VAT exemption for aircraft – scope of the exemption for international airlines

The European Union value added tax (VAT) directive exempts (or zero-rates) supplies of aircraft and parts that are used by “airlines operating for reward chiefly on international routes”. There is a wide divergence between the Member States as to the level of international flights an airline must operate to qualify as such an airline – from more than 50% in Germany to more than 80% in France.

This divergence in approach stems from the differences between the various language versions of the VAT Directive. Each official European language version has equal validity.

On the basis of the German (hauptsächlich), the English (chiefly) and the Italian (prevalentemente) versions of the VAT directive, the German, English and Italian authorities accept that an airline operates for reward chiefly on international routes if more than 50% of its business involves international traffic.

The Dutch language version (hoofdzakelijk) has led the Dutch authorities to set the threshold at over 70%.  By contrast, the French language version of the directive (essentiellement), means that the French authorities require an airline to have more than 80% of its business as operating on international routes.

The only guidance to date as to what the threshold for operating “chiefly” on international routes should be is found in Cimber Air (case C-382/02). The court noted that the interpretation must take account of the divergence between the language versions of the VAT directive. The French, Italian, Spanish and Portuguese versions use the word “essentially” or an equivalent word. By contrast, the Danish, German, English and Dutch versions use, respectively, use “chiefly” or “mainly”. The court acknowledged that the language found in the French, Italian, Spanish and Portuguese versions, suggested that an airline’s international operations needed to account for almost all of its business to qualify for the exemption. By contrast, the language in the Danish, German, English and Dutch versions suggests that all that is required for the exemption to apply to an airline is for its operations on international routes to exceed its non-international operations. Having acknowledged this difference in the various language versions, the European court did not reach any conclusions as to the level of international operations required to fall within the exemption.

Given the limited guidance, care will need to be given in assessing whether an airline qualifies for the exemption in the VAT directive. Counter intuitive though it may seem, because of the different levels of international operation needed for an airline to qualify for the VAT exemption, the same airline could qualify for the exemption in one Member State but not in another. Those Member States that require a high level of international activity before accepting the VAT exemption is available, risk their interpretation of the VAT directive being challenged before the European courts.