India Denies Tax Breaks to Irish Aircraft Lessors
India’s tax authorities are now rejecting tax breaks for Irish-based aircraft lessors, challenging the benefits these lessors previously enjoyed under a tax treaty between India and Ireland. The Economic Times reports that at least three unnamed lessors have been denied tax exemptions, marking a shift in India’s approach to international leasing practices.
India’s Crackdown on Tax Exemptions for Irish Lessors
The Indian Revenue Service is relying on the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument, an international treaty designed to combat tax avoidance by multinational companies. Both India and Ireland are signatories to BEPS, which allows jurisdictions to amend tax treaties to prevent tax base erosion. The tax office claims these lessors operate from Ireland primarily to minimize taxes on lease income earned in India, and the BEPS framework provides grounds for India to deny treaty benefits if it deems the Irish setup as primarily tax-driven.
Under the existing tax treaty, lessors based in Ireland are exempt from paying taxes in Ireland on income earned from leasing aircraft to Indian airlines. Moreover, Indian airlines have not been required to withhold taxes on lease payments remitted to Irish lessors. This arrangement has allowed Irish lessors to operate with favorable tax conditions, but India’s tax office argues that these setups may lack substantial commercial purpose beyond tax benefits.
Dispute Over Lease Rentals from 2020-21
The tax dispute concerns lease rentals for the fiscal year 2020-21, which are now under review by India’s tax office dispute resolution panel. Under the BEPS Multilateral Instrument, a “principal purpose test” is applied to determine if tax treaty benefits are primarily used for tax avoidance. If the panel finds that one of the principal purposes of operating from Ireland is to gain tax advantages, the tax benefits may be denied.
To retain these benefits, the affected lessors must convince the dispute panel that their presence in Ireland serves legitimate commercial purposes rather than solely tax-driven motives. If they fail to do so, the decision could have significant implications for other Irish lessors working with Indian airlines, setting a precedent for India’s stance on international leasing structures.
India’s Push for Local Leasing in GIFT City
While India is clamping down on foreign lessors’ tax exemptions, it is actively encouraging aircraft lessors to establish operations within India. Gujarat’s IFSC GIFT City has been promoted as an alternative, offering attractive incentives for aircraft leasing businesses, including a ten-year tax exemption on lease income and tax-free income transfers to other jurisdictions. The government’s goal is to develop GIFT City as a leading hub for aircraft leasing, reducing reliance on foreign leasing structures and retaining more of the economic benefits within India.
Implications for the Aircraft Leasing Market
India’s move to deny tax breaks to Irish-based lessors signals an increasing regulatory focus on multinational tax avoidance in the aircraft leasing industry. With Indian airlines heavily reliant on leased aircraft, this shift could drive up leasing costs if tax benefits for foreign lessors are curtailed. However, India’s push to establish GIFT City as a domestic leasing hub could offset these impacts by providing Indian airlines with local leasing options and potentially reducing long-term costs.
This shift highlights India’s broader tax reform efforts aimed at encouraging companies to operate domestically and contribute more to the Indian economy. As the dispute resolution panel evaluates these cases, the outcome could reshape the leasing landscape for Indian airlines and influence similar tax policies globally.
Sources: AirGuide Business airguide.info, bing.com, ch-aviation.com