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COMMENTARY & ANALYSIS
tax notes international®

The Future of Aircraft Leasing Through Ireland

by Jun Li, Dmitri Semenov, and Petrina Smyth

considerations related to leasing aircraft, as well
Jun Li and Dmitri Semenov are partners with
EY in New York, and Petrina Smyth is an as the effect of the Ireland-U.S. treaty on these
executive director with EY in Dublin. transactions and structures. Section III examines
the BEPS initiative and other regimes designed to
In this article, the authors discuss the tax curb tax avoidance and increase financial
aspects and structuring of aircraft leasing in transparency around the world.
Ireland in light of U.S. federal income tax
considerations, the Ireland-U.S. treaty, and the Issues discussed will include the EU anti-tax-
OECD’s base erosion and profit-shifting project. avoidance directive (2016/1164 (ATAD 1)), the
Multilateral Convention to Implement Tax Treaty
Copyright 2019 EY. All rights reserved. Related Measures to Prevent BEPS (the
multilateral instrument, or MLI), and transfer
Ireland has positioned itself as the center of pricing and mandatory disclosure regime
the aircraft leasing industry. Over 50 percent of provisions.
global aircraft are leased from Ireland, and 14 of
1 The timing of changes in tax treaties related to
the top 15 global lessors operate in the country.
the MLI will depend on implementation timelines
There are many reasons why Ireland has become
in individual countries. The timing of the
the global aircraft leasing hub. In addition to a
implementation of the interest limitation rules in
robust infrastructure and access to experienced
Ireland is unclear, but it is anticipated that it will
professionals, Ireland-based aircraft structures
be implemented in Ireland from January 1, 2021.
include access to the United States and
New Irish transfer pricing provisions are effective
international treaties to mitigate potential
for periods commencing on or after January 1,
withholding taxes.
2020. Aircraft investors will need to review their
Ireland also offers a low effective corporate tax structures in light of these provisions’ upcoming
rate and other tax benefits. Some of these have effective dates. While challenges remain, Irish
come under scrutiny because of the OECD’s base structures continue to provide compelling
erosion and profit-shifting project. Ireland and benefits for aircraft ownership.
many of its treaty partners have committed to
implementing BEPS-related recommendations, I. Aircraft Leasing Structuring Options
which could affect the availability of reduced
treaty withholding rates for some structures as A. S110 and Irish Trading Company Structure
well as increase the overall effective tax rate
There are several aspects of Ireland’s tax
because of the application of interest limitation
regime that make the country a favorable locale
and anti-hybrid rules.
for aircraft leasing. These include:
This article examines recent trends and
• corporate tax rate of 12.5 percent for trading
structuring considerations in aircraft leasing from
activities;
Ireland. Section I discusses the common structures
• accelerated aircraft tax depreciation over
used to own and lease aircraft from Ireland.
eight years;
Section II discusses U.S. federal income tax
• no domestic withholding taxes on outbound
lease rental payments;
1
Market Research Future, “Aircraft Leasing Market Research Report
– Global Trends and Forecast to 2025” (July 2019).

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COMMENTARY & ANALYSIS
• effective 0 percent-rated VAT regime with
full recovery on costs related to aircraft
leasing activities;
• generous exemptions from withholding
taxes on interest (for example, quoted
Eurobonds) and dividends paid from
Ireland;
• no onerous “thin capitalization” rules;
• signed double taxation treaties with 73
countries; and
• generally, no transfer taxes on sale of
aircraft.
422
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2
Irish S110 and Irish trading company
structures are typically used for aircraft-related
deals. A section 110 structure is generally funded
with profit participating notes and has been
historically subject to a very low effective rate
because most profits are repatriated via
deductible interest, including profit participating
interest. A trading company structure is based on
2
An Irish S110 company is an Irish tax-resident company that meets a
set of conditions qualifying it for specific treatment under Irish tax
legislation.
TAX NOTES INTERNATIONAL, JANUARY 27, 2020

