Aviation finance—tax leases
Produced in partnership with Norton Rose Fulbright
Aviation finance—tax leases

The following Banking & Finance guidance note Produced in partnership with Norton Rose Fulbright provides comprehensive and up to date legal information covering:

  • Aviation finance—tax leases
  • What is a tax lease?
  • Tax leasing in leveraged leasing structures
  • Types of tax leases
  • Risks in tax leasing structures

Aviation finance lends itself to tax leasing in many jurisdictions. Tax leases are usually a means of tax deferral. They can be advantageous, from a tax perspective, to equity investors that have taxable profits arising from their normal course of business.

Tax leases can be completed in various jurisdictions including Japan, Germany,and France.

The key risk in tax leasing arises if the transaction is terminated early. This will mean that the equity investors will be unable to defer their tax liability to the extent and for the period they had anticipated.

What is a tax lease?

Most tax leases are tax deferral structures. They occur when certain entities (equity investors) enter into a transaction with the express intention of incurring an immediate tax loss, which they can set off against their taxable profits arising from their normal course of business. At a certain time in the future, they will expect the transaction to generate profits and, at that point, the overall liability of the equity investors to tax will increase.

The equity investors will normally act through a special purpose vehicle (SPV) which is transparent for tax purposes: ie it will pass its profits and losses through to the equity investors. The equity investors will derive taxable income, during the term of the lease, from the rent payable by the lessee to the