Irish tax perks under I-T lens: What it means for aircraft leasing?

For decades, Ireland stood as a premier destination for companies engaged in leasing aircraft to airlines in India. However, recent developments have raised concerns over the future of such arrangements. At least three Irish leasing companies have had tax benefits, as stipulated under the treaty between India and Ireland, denied by the Indian Income Tax (I-T) department. This decision could significantly alter how local airlines procure their aircraft, according to a report in The Economic Times.

 

The I-T department’s scrutiny stems from notices issued to the offshore firms, asserting that their primary motivation for operating from Ireland is to evade taxation on operating lease rentals earned from Indian airlines. Under the tax treaty between India and Ireland, these earnings are exempt from taxation in Ireland, and airlines are not obligated to withhold any tax before remitting rental payments to foreign lessors.

 

Tax arrangements face new scrutiny

 

However, this arrangement is now under examination, particularly as both India and Ireland are signatories to the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI). This initiative aims to close gaps in international tax treaties that allow for tax avoidance.

 

The disputes concerning lease rentals from the financial year 2020-21 are currently being reviewed by a dispute resolution panel (DRP), which consists of three I-T commissioners. According to the ‘principal purpose test’ (PPT) under the MLI, tax treaty benefits may be denied if obtaining a tax advantage is determined to be one of the principal reasons for an arrangement or transaction. Foreign leasing companies will need to persuade the DRP that their operations in Ireland are driven by legitimate commercial considerations rather than solely by tax benefits.

 

GIFT City: A potential hub for aircraft leasing 

Complicating the situation is the emergence of GIFT City, which is promoting the advantages of establishing an aircraft leasing business within its International Financial Services Centre in Gujarat. GIFT City offers a ten-year tax holiday on lease rentals, and any rent paid by a GIFT entity to a lessor in another jurisdiction is exempt from withholding tax.

 

This presents an intriguing opportunity for foreign lessors currently based in Ireland. They could potentially set up operations in GIFT City to lease aircraft, avoiding tax deductions on rental payments made to the original lessor in Ireland while also capitalising on margins from both transactions.

 

Industry insiders indicate that some foreign lessors may consider the prospect of establishing a presence in GIFT City, with reports suggesting that Indian airlines are already exploring lease agreements with firms based there for engines, equipment, and aircraft acquisitions.

 

GAAR threatens GIFT tax shelters

 

However, a lingering concern exists: the possibility that the I-T department could invoke the General Anti-Avoidance Rule (GAAR) against GIFT entities, asserting that they lack sufficient ‘substance’ and were merely created for tax avoidance purposes.

 

GAAR aims to eliminate tax benefits from transactions that lack genuine commercial intent, such as companies without operational facilities or staff.

 

Tax professionals predict varied outcomes from the DRP proceedings. Established firms may have a stronger case than newer lessors operating in Ireland. The I-T department has pointed to representations from the leasing industry advocating for Ireland to forge similar tax treaties with other nations, reinforcing the belief that many lessors were attracted to Ireland primarily due to its tax exemptions.