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FLYING TO AN EU COUNTRY?

August 2009

Category: Business Aircraft – Ownership

Author: Christopher Younger

Flying To A European Union Member Country?
Do your homework: Recent changes could significantly increase the cost of doing so...!


Let’s imagine you are preparing to fly to Europe on an important business trip. You are excited to have finally earned the privilege of traveling to, and throughout Europe in the convenience of your company’s airplane. Having flown to Europe on innumerable commercial flights in the past, you don’t think twice about getting aboard your own plane to make the same trip – albeit in a much more comfortable and productive atmosphere. To top it all off, you have business associates in France who you have invited to fly with you on your jet, and you are looking forward to their company on your flights within Europe.

Your first stop is Paris, where your colleagues are based. Upon your arrival, you feel relaxed and refreshed. You land in Paris to pick up your passengers, and plan to fly on to Italy. You meet your colleagues and you board the airplane bound for your next business destination.

Just before you are ready to close the cabin door and take off on the second leg of your journey, a French Customs Official boards, and asks to speak with you. Your French is a bit rusty, but luckily his English is passable. Between your broken French and his imperfect English, you come to understand that the French Customs Authorities need verification that you have imported your aircraft into the European Union (EU) in accordance with EU procedures for doing so. If not, the Customs Official notifies you that you will need to do so before the airplane is allowed to take off. Your initial thought is that you simply need to fill out some forms and sign a few official documents before you can depart.

Not so fast! As your conversation with the Customs Official progresses, you grow pale and start to feel faint. The customs official explains that, in addition to the ‘simple’ paperwork you knew you would need to complete (which, it turns out, is not so simple after all, because it is all written in French), the jet will be subject to an import duty. Slowly, you begin to calm down and you think, “well, the duty will certainly just consist of a nominal fee that needs to be paid when the documents are completed.”

Quickly, your consoling thought fades and you grow even paler as the Customs Official explains that the customs duty/Value Added Tax (VAT) to be paid will be an amount that is approximately 20% of the total value of the jet in which you are sitting! Furthermore, he proceeds to explain that the amount of the duty must be paid in immediately available funds before your crew can board your aircraft and you can take off for your next destination!

You’re left wondering, “How could my pilot not have known of this before we left on this trip? Certainly someone should have known about this before we left!”

This article will provide a brief summary of the pertinent information relating to requirements for aircraft importation into the EU that you should be aware of so that you hopefully don’t find yourself in the situation described above.

THE EU ‘COMMUNITY CUSTOMS CODE’
The EU is currently comprised of 27 member countries. One of the many purposes of the EU is to harmonize import and export requirements among its members, such that all of the members will benefit, both financially and administratively, from such uniform requirements.

In the context of customs duties, the rules relating thereto are found in the EU’s Community Customs Code (the ‘Code’), which has applied to EU countries since January 1, 2004. As far as the entry of foreign registered aircraft into an EU member state is concerned, the Code sets forth specific requirements that permit an aircraft to be temporarily imported into the EU without customs documentation and without the requirement to pay customs duties, or VAT in connection therewith.

European Commission (the ‘Commission’) Regulation (EC) No. 993/2001 states that an aircraft that is not EU registered and is in private use may enter the EU for up to six months without liability for VAT or import duty tax. Private use constitutes use that is other than commercial. Commercial use is defined as the transport of persons or of goods for remuneration, or in the framework of an economic activity of an enterprise. Furthermore, aircraft in commercial use may remain in the EU only so long as required for carrying out transport obligations.

One issue with the foregoing requirements lies in the fact that, absent specific guidance from the Commission on a particular point, each EU member state individually interprets the provisions of the Code. Keep in mind that there are 27 EU member countries and that EU documents are translated into 23 different official EU languages! Thus, the interpretation and application of a particular provision of the Code in one EU member country can vary considerably from the same provision in another EU member country.

Another important issue relating to the foregoing requirements pertains to the carriage of EU nationals as passengers and crew members. It is far from clear how such carriage could affect the status of a flight as private or commercial in nature. Again, each EU member country is left to interpret the effect of such carriage on the status of the flight and whether, as a result thereof, temporary duty free importation of the aircraft into the EU is permitted.

If such carriage results in a determination that temporary duty free importation of the aircraft into the EU is not permitted, the aircraft would need to be imported and would be subject to normal customs duties including the VAT.

VAT EXEMPTIONS
As stated above, if an aircraft must be permanently imported into the EU, then the VAT will be imposed at a rate equal to the VAT rate for the EU country into which the aircraft is being imported. Current VAT rates range from 15% to 25% of the aircraft’s value! In addition, some EU members impose additional taxes on aircraft (e.g. Italy, which imposes an additional ‘luxury tax’ on aircraft) that are imported into them.

As of now, two EU member countries (the United Kingdom and Denmark) impose VAT at a 0% rate on aircraft that weigh more than 24,000 pounds. The aircraft must be imported into the EU through either the U.K. or Denmark and, therefore, must first land in one of the countries before landing in another EU member country so that the country may legally apply the 0% VAT rate to the imported aircraft.

However, after December 31, 2009, the exemption from VAT in Denmark will expire (except in certain narrowly defined circumstances where the exemption will expire on June 30, 2010).

Moreover, the Commission recently requested that the UK change its legislation governing the VAT exemption for transactions related to aircraft. According to the Commission, the UK applies exemptions incorrectly because they are based on different criteria (weight and design of the planes) instead of whether they are operating on commercial international routes. It remains to be seen how the U.K. will respond to the Commission’s request and how this matter will ultimately be resolved.

CONCLUSION
The idea of flying to, and through Europe in your company’s jet may be appealing, but it could also be very expensive without careful planning. As a result, be sure to check with your point of entry handler/FBO/flight planning organization before undertaking EU operations that would involve the enplaning or deplaning of EU ‘persons.’

In addition, so long as VAT exemptions exist, and your aircraft qualifies for them, it is advisable to explore the possibility of using a customs broker to import your aircraft through the U.K. (or, alternatively, Denmark until the end of the year) if there is any question as to whether the aircraft may be subject to customs duties if flown first into another EU member country. Otherwise, your dream flight to Europe could turn into a nightmare!

Christopher B. Younger, Esq., is the owner of the Law Offices of Christopher B. Younger, LLC. He concentrates his practice in the areas of business and personal aircraft transactions and aviation taxation. He has extensive experience in planning and implementing a wide variety of aircraft ownership and operating structures, each designed to take into account his client’s specific needs. In addition, he has worked on numerous tax audits with the IRS and with various state taxing authorities involving the taxation of aircraft and aviation related transactions.

The Law Offices of Christopher B. Younger, LLC provides full-service tax and regulatory planning and counseling services to business aircraft owners, operators and managers. The firm’s services include Code Section 1031 tax-free exchanges, federal tax and regulatory planning, state sales and use tax planning, and preparation and negotiation of transactional documents commonly used in the business aviation industry, including aircraft purchase agreements, leases, joint-ownership and joint-use agreements, management and charter agreements, and fractional program documents.

Mr. Younger can be reached at the firm’s Frederick, Maryland office located at 4905 Shelburne Court, Jefferson, Maryland 21755, telephone (301) 534- 2428, email: cbyounger@cbyoungerlaw.com

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