A rather popular form of using foreign companies in international tax planning is that of leasing companies.

Under this scenario, a company is set up for the ownership of (usually valuable) assets (e.g. airplanes) which it leases to affiliated and/or external customers.

1. Reasons for setting up foreign leasing companies

There are various reasons for setting up leasing companies. An important reason for using this kind of special purpose vehicles may be risk insulation; companies often strive to separate risk-bearing activities legally from other operations. In addition, and this may specifically be important for leasing operations, if risk-bearing activities involve the use of valuable assets (such as airplanes), companies may want to separate ownership of these assets from the operations for which these assets are used. Such separation can be established by using a separate company for the ownership of the asset. The assets can then be leased to the group company using the asset in its commercial operations (or directly to external customers).

However, also in case the leasing of assets is a group’s core business, it may be worthwhile to consider structuring the ownership of the assets in question via special purpose vehicles, especially for tax planning purposes.    
 
Fiscal reasons for setting up foreign leasing companies are mainly the possibility to qualify for a low tax rate (or tax exemption) for profits derived from the activities in question. Furthermore, in certain (albeit exceptional) cases, a low VAT rate may provide fiscal benefits.

2. Important characteristics for a country to be regarded as tax advantageous jurisdiction for employment companies

A country should meet the following criteria in order to be regarded as tax efficient jurisdiction for leasing companies:

• it should have a low general corporate income tax rate, or, such as Malta, in spite of the low general corporate income tax rate, there should be ways (in the case of Malta; through  distribution of the profits) to mitigate the effective tax burden over such profits

• it should have a large double tax treaty network, in many cases providing for reduction of (and preferably exemption from) withholding tax over lease payments made to lessors established in such countries by lessees of such companies. Many countries levy withholding taxes. These taxes are usually levied over payments of dividends, interest and/or royalties made by residents of those countries, but some countries also levy withholding taxes over lease payments (sometimes via requalification of the payments in question to royalty payments). The rates of these taxes vary, but in some countries they may rise to 30%. The availability of double tax treaties, which may provide for reduction of such withholding taxes in case of payments to companies in countries that have tax treaties with the countries of residence of the paying parties, is an essential element in international tax planning

• Ideally, it should not levy withholding tax over lease payments

• ideally, the country of establishment of the leasing company would not have withholding taxation over dividend payments (or it should be relatively easy to circumvent such taxation)

• ideally, the country of establishment of the leasing company would not levy tax over gains upon the sale of shares in local companies by non-resident shareholders either.

3. Issues to consider

Under new European rules for VAT, introduced in 2010, administrative burdens in the field of VAT for companies engaged in leasing operations have increased. In more cases than before, this kind of companies is required to register for VAT and for so-called ‘VIES’ (VAT Information Exchange System), applicable in the EU.   Although in the vast majority of the cases, application of VAT rules should per balance have a financially neutral effect, this is something to keep in mind when managing such operations.

Furthermore, when it comes to airplane leasing, it should always be considered whether the activities in question require a license in the country of establishment of the leasing company. 

4. What we can do for you

Consulco has significant experience and expertise in the fiscal- and legal guidance of leasing companies in Cyprus, including regulatory aspects of such operations. 
We are able to assist clients using this kind of companies in all the relevant areas, such as incorporation, domiciliation, taxation, legal matters and accounting matters. 
 

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