Aircraft leasing structures: where VAT positions break

Few documents do as much work in an aircraft structure as the lease. It is the instrument that separates ownership from operation, that allocates crew, maintenance, insurance and control between the parties, and that — almost incidentally — determines the value added tax treatment of the aircraft’s use. Owners tend to think of the lease as paperwork to be signed once the real decisions have been made. In fact it is where several of the most important decisions are made, and where the gap most often opens between what a structure claims and what it actually does.

This article sets out how aircraft leasing structures work in Europe and where their VAT positions break: the fundamental difference between a dry and a wet lease, why operational control is the fact everything else turns on, how the place-of-supply rules and the Article 148 exemption interact with the lease, why leasing chains attract scrutiny, and how finance and operating leases differ on the ownership side. It is written for owners, operators and their advisers who want to understand the lease as a structural choice rather than a formality.

Why the lease is the hinge

An aircraft structure typically separates three roles: the party that holds legal title, the party that operates the aircraft, and the party that uses it. The lease is what connects them. It is the lease that says whether the operator takes the bare aircraft or a complete flying service, who provides and employs the crew, who carries the insurance and the maintenance responsibility, and — crucially — who holds operational control. Because every one of those allocations has a regulatory and a tax consequence, the lease is not a wrapper around a decision already taken; it is the decision.

This matters because the two systems that judge an aircraft structure — the civil aviation regulator and the tax authority — both read the lease against reality. The regulator asks whether the party named as operator genuinely controls the aircraft. The tax authority asks whether the supply described in the lease matches the supply actually made, and whether the VAT treatment claimed follows from it. A lease that describes one arrangement while the parties perform another is the classic mismatch, and it is visible to both systems at once.

Dry lease versus wet lease

The foundational distinction in aircraft leasing is between a dry lease and a wet lease, and it is worth stating precisely because so much follows from it.

In a dry lease, the lessee takes the bare aircraft. The lessee provides its own crew, arranges its own insurance, carries the maintenance and continuing-airworthiness responsibility, and holds operational control. For VAT, a dry lease is the hiring of a means of transport — a supply of services under the VAT Directive, located by the specific place-of-supply rule in Article 56 — and the exemption analysis follows from that characterisation. (Only a lease under which ownership passes, such as a hire-purchase, is treated as a supply of goods.)

In a wet lease — most often an ACMI arrangement, standing for Aircraft, Crew, Maintenance and Insurance — the lessor provides a complete operation. The lessor supplies the aircraft together with its crew, maintains it, insures it and retains operational control; the lessee effectively buys capacity rather than an aircraft. For VAT, this can look less like the hire of an asset and more like a transport or charter service, which changes the place-of-supply analysis — and the question of who is the operator shifts to the lessor.

The distinction is not a drafting preference to be chosen for its tax result. It describes a real difference in who does what, and the tax treatment is a consequence of that reality, not a free choice laid on top of it. This is precisely why the mismatch is so dangerous: a lease labelled “dry” to achieve one VAT outcome, under which the lessor in fact provides the crew and controls the flights, has told the authorities something untrue about the supply — and the correction follows the facts.

Operational control: the fact everything turns on

Beneath the dry/wet label sits the single fact that both the regulator and the tax authority care about most: who holds operational control of the aircraft. Operational control means the authority and responsibility for initiating, conducting and terminating a flight — crewing it, dispatching it, deciding whether it goes, and bearing the safety responsibility for it. It is not a clause; it is a set of things a party actually does, and it can be observed in the crew contracts, the operations manual, the dispatch records and the insurance.

Operational control is decisive because it answers the question on which the Article 148 exemption depends: is the aircraft used by an airline? An exemption for aircraft used by airlines operating for reward presupposes a real operator genuinely in command. Where a wet-lease or AOC arrangement places genuine control with a real operator, the structure has a credible airline. Where the owner in fact controls the aircraft and the “operator” merely lends a certificate, there is no airline in any meaningful sense, and both the regulatory approval and the tax exemption are exposed.

This is why we draft a lease only after establishing who will really control the aircraft, and then make sure the operation matches. A lease is only as strong as the reality it records; where the two are aligned, the structure is defensible, and where they diverge, no amount of careful drafting rescues it.

VAT and the place of supply

The VAT treatment of a lease flows from two things: its characterisation (goods or services, dry or wet) and the place-of-supply rules that locate it. Under Directive 2006/112/EC, the hiring of a means of transport has its own place-of-supply rule (Article 56), and the chartering of an aircraft is treated accordingly. That location decides which country’s VAT applies, who charges whom, and whether an exemption is available.

