Tax Implications of the Lease of Aircraft

October 23, 1995 BIR RULING NO. 161-95 28 (b) (6) 102 000-00 161-95 Belo Gozon Elma Parel Asuncion & Lucila 15th Floor, Sagittarius Condominium H. V. dela Costa Street Salcedo Village Makati, Metro Manila 1227 Attention: Atty . Bernard Raymond T . Saulog Gentlemen : This refers to your letter dated February 24, 1995, on behalf of your client, Grand International Airways, Inc. (GRAND AIR), seeking for a formal ruling as to the tax implications of the lease of aircraft. aisadc It is represented that GRAND AIR is a corporation organized and registered under the laws of the Philippines; that in order to carry out its business, it intends to lease two (2) aircraft which are more particularly described as follows: AIRCRAFT 1 Airbus A300-B-4-100, Serial No. 9 AIRCRAFT 2 Airbus A300-B-4-200, Serial No. 46 that the lessor of Aircraft 1 is AERO USA, INC., a corporation organized and existing under the laws of the State of Connecticut, U.S.A.; that, on the other hand, the lessor of Aircraft 2 is POLARIS HOLDING COMPANY, a corporation organized and existing under the laws of the State of Delaware, U.S.A.; that both these companies do not maintain any office or do permanent business in the Philippines; that pursuant to the lease agreement executed by the parties concerned, GRAND AIR shall pay unto the aforenamed lessors rentals at the rate of US$800.00 per flight hour for months 1 to 12 and rentals at the rate of US$1,000.00 per flight hour for months 13 to 16; that it is further agreed upon by the parties that the said rates shall apply to the first 150 Flight hours consumed; that GRAND AIR binds itself to pay additional amount of US$300.00 for every flight hour in excess of 150 flight hours; and that the minimum rentals payable to the lessors has been fixed at US$150,000 while the maximum rentals is pegged at US$180,000; that in view of the facts presented, you are seeking for confirmation of the following opinions: 1. That GRAND AIR is not required under the law to withhold any tax on the rental payments on behalf of the non-resident lessors, considering that the same are tax exempt under the RP-US Tax Treaty; and 2. That the rental payments are not subject to VAT. In reply, please be informed that considering that the parties (lessee and lessors) in this case (i.e., GRAND AIR, AERO USA and POLARIS HOLDING COMPANY) are resident corporations of the Philippines and the United States, respectively, the provisions of the RP-US Tax Treaty should be applied. In connection thereto, paragraphs 1 and 6 of Article 8 of the said RP-US Tax Treaty provides as follows: "ARTICLE 8 "(1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. xxx xxx xxx "(6) The term "business profits" means income derived from any trade or business whether carried on by an individual, corporation or any other person, or group of persons, including the rental of tangible personal (movable) property." xxx xxx xxx Moreover, Articles 5 (1) and (2) of the said Treaty provides, viz: "ARTICLE 5 "PERMANENT ESTABLISHMENT "(1) For purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "(2) The term "fixed place of business" includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." xxx xxx xxx It is very clear from the foregoing that the rental on the subject aircrafts is considered "business profit" as contemplated under Article 8(6) of the RP-US Tax Treaty, the said rental being "rental of tangible personal (movable) property". Furthermore, the said Treaty likewise provides that "business profit" on the said rental may only be taxed in the United States where the lessors are residents, considering that the said foreign lessors have no "permanent establishments" in the Philippines as the said term is defined under Article 5(1) and (2) of the said Tax Treaty. It follows therefore that the rentals paid to the said non-resident lessors (i.e., AERO USA and POLARIS HOLDING COMPANY) by the lessee-domestic corporation (i.e., GRAND AIR) for the lease of the subject two (2) aircrafts are exempt from Philippine income tax under the RP-US Tax Treaty, and therefore, GRAND AIR is not required under our tax laws to withhold any tax on its rental payments to AERO USA and POLARIS HOLDING COMPANY. (BIR Ruling No. 192-91 dated September 17, 1991) Furthermore, the subject rental payments are not subject to the value-added tax imposed under Section 102 of the Tax Code, as amended, considering that non-resident foreign corporations are no covered by out VAT law. This ruling is being issued on the basis of the foregoing facts represented. If upon investigation, however, it will be disclosed that the facts are different from the said representation, this ruling shall be considered null and void. cdpr Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue