Tax Advisers - Deloitte

Ireland
US tax amendments bring
aircraft lessors to Ireland
Pat O’Brien
KPMG
Dublin
With few exceptions, aircraft lessors have been based either in
the United States (GECAS, ILFC, CIT, ACG, Pegasus) or in
Ireland (AerCap, RBS, Pembroke, Orix, Aergo, Babcock &
Brown). The reasons for locating in Ireland are clear: a corporate
tax rate of 12.5%, eight-year tax depreciation, access to
44 double tax treaties, stamp duty exemptions and favourable
VAT treatment. The more intriguing question is why lessors
would choose to locate aircraft ownership in the United States
where the book tax rate is of the order of 35% to 40%.
The answer is to be found in the Subpart F provisions of the
US tax code. Before 2005 the net effect of these provisions was
that the US parent of an Irish aircraft leasing company would
have had to treat the profits of its Irish subsidiary as taxable in
the United States, regardless of the level of activity carried on
in Ireland. This meant that a low-tax Irish aircraft leasing
operation conferred no tax benefit on a US parent company. The result was that aircraft
leasing was taxed less favourably in the United States than almost any other asset type. For
other assets, depending on the degree of activity in the controlled foreign company, it was
possible to avoid pick-up under Subpart F.
This all changed on January 1 2005, when changes to US tax law introduced by the
2004 Jobs Creation Act came into effect. An Irish leasing platform with the required
degree of substance will now provide substantial tax benefits to its US owner. It may
even be possible to take part of the existing aircraft lease portfolio of the US parent out
of the United States and into Ireland without crystallizing US taxable income. The
really good news for tax directors, in an era when cross-border tax planning is
somewhat frowned upon in the United States, is that the steps I have just described have
– as near as one could ever hope to get – a stamp of approval from the US authorities.
Subpart F amended
The context for the introduction of the new provisions in the United States was the repeal
of the FSC and ETI regimes that had provided significant financial benefits to owners
(including lessors) and users of US-manufactured aircraft. These benefits led to the usual
tensions between Europe and the United States and to a number of determinations
unfavourable to the United States at the WTO. The elimination of the FSC and ETI
regimes, combined with the long-standing unfavourable treatment of aircraft leasing
under the Subpart F regime, was felt to put US-owned aircraft lessors at a significant
commercial disadvantage. The relevant amendments to Subpart F are intended to deal
with this and this extract from the House Committee Report is telling:
The Committee anticipates that taxpayers now eligible for the benefits of the (ETI or
FSC regimes) will find it appropriate, as a matter of sound business judgment, to structure
their business operations to take into account the tax law changes brought about by the
bill. The Committee notes that courts have recognised the validity of structuring
operations for the purpose of obtaining the benefit of tax regimes expressly intended by
Congress. The Committee intends that structuring or restructuring of operations for the
purposes of adapting to the repeal of the (ETI of FSC regimes) will be considered to serve
a valid business purpose and will not constitute tax avoidance... For example, the
Committee intend that a restructuring undertaken to transfer aircraft subject to existing
FSC or ETI leases to a CFC lessor, to take advantage of the amendments made by this
bill, would serve as a valid business purpose and would not constitute tax avoidance for
purposes of determining whether a particular tax treatment (such as non-recognition of
gain) applies to such restructuring.
Given the almost uniquely unfavourable treatment accorded previously to aircraft leasing
under the Subpart F provisions, this is a most welcome development and has already had
the anticipated effect. The aircraft leasing community in Ireland now includes a number
of US-owned platforms.
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