Article 148 then sits across the top. It exempts the supply, chartering and hiring of aircraft used by airlines operating for reward chiefly on international routes. Read with Article 56, it shapes how a leasing chain should be built: a lease to a qualifying airline operator may fall within the exemption, while a lease to a party that is not such an airline will not. The two provisions have to be read together; read apart, they produce contradictions — an exemption claimed at one level that is inconsistent with the place-of-supply treatment at the level above or below it.

The practical lesson is that the VAT treatment of a lease cannot be decided in isolation. It depends on what kind of supply the lease is, where that supply is located, who the counterparty is, and whether the aircraft genuinely qualifies for exemption. A leasing structure designed with all of these in view reconciles; one assembled from separate VAT opinions on each lease in the chain does not.

Leasing chains: where they break

Many structures interpose more than one lease between owner and operator — an owner leasing to an intermediate company, which leases on to the operator, sometimes across jurisdictions. There can be good commercial reasons for this: a financing structure, a fleet-management arrangement, a genuine leasing business. But each link in the chain has to carry a commercial rationale of its own, and a chain whose only function is to move the VAT or the ownership to a more convenient jurisdiction is vulnerable.

Under the Anti-Tax Avoidance Directive and the OECD principal-purpose test, tax authorities can look through an arrangement whose main purpose is a tax advantage and whose intermediate steps have no independent business reason. Applied to a leasing chain, this means that an interposed company with no substance, no genuine function and no purpose beyond the tax result can be disregarded — collapsing the structure back to the beneficial owner and the operator, and with it the VAT treatment that depended on the chain. The more links a structure has, the more each one has to justify its existence.

The discipline is to build only the links that have a reason to exist, give each the substance its role requires, and document the commercial rationale. A short, honest chain in which every party does something real is far stronger than a long one engineered for a VAT result, however elegant the latter looks on a structure chart.

Finance leases versus operating leases

Alongside the dry/wet distinction, which is about operation, sits a second axis that is about ownership and financing: the difference between a finance lease and an operating lease. The two are often confused, but they answer different questions.

An operating lease is, in substance, a rental: the lessee uses the aircraft for a period and hands it back, and the lessor retains the risks and rewards of ownership, including residual value. A finance lease is, in substance, a financed purchase: the lessee takes substantially all the risks and rewards of ownership over the asset’s useful life, often with an option to acquire it at the end, and the lessor’s role is closer to that of a financier than an owner. The distinction matters for how the arrangement is treated in the accounts, for the VAT analysis of the supply, and for who is regarded as the economic owner of the aircraft.

These two axes — dry/wet on the operational side, finance/operating on the ownership side — are independent, and a real structure sits somewhere on both. A dry operating lease to an AOC operator is a very different animal from a finance lease used to fund an acquisition, even though both are “leases”. Designing a structure means being deliberate about both axes rather than reaching for “a lease” as if it were a single thing.

A worked example

Consider — generically, with no client detail — an owner who wants to place a jet on a commercial operator’s certificate for charter while retaining personal use. The casual version signs a “dry lease” to the operator because someone said it was better for VAT, but in practice the owner’s people continue to schedule the aircraft, the operator supplies crew on an ad hoc basis, and the “charter” flights are largely the owner. The lease says dry; the operation is neither clearly dry nor clearly controlled by the operator; the exemption is claimed anyway. On examination, the characterisation does not match the practice, operational control is ambiguous, and the position unwinds.

The designed version decides first who will really control the aircraft — a genuine operator that crews, dispatches and takes responsibility for the flights — and then drafts the lease to match that reality, whether as a dry lease to a controlling operator or a wet-lease arrangement, depending on who genuinely does what. The place-of-supply and Article 148 analysis is built on that characterisation, the owner’s own use is routed through the commercial programme at arm’s length, and the records are kept from the first flight. The lease now records what the aircraft does, and the VAT position follows from a reality the parties can demonstrate.

Mistakes we see

The recurring errors in leasing structures are all variations on one theme: treating the lease as a tax instrument detached from the operation. Owners choose “dry” or “wet” for the VAT result rather than for what the parties will actually do. Operational control is left ambiguous, so that neither the owner nor the operator can clearly be said to command the aircraft. The place-of-supply treatment of one lease is decided without reference to the exemption claimed on another. Chains are lengthened for convenience, with interposed companies that have no genuine function. And, as everywhere in this field, the records that would prove the arrangement is what it claims to be are not kept.

Each of these is avoidable, and each is far cheaper to prevent than to defend. The remedy is not a cleverer lease but an honest one: establish who really controls the aircraft and who really uses it, draft the lease to record that, build the VAT analysis on the real characterisation, keep only the links that have a reason to exist, and retain the evidence. A lease built that way is a structural asset; one drafted for its tax label is a liability waiting to be read against the flight log.

Key terms

Frequently asked

Last reviewed 19 October 2026. This article is general information, not tax or legal advice; every structure turns on its own facts.