Buying an Aircraft in Africa? Tax Considerations

Beyond the price tag, there are many other considerations for aircraft buyers such as depreciation, insurance, crew salaries, maintenance costs, and tax implications. Importantly, the tax implications of buying an aircraft in Africa can vary from other, more developed regions like the US or Europe. But what should potential aircraft buyers know?

As a rule of thumb, the experts recommend consulting with local in-country legal, tax, and financial advisors since each jurisdiction within Africa is different.

For instance, in South Africa – Africa’s largest Business Aviation market – there are no taxes or duties payable to the South African Revenue Service (SARS) if an aircraft being sold is in the country, and such sale is between a South African resident and a non-resident.

Chetan Vanmali, Partner at Webber Wentzel, says that most aircraft purchases are financed through loans that have a syndicated mortgage where there are multiple lenders, most of whom tend to be commercial banks.

“Rent-to-buy options are common as well, since they include finance and operating leases where the lessor purchases the aircraft with loan financing from banks through a special purpose vehicle,” Vanmali says.

“They then lease it to an operator with security registered over the aircraft in the form of a local mortgage with the South African Civil Aviation Authority (SACAA) and usually an international mortgage on the International Registry.”

Should an aircraft need to be imported into South Africa, import VAT on either the value of the aircraft or the lease is payable.

On the other end, if a foreign supplier of an aircraft, leases the aircraft in the country to a South African lessee, the foreign supplier does not have to register for VAT and charge VAT on the lease amount – provided certain conditions are met.

“For example, the lessee must be a South African resident,” Vanmali highlights, adding that the aircraft must be supplied for use wholly or partly in South Africa.

The foreign supplier and the local recipient must also agree in writing that the local recipient will enter the aircraft for home consumption (pay the relevant import VAT, for example) and not be reimbursed by the supplier for the import VAT.

“The above exemptions encourage foreign lessors to lease aircraft in South Africa.”

In Kenya, meanwhile, VAT is charged pursuant to provisions of the VAT Act on taxable supplies made by a registered person. “Kenya is a Partner State of the East African Community,” adds Sonal Tejpar, Partner at Anjarwalla & Khanna LLP (ALN Kenya).

“As such, import duty is charged pursuant to the East African Community Common External Tariff (EACCET) at various rates (i.e. 0%, 10%, 25% or 35%) on an ad valorem basis, on the customs value of the goods, and the nature and description of the goods as set out in the EACCET.”

If the buyer of the aircraft is in a different jurisdiction and is exporting the aircraft from Kenya, “the export would be considered to be a supply, and such supply would be zero-rated as the exportation of goods under Part A of the Second Schedule of the VAT Act is a zero-rated supply,” Tejpar adds.

Do Some African Countries Offer More Buyer-friendly Tax Conditions?

Experts argue that it would be difficult to classify a specific country or region in Africa as being ‘buyer-friendly’ without undertaking a jurisdictional comparative analysis.

That said, Tejpar suggests there are some African countries that have made deliberate and progressive laws and policies to ease the process of purchasing, importing, and operating aircraft.

“For instance, Kenya, through the Finance Act of 2023, did away with three taxes in respect of aircraft, including the Railway Development levy, the Import Declaration Fee, and Value Added Tax,” she highlights. “These serve as incentives for the purchase of aircraft in Kenya.”

Raeesah Shaik, Associate at Webber Wentzel adds that Mauritius is a popular option for many non-residents because there is no capital gains tax, inheritance tax, or withholding tax on dividends.

“The country's Double Taxation Avoidance Agreements network further enhances tax benefits, providing relief and preventing double taxation for foreign investors.”

So, what defines a ‘favorable’ ecosystem? For Vanmali, it’s a combination of the tax regime, the regulatory environment, and the infrastructure and services present in a certain country. “Countries with lower or no taxes on aircraft, exemptions, or incentives are attractive. Tax treaties between countries can also impact double taxation concerns.”

From a regulatory standpoint, he adds “Favorable conditions involve clear, consistent regulations for aircraft registration, certification, and operation. Countries aligned with international conventions enhance recognition and acceptance.”

African Tax Perspective: Where to Base the Aircraft

While in the US, aircraft buyers may plan to deliver airplanes to states with more favorable tax environments mitigating the impact of high sales taxes in their home state, that is not possible in Africa. The continent is made up of various countries, each with its own Civil Aviation Authority managing rules, regulations, and registrations.

But once purchased, is there a more favorable region to base the aircraft? According to the experts, that depends!

Tax laws in Kenya apply uniformly across all different counties (states) in Kenya, Tejpar says, so there would be no benefit in having an aircraft based in a county different from where the owner is based.

“It follows that we would term this as unusual in our jurisdiction because operator certificates that allow owners to base an aircraft are country-specific,” she adds. “Where an aircraft owner wants to use their aircraft in another country, they would have to obtain the necessary licenses and certificates there.”

In South Africa, no VAT is payable on the sale of an aircraft located in the country between a resident and a non-resident. However, there is VAT payable if the sale is between two South African residents.

“Regardless of where the sale occurs, if an aircraft is registered in South Africa, there are costs involved in deregistering and changing ownership title,” explains Vanmali.

Moreover, besides the tax considerations, Africa has underlying conditions that should be considered by potential buyers, namely the overall bureaucracy, and the ever changing social, economic, and political contingencies.

Tejpar highlights the restriction on the registration of aircraft by foreigners, the unpredictable regulatory environment, undue scrutiny by regulators and/or government agencies, and the lack of an aircraft mortgage registry as top factors.

“While there exists a robust regulatory framework, it may not always be the case that this translates to administrative efficiency,” she concludes.

“For instance, while the law allows for registration of a foreign-registered aircraft in Kenya, there are numerous requirements, not specified in the law, which a party must meet for the foreign aircraft to be registered there.”

More information from:
Anjarwalla & Khanna LLP: https://aln.africa
Webber Wentzel: www.webberwentzel.com