposive interpretation of the exemption in this case. Therefore, Article 15(6) of the Sixth Directive should be interpreted as meaning that the exemption provided for therein applies to the supply of aircraft to an operator which does not itself operate for reward chiefly on international routes but which in turn supplies those aircraft for the use of an airline which does carry out such an activity.

C. Third question:
In this question the issue is pinpointed whether, the fact that the company which owns the aircraft ( A Oy ) in turn makes a charge for the use of the aircraft to a private person (X) who is that company’s shareholder and who uses the procured aircraft principally for his own business and/or private use, taking into account the fact that the airline has also been able to use the aircraft for other flights.

It occurs now from Article 15(6) of the Sixth Directive that the sole criterion for determining the applicability of the exemption is whether an aircraft is used by an airline operating for reward chiefly on international routes. Since the company which acquired the aircraft is able to prove that the aircraft are effectively used for commercial exploitation by an airline of that kind, any commercial or other relationship which may exist between the company which owns the aircraft, its majority shareholder and the airline itself should not have any effect as regards VAT.

Only if it can be established that the aircrafts are not genuinely intended to be exploited commercially by the airline and that instead they are solely for private use – in short, final consumption – by a natural or legal person, will it be possible to refuse the exemption on the ground that the conditions laid down in Article 15(6) of the Sixth directive are not satisfied. In any event, it is for the national court seized of the main proceedings to assess all those matters.

Conclusion
According to the opinion of the Advocate General:
– Article 15(6) of the Sixth Directive must be interpreted as meaning that the concept “airline operating for reward chiefly on international routes” also refers to a commercial airline operating for reward chiefly on international charter routes for the requirements of companies and private persons.
– Article 15(6) of the Sixth Directive must be interpreted as meaning that the exemption provided for therein applies not only to that supply of aircraft which takes place directly to airlines operating for reward chiefly on international routes, but also to the supply of aircraft to an operator which does not itself operate for reward chiefly on international routes, but which in turn supplies the aircraft for the use of an airline which carries on that activity.
– The fact that the owner of the aircraft in turn makes a charge for the use of aircraft to a private person who is its shareholder and who uses the procured aircraft principally for his own business and/or private use, taking into account the fact that the airline has also been able to use the aircraft for other flights, does not alter the conclusion reached in the reply given to the second question, with the sole proviso that those factors could indicate that the aircraft was not really intended to be exploited commercially by the airline and instead was intended for the exclusive private use of a natural or legal person, a matter which it falls to the national court to determine.

Now hopefully the Court of Justice will maintain this point of view and take a thorough aviation decision.

For further information and comment, please contact Arthur Flieger at Flieger@fliegerlaw.com, Website: www.fliegerlaw.com, telephone: +32 3 238 77 66

 

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