a fully taxable Irish trading entity subject to 12.5
percent tax, reduced through depreciation and
leverage. Most aircraft leased from Ireland are
held within the trading company structure.
However, the section 110 structure has been
particularly popular with U.S. private equity
investors. Figure 1 illustrates section 110 and the
trading company potential solutions.
Fund Investment Structure
Figure 2 depicts a sample fund investment
structure that can be used to allow U.S. and
foreign investors to participate in aircraft leasing
deals.
The onshore fund is formed as a U.S.
partnership for U.S. investors, and the offshore
fund is formed as a Cayman Islands partnership
for foreign and U.S.-tax-exempt investors. Both
are treated as partnerships for U.S. federal income
tax purposes. Using the partnership structure for
the onshore fund allows U.S. investors to mitigate
the effect of U.S. anti-deferral rules (that is,
passive foreign investment companies and
controlled foreign corporations), while taking into
account gains, losses, and foreign taxes on a
current basis. Further, this structure should allow
U.S. investors to mitigate the corporate tax at the
U.S. blocker level for U.S. deals and mitigate PFIC
exposure for non-U.S. deals.
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COMMENTARY & ANALYSIS
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The partnership structure for the offshore
fund helps the Irish holding company qualify for
Ireland-U.S. treaty benefits, mitigating the Irish
withholding tax on interest under the portfolio
interest income rules.
II. U.S. Federal Income Tax Considerations
U.S. tax consequences associated with aircraft
leasing depend in part on the type of income
(leasing revenue vs. gain on the sale), the type of
transaction, and the location of the aircraft
(United States-to-United States, foreign-to-
foreign, or international flights). The use of Irish
holding entities can reduce exposure to U.S.
withholding (30 percent), U.S. effectively
connected income (21 percent), or U.S.
transportation income (4 percent) taxation to the
extent that the Irish entity can qualify for the
benefits of the 1997 Ireland-U.S. treaty. For
example, article 7 of the treaty exempts profits
from domestic flights unless those profits are
connected with a permanent establishment, and
article 8 specifically addresses profits from the
operation of aircraft in international traffic,
eliminating the 4 percent gross transportation tax
discussed below. Article 13 of the treaty also
exempts gains from the sale of such aircraft from
tax, even if the seller has a PE in the United States.
In addition to the beneficial tax reductions, the
Ireland-U.S. treaty contains a special limitation on
benefits provision, resulting in a reduced burden
for qualifying under the treaty. Article 23(4)
grants treaty access to residents deriving income
from shipping and air transport who otherwise
fail the LOB provisions, if at least 50 percent of the
resident’s ownership is held by U.S. persons, U.S.
citizens, or citizens of a third state that grants a
similar exemption for shipping and air transport
income.
On December 22, 2019, proposed regulations
were issued (REG-100956-19), which allow
foreign corporations that are selling leased items
of tangible personal property to apply the
depreciation rule to source the gain from such
sale.
For example, assume that an Irish resident
leasing corporation has been leasing airplanes to
foreign airlines and that the planes have been
flown entirely outside the United States. Assume
further that multiple sales of the airplanes were
made in 2019, and that such sales were
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COMMENTARY & ANALYSIS
attributable to the office of a dependent agent in
the United States. Under the commonly accepted
interpretation of section 865(e)(2), before issuance
of the proposed regulations, all of the gain on
sales would be U.S.-sourced and taxable as
income effectively connected to a U.S. trade or
business. Under new prop. reg. section 1.865-
