The crazy rules of aViATion

Summer is almost here and a great number of us will be hopping on a plane and flying off to a holiday destination. In anticipation of the travel season, we’re looking at some of the more confusing rules, or rather lack of harmonization governing Value Added Tax (VAT) in passenger transport in the European aviation industry.

To give you some quick VAT background:

  • International flights are exempt from VAT, while domestic flights are not.
  • “International” also includes flights within the European Union.
  • VAT, when applicable, is charged “proportionately in terms of distances covered”, meaning that a longer trip will incur more VAT than a shorter trip.

Now let’s look at four similar trips, but four different theoretical VAT consequences:

  1. If you are in Sweden, taking a flight which takes you over Finnish territory (even for a short amount of time) that flight is no longer considered as domestic and cannot be liable for any amount of Swedish VAT. We can think of a theoretical scenario where pilot avoiding rough weather over Sweden and flying into Finnish airspace could technically render his flight VAT exempt!
  2. Let’s imagine that after your trip to Sweden, you decide to go to the UK. You take a plane from Northern Ireland to Scotland and pass through Irish airspace on the way there. According to the Swedish logic in the paragraph above, your flight should be VAT exempt, but in the United Kingdom, if you pass through another country, your trip would still be considered domestic, and taxed wholly at the domestic rate.
  3. For this case, we’ll imagine that you are in France. You’d like to fly to Corsica for a hiking tip (yes, while many overseas holdings are considered international – Corsica is an exception!). Your flight path will take you above not only France, but Switzerland and Italy and some foreign waters. France falls into yet another category of VAT on passenger transport. For this flight, VAT is due theoretically only on price corresponding to the French section, and if this is not available it will be based on the ratio between the distance covered in France and the total distance.
  4. And lastly we’ll take the case of Germany where the situation is even more complicated. Flights which begin and end in Germany, but passing through international waters or airspace may be considered domestic or they may be considered international (it’s more likely to be considered local and therefore subject to VAT in practice). The classification depends on the distances covered. And when we speak about cross-border passenger transport, such as a flight from Germany to Poland, VAT is also allocated based on distances covered. Each flight distance could be different depending on flight patterns, weather, and air traffic. These specific rules mean that the German VAT authorities require airline operators to log the miles they cover inside and outside the German territory for each trip, even if ultimately the international part of the trip will be considered VAT exempt.

In this blog we have, of course, oversimplified a very complex set of rules. But as you can see it’s easy to get lost in the directives, articles, and administrative practices specific to passenger transport in the EU. The aviation industry is especially at risk due to a combination of volume, vague rules and the cross-border nature of this means of transport. In theory there may be VAT consequences for flights which are diverted, delayed in the air, given an alternate flight path, etc. For the moment, VAT authorities have not heavily scrutinized this industry, but companies in the aviation sector need to keep a sharp eye on how they are reporting VAT.

Companies who perform passenger air transport services have no choice but to remain keenly aware of both the legal environment, as well as the literal environment in which they do their business.


Disclaimer: Please note that this article reflects the personal views of its author only regarding non-harmonized rules and administrative practices within the European Union and should in no way be considered as tax advice.


By Christophe Plainchamp