South Africa: VAT treatment of leasing of aircraft engines

Concerning the value added tax treatment of leasing of aircraft engines

Concerning the value added tax treatment of leasing of aircraft engines

The position of the South African Revenue Service (SARS) regarding the value added tax (VAT) treatment of aircraft leases is to separate the leasing of aircraft engines from the aircraft itself.

Under this position, a non-resident lessor that leases only aircraft engines to be used in South Africa is deemed to have an enterprise for VAT purposes and must register for VAT when the value of the lease payments exceeds R1 million in any 12-month period.

Background

Effective 1 April 2021, the definition of “enterprise” in section 1(1) of the VAT Act was amended to include a proviso providing that when a lessor is neither a resident of South Africa nor a registered vendor and that lessor supplies goods (ships, aircraft and rolling stock) under a cross-border rental, then the lessor does not conduct an enterprise in South Africa provided that:

  • The supply is made to a recipient (a lessee) that is a resident of South Africa;
  • The goods being supplied are for use by the lessee wholly or partly in South Africa; and
  • The lessee and lessor agreed in writing that the lessee will enter the goods for home consumption and pay the VAT on importation, and that the lessee will not be reimbursed by the lessor for any VAT incurred.

Historically, prior to enactment of this provision, the Commissioner for the South African Revenue issued various rulings relating to section 72 of the VAT Act that concluded that foreign lessors of aircraft and aircraft engines were not required to register for VAT purposes, provided certain requirements were met. These rulings were withdrawn, as of 31 December 2021.

Aircraft leasing transactions and VAT

Following the enactment section 1(1) of the VAT Act, the SARS’ position regarding the leasing of aircraft engines is separate from the aircraft, as follows:

  • Since the term “aircraft” is not defined in the VAT Act, it must be given its ordinary, grammatical meaning.
  • With regard to the dictionary definition, the term “aircraft” does not include only the aircraft engines and cannot be broadly interpreted to include engines.
  • Consequently, when only an engine is leased separate from the aircraft, the exception to the definition of “enterprise” does not apply.

To reiterate—a non-resident lessor that leases only aircraft engines to be used in South Africa has an enterprise for VAT purposes and must register for VAT when the value of the lease payments exceeds R1 million in any 12-month period.

Read an April 2022 report [PDF 779 KB] prepared by the KPMG member firm in South Africa

 

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