3(d)(4), the gain would be foreign-sourced to the
extent of the foreign depreciation adjustments
made to tax basis. Any excess gain would be
sourced like inventory.
Assume that the airplanes sold in 2019 were
purchased for $200 and that $80 of depreciation
was allowable for the lease period. All of the
depreciation is foreign depreciation, because the
planes were flown entirely outside of the United
States. If the airplanes were sold for $150, then the
gain would be $30 ($150 sales price - $120 tax basis
= $30), all of which would be foreign-sourced and
not taxable in the United States.
Under many leasing projects, the Irish lessor
retains an aircraft manager that operates in both
Ireland and the United States. Under the IRC and
under the Irish treaty, sales made by a U.S. aircraft
manager always raised a concern or risk that the
aircraft manager would be found to be a
dependent agent selling through an office in the
United States. Under the new proposed
regulations, sales by a dependent agent in the
United States of aircraft or other leased
equipment that has been used entirely outside the
United States will largely be foreign-sourced and
not taxable. (Care should be taken, however, to
ensure that the aircraft was not used in the United
States as a portion of the recapture gain on the sale
of the aircraft will be U.S.-sourced under the
depreciation rule.) Taxpayers can rely on these
proposed regulations and cause this new rule to
be effective for tax years beginning after
December 31, 2017.
Tables 1 and 2 summarize key U.S. tax
planning considerations associated with the
United States, international, and foreign-to-
foreign flights.
III. BEPS Considerations and Irish Response
A. International Initiatives
Taxing authorities around the world continue
to demand increased levels of transparency and
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reporting from alternative investment funds
regarding their investors, business operations,
and transactions. Several initiatives are being
implemented globally, such as the BEPS project,
the common reporting standards (CRS) initiative,
the U.S. Foreign Account Tax Compliance Act,
and ATAD. Some of these initiatives may put
pressure on the Irish effective tax rate and the
ability to claim treaty benefits. We have outlined
their possible effects in broad terms below. Each
structure will have to be reviewed on a case-by-
case basis to understand the impact, if any, of
ATAD, BEPS, and other international tax
developments.
As of October 30, 2019, 90 jurisdictions had
signed the MLI, which contains minimum
standards relating to treaty abuse. The Ireland-
U.S. treaty abuse minimum standard requires that
all treaties include either:
• a principal purpose test (PPT) only;
• a PPT and either a simplified or detailed
LOB provision; or
• a detailed LOB provision, supplemented by
a mechanism that would deal with conduit
arrangements not already dealt with in tax
treaties.
The LOB should contain provisions
identifying which residents are able to claim
treaty benefits (individuals, listed entities, or
entities that are 100 percent owned by other
treaty-qualified persons). The PPT should deny
benefits if the principal purpose of the
arrangement is to obtain treaty benefits.
ATAD outlines action in many areas,
including hybrid mismatches, interest
restrictions, and CFCs. These changes will affect
several aspects of international tax law, including
anti-conduit financing rules, limitations on the
ability to use interest expense deductions, and
new rules for CFCs triggering taxation of
undistributed CFC income at the EU holding
company level.
These rules will work in addition to the MLI.
Their goal is to reduce interest deductions and
other deductible payments under hybrid
arrangements/vehicles when a deduction, but no
corresponding income inclusion, is generated in
an EU payer jurisdiction. Otherwise, a double
deduction is generated (that is, a deduction is
available for the same payment in both an EU
TAX NOTES INTERNATIONAL, JANUARY 27, 2020
 COMMENTARY & ANALYSIS

