VAT and aircraft import in Switzerland
In recent months, the Swiss authorities have intensified their checks on the customs status of business aircraft that are in Switzerland but have not been imported. During several investigations, it was found that many owners and operators are not always well-informed about their rights and obligations in this regard. Bearing in mind that tax reassessments can have costly consequences, attorney-at-law Philippe Renz reviews the current situation.
VAT island at the heart of Europe
Since Switzerland is not a member of the European Union (EU), services provided or acquired in Switzerland, along with any imported goods, are subject to Swiss VAT, irrespective of the European VAT regime. In principle, the standard rate for aviation is 8%, which applies equally to the sale, lease, importation, and maintenance of an aircraft, as well as any transportation carried out using it. Only issues related to VAT and customs duties on imports are addressed here, namely: when should an aircraft be imported into Switzerland, can VAT be recovered and how, and what are the customs duties?
In recent months, the Swiss Federal Customs Administration (FCA) has carried out quasi-systematic checks on business aircraft that are frequently based in Switzerland but are not in free circulation, in order to determine whether they should be – or should have been – imported. The sums involved are significant and the FCA’s relative laxity during the booming economic years has given way to a much more rigid approach. Therefore, many owners, operators and managers have been subject to investigations, tax reassessments, and/or criminal proceedings, some of which are paying a heavy price.
Customs laws vs. Aviation laws
A common initial problem, both in Switzerland and in the EU, is the confusion between aviation laws and customs laws. These legal frameworks have different ends, so it is not because an aircraft is authorized to fly within a given country under aviation law that the aircraft can carry out this flight in accordance with that country’s customs law, without being released for free circulation.
For example, from the point of view of traffic rights, an internal commercial flight from Geneva to St. Moritz (cabotage) may be authorized in certain cases by the aviation authorities, but only if the aircraft has been imported into Switzerland. In the same way, while traffic rights are not required for the non-commercial flight of an aircraft to, from, or within Switzerland, the aircraft’s stay in Switzerland can rapidly lead its owner and, by extension, its beneficial owner, to have to import it. Moreover, the definition of aviation law’s “commercial operation” is often interpreted more widely by aviation authorities in Switzerland and Europe than customs law’s “commercial use,” as defined in the Istanbul Convention on Temporary Admission. Thus, a flight that is considered to be private from the aviation viewpoint may be described as commercial under this Convention. Here too, the aircraft’s owner can easily be deceived by these differences and wrongly believe that he was within his rights.
Exempt status vs. Obligation to import
Any goods – such as an aircraft – that arrive in a particular customs territory acquire a specific customs status based on the purpose and duration of their stay in that territory. For example, an aircraft which is sent to Switzerland for repair is placed under the customs procedure for inward processing traffic. While an aircraft that is staying there for a specified number of days before being re-exported is placed under the temporary admission procedure, without any requirement for that aircraft to be released for free circulation. Any aircraft that cannot be placed under any other status (transit, outward processing traffic, importation as a personal effect) must be imported, and is therefore subject to customs duties, chiefly VAT.
The borderline between the temporary admission status and the release for free circulation may be tenuous and vary according to the customs authorities’ practices and their interpretation of Swiss and European legislation. In Switzerland, in view of the current practice with respect to aircraft that are not HB-registered, any aircraft operated under a commercial regime will only be able to stay in Switzerland for one or two days before needing to leave the country; otherwise, it will have to be imported. Exceptions to this rule are rare. An aircraft destined for private use under customs law may remain in Switzerland for 6 months per year without being imported, if neither the company that owns the aircraft nor the actual users are domiciled or resident in Switzerland (this rule is known as the 180-day rule). Otherwise, the so-called 12×3-day rule (12 cross-border flights per year, with a maximum of 3 days in Switzerland each time) will apply, among other things. Thus, the owner or user of an aircraft domiciled in Switzerland must import it as soon as the aircraft remains in the country for four days in a row.
Importation and Recovery
When an aircraft meets the importation conditions, it is up to the person who brings it into the customs territory to declare it to the FCA. Generally, the company that owns the aircraft or its operator does this but failing that, the authorities can also hold the pilot or the management company (for example) responsible for the customs debt.
Unless a duty-free status applies, the aircraft’s market value at the time of release for free circulation is used as a basis for the VAT calculation. Importing to Switzerland has other consequences at customs level: the FCA considers that all work carried out on the aircraft from then on (passive work) – including all maintenance work – must be cleared and also taxed when the provider is not located in Switzerland. While this Swiss practice differs from that of the vast majority of European countries, the FCA is particularly careful, and even punctilious, in monitoring its observance.
The question everyone is asking is: how can the VAT burden be reduced or avoided? An aircraft may be imported duty-free if it is imported by and on behalf of the holder of an AOC that is operating it in cross-border traffic. The same may apply if an aircraft is handed over by its owner exclusively to an AOC operator to operate on its own account, while assuming all the economic risks. In all other cases, VAT will have to be paid. This may be refunded in part or in full depending on the business and private use of the aircraft, through the owning company obtaining a VAT number. As a general rule, if the aircraft’s user makes use of it at least 80% for professional purposes and a maximum of 20% for private purposes, the paid tax can be fully recovered.
Customs duties are calculated in relation to the aircraft’s weight. They are not very high and can generally be avoided by means of a declaration by the beneficial owner attesting to the exclusively civilian use of the aircraft.
Steps to follow
In order to avoid any unpleasant surprises and importation delays, the procedure related to the release for free circulation of the aircraft, and where appropriate, the recovery of input tax, should be anticipated weeks in advance. The importer should therefore:
- Prepare all the necessary documentation for the import procedure;
- Register for VAT (if not already done);
- In the case of a foreigner, appoint a tax representative in Switzerland;
- Ensure that the contractual ownership and operating structure of the aircraft meets the legal requirements for the recovery of input tax;
- Request written confirmation by the tax authorities regarding the recovery of input tax;
- Where appropriate, enter into a centralized settlement agreement with the tax authority for the declaration of maintenance work.
An importer who has not followed these steps correctly or within the deadlines is risking an automatic importation procedure, payment of default interest at an annual rate of 4%, the inability to get the input tax refunded, the requirement to reimburse any VAT that was wrongly recovered and even criminal penalties. As such, it is in the interest of owners and operators of aircraft that have not been imported into Switzerland but that stop in Switzerland, to proactively clarify the customs status of their aircraft, and if need be, take the necessary steps to comply with the legal requirements. With all the information already in its possession, the FCA is closely monitoring them, and is perhaps even already tracking them.