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Table 1. Taxation of Foreign Investors Under U.S. Domestic Rules
Irish HoldCo
Benefits (if meets
Categories of Flights Rental Incomea Gains on Salesb U.S. Blocker LOB)

U.S.-to-U.S. flights 30% withholding tax 21% if ECIc Potentially Yes

(WHT), unless ECI,
then 21%

Foreign-to-foreign 0% 0% if not sourced to No Yes

flights U.S., 21% otherwise

International flightsd 4% gross 21% if income sourced No Yes

transportation tax to U.S.
a
For aircraft leased to U.S. airlines for domestic use, the rent attributable to domestic use should be treated as U.S.-source
rental income and could be subject to 21 percent net basis taxation or 30 percent gross tax. U.S.-source rental income from
domestic flights that is not effectively connected to a U.S. trade or business is subject to 30 percent gross tax. Any U.S.-source
rental income could be subject to U.S. net basis tax if the income was considered effectively connected to a U.S. trade or
business that the company had in the United States.
b
Gain on the sale of aircraft, including gain on aircraft sold outside the United States, may be considered U.S.-source income
subject to U.S. net basis tax. Under the newly proposed regs, gain on the sale of aircraft will be U.S.-sourced and effectively
connected to the extent of the previous U.S. depreciation allowances. Any excess gain should be sourced as inventory. If the
aircraft was used predominantly outside the United States, the gain should be considered foreign-source income, non-ECI.
c
If S110 Co. is found to be engaged in a U.S. trade or business, it will be subject to U.S. federal income tax on any income that
is considered to be effectively connected with such trade or business. The potential federal income tax rates goes up to 21
percent (plus applicable state and local taxes). Also, a branch profits tax of 30 percent may apply (unless reduced by a treaty).
d
In general, foreign carriers cannot operate aircraft on U.S. domestic flights (flights that begin and end in the United States).
Foreign carriers can and do use aircraft for flights that end and/or begin in the United States. Rent attributable to such
international flights is 50 percent U.S.-sourced, and such U.S.-source income may be subject to a 4 percent gross transportation
tax. The gross transportation tax is defined as gross income (including rent) that is attributable to transportation to and from
the United States, that is, international flights that begin or end in the United States. In general, gross transportation income
shall not be treated as effectively connected with the conduct of a trade or business in the United States unless (i) the taxpayer
has a fixed place of business in the United States involved in the earning of U.S.-source gross transportation income, and (ii)
substantially all (at least 90 percent) of the U.S.-source gross transportation income of the taxpayer is attributable to a fixed
place of business in the United States.

member state and one or more other
jurisdictions). Furthermore, these initiatives seek
to reduce the availability of interest deductions in
excess of interest income by limiting deductions
using a limitation based on earnings before
interest, taxes, depreciation, and amortization.3
Also, the CFC rules look to force the inclusion of
all low-taxed foreign passive income when it does
3 uncertainty that increases in substance and
The ATAD directive suggests an EBITDA 30 percent limitation; a €3
million safe harbor limitation amount is proposed as a floor to the
EBITDA limitation. Also, the structures may have to be amended to take
account of ATAD with previously used hybrid financing arrangements
potentially no longer available. In May 2017 the Council of the European
Union adopted the directive amending the ATAD. This directive (2017/
952/EU), known as ATAD 2, extends the scope of ATAD to hybrid
mismatches involving non-EU countries. Also, ATAD 2 encompasses
forms of hybrid mismatches not covered by ATAD.
not appear there is sufficient substance, the
“significant people functions approach,” or to
force the inclusion of this income to the extent
there are no significant people functions in the
jurisdiction from which the income flows.
The form that changes necessitated by ATAD
will take is becoming clearer as each EU
jurisdiction publishes its own implementing
legislation. However, it is not yet clear how
jurisdictions that have adopted the MLI will
ultimately apply it. The evident trend leaves no
business purpose will be required to continue to
take advantage of treaty networks. The time to
begin analyzing foreign investment structures
and taking steps to ensure continued treaty access
is now.

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COMMENTARY & ANALYSIS

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Table 2. Taxation With Application of the Ireland-U.S. Treaty (assuming that Irish Company meets the
limitation on benefits (article 23))
Irish HoldCo
Benefits (treaty
Categories of Flights Rental Income Gains on Sales U.S. Blocker qualified)

U.S.-to-U.S. flights 0% WHT, unless 0%, unless attributed Potentially Yes

(article 7 — business attributed to PE, to PE, assuming U.S.
profits) assuming U.S. source, source, then 21%
then 21%

Foreign-to-foreign 0% 0%, unless attributed No Yes

flights to PE, assuming U.S.
source, then 21%

International flights 0% 0% (article 13 — No Yes

(article 8 — shipping capital gains)
and air transport)

Also, the structure may have to be amended to
take account of ATAD with previously used
hybrid financing arrangements potentially no
longer available. The effect of interest restrictions
on the effective tax rate must also be assessed. At
the time of this article’s publication, the timing of
the implementation of the interest restriction rules
in Ireland was unclear, but it is anticipated that it
will be implemented in Ireland from January 1,
2021.

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Table 3. Comparison of International Reporting Rules
Initiative
EU Mandatory Disclosure
Regime (MDR)
Transfer Pricing
Multilateral Instrument —
Treaty Access/PPT
Transparency and
Reporting
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Issue
To the extent that the first
step of implementation of
any cross-border
arrangements (transactions)
has been taken from June 25,
2018, to June 30, 2020, same
may be reportable to Irish
Revenue by August 31, 2020.
New transfer pricing rules
contained in the Irish
Finance Bill 2019 come into
effect for periods
commencing on or after
January 1, 2020.
Minimum standard in MLI
requires adoption of PPT or
PPT + LOB or LOB with anti-
conduit.
Restriction of tax treaty
access if obtaining the
benefits of the tax treaty is a
main purpose.
Ireland is fully
implementing OECD
exchange of information
requirements in respect of
tax rulings.
FATCA/CRS require Irish
Revenue to exchange
information with other
authorities.
Potential Practical Impact
Additional reporting is
required.
Additional transfer pricing
compliance and disclosure.
Source countries will assess
if HoldCo arrangement in
Ireland meets the PPT.
There may be additional
withholding tax costs if
treaty benefits are not
available.
FATCA/CRS — if within
scope, must be able to collect
the required data.
FATCA reporting required
by June 30 each year.
CRS reporting required by
June 30 each year.
COMMENTARY & ANALYSIS
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Actions
Need to incorporate into
transaction procedures an
additional step to ensure
that MDR is considered.
Consider whether existing
transfer pricing policies and
documentation satisfy the
Finance Bill 2019
requirements including
master/local file
requirements.
Undertake analysis of
HoldCo structure in Ireland
to determine potential effect
of PPT, if adopted in Irish
treaties.
Consider whether
alternative options might be
more efficient going forward
(e.g., greater substance,
transparent structures, or
consolidating structures).
Identify whether funds/
management group have
notification and filing
obligations in Ireland.
Consider whether it is
operationally feasible to
collate the required data.
Consider whether within
scope of FATCA and CRS,
and if data can be collected
and reported by the relevant
deadlines.
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COMMENTARY & ANALYSIS

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Table 3. Comparison of International Reporting Rules (Continued)
Initiative Issue Potential Practical Impact Actions

ATAD was agreed among Timing in relation to Monitor implementation of

EU member states on June
20, 2016. The ATAD includes
a general antiabuse rule, an
interest limitation rule, exit
taxation rules, CFC rules,
and anti-hybrid rules.
introduction of interest rules.
limitation rules in Ireland is
uncertain at this point. At
present, expected
implementation date is
January 1, 2021.

Ireland has some limited Consider how changes will

“subject to tax rules” but affect structures in the
nothing in relation to future.
hybrids generally, hybrid
entities, or imported hybrid
ATAD mismatches. Anti-hybrid
rules will be implemented
from January 1, 2020, with
anti-reverse hybrid rules to
be implemented in 2022.

Step-up largely given on Consider potential future

entry to Ireland. ATAD restructuring options that
compliant exit tax was will meet the new
implemented in Ireland in requirements.
2018.

CFC rules were

implemented in Ireland in
the Finance Act of 2019.

Figure 3 outlines some of the timing issues
associated with the ATAD and MLI initiatives.
B. Future Considerations
Ireland continues to work with the
international community to address the
challenges around treaty shopping and tax
avoidance. Table 3 outlines considerations to
make sure that aircraft investment structures
comply with these new rules.
IV. Conclusion
Ireland is a world leader in the aviation
leasing industry and will likely remain so. It has
provided an efficient and reliable jurisdiction for
investing in aircraft.
However, changes relevant to the aviation
leasing industry are undoubtedly coming to the
international tax landscape, some of which are
already well underway. These changes will
substantially alter how business is done, along
with the considerations and planning undertaken
to maintain tax-efficient structures. Although all
the changes are not yet clear, now is the time to
begin preparing for these changes and initiating
the steps to maintain or create tax-efficient
structures. This is the case not just for the airline
leasing industry, but also for the asset
management industry as a whole. 

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