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Aviation Finance and the Cost of International Tax Reform


Tony Ryan, the Irish businessman, is best remembered as the co-founder of the low cost airline that carries his name. Ryanair launched in 1985 with a single 15-seat turboprop connecting Waterford with London Gatwick. Today, it is Europe’s largest airline. More than 106 million customers boarded Ryanair planes last year.But before popularising no-frills flying in Europe, Ryan had already revolutionised the aviation industry in a different area: In 1975, as the founder and CEO of Guinness Peat Aviation (GPA), he invented aircraft leasing as it exists today.

Patrick Blaney, who succeeded Ryan in the CEO post, described in an interview with the Irish Independent in 2016 how the GPA founder created the new industry almost single-handedly. It began when Aer Lingus, his employer at the time, tasked Ryan to solve an overcapacity problem by ridding the company of two unneeded planes.

“Tony Ryan was dispatched by [Aer Lingus] to find a home for these two planes and he found an airline in Thailand called Air Siam, which needed not just the planes but a flight crew and cabin staff,” Blaney said.

“So he very neatly organised for two aeroplanes that Aer Lingus had bought but didn’t need, they had trained crews and all the rest to fly, and he shipped the whole lot out to Thailand.”

With the creation of GPA soon after sealing the Air Siam deal, Ryan filled a niche in the market: leasing allowed airlines to quickly increase capacity in growth times, or scale back when demand dropped. In addition, there are certain advantages to airlines in the way leased planes are accounted for on the balance sheet.

Aircraft leasing and financing became big business. Today, 40–50% of all commercial planes are leased. While Ireland still dominates the industry, other jurisdictions including Singapore, Hong Kong, Cyprus and Malta have also sought to attract the sector.

New Challenges

But the business model is facing new challenges created by changes to the international tax environment. Supranational organisations have agreed measures to curb tax avoidance and the question arises whether this will have a detrimental impact on aviation finance.

In a global survey of more than 400 industry experts, conducted by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte, 78% of aviation experts working for airlines, and 87% of those working for lessors agreed that the industry will feel the impact of anti-tax avoidance measures.


One of the main drivers for changes to international taxation is the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. This project aims at closing gaps in international tax rules that allow multinationals to minimise their tax bills by playing the tax regimes of different jurisdictions against each other.

Haroun Asghar, Head of Tax at Etihad Airways, thinks that “the political support underpinning [the] BEPS [Project] can’t be under-estimated”. He adds that “the speed and scope of these changes has been impressive. It is the most significant development to international tax architecture for over half a century.”

The anti-tax avoidance directive (ATAD) is the EU’s implementation of the BEPS Action Plan. Agreed last year, the ATAD will come into effect from January 2019 and apply to all EU members, including Ireland, the global centre of aviation finance.

What financial impact will the new measures have? While the survey results display considerable uncertainty — 30% of respondents didn’t take a view — a narrow majority of the survey panel, 53%, expects the cost for leasing aircraft to increase. Only a 13% minority does not think so.

Double tax treaty changes

More recently in focus of the BEPS Project have been double tax treaties. An OECD signing ceremony scheduled to take place in June in Paris will set in motion changes to more than 2,000 tax treaties– about two-thirds of the worldwide total. First treaty amendments could come into effect from January 2018.

In addition to the other measures, the prospect of changing double tax treaties will draw increased attention to tax gross-up clauses.


Included in most standard aircraft lease agreements — but rarely triggered — gross-up clauses could almost be considered a mere formality: added to every contract, but never expected to become relevant. Now that tax bills are set to increase, they will be subject to closer scrutiny.

Half of respondents to the survey agree that “proposed double tax treaty changes will have an impact on the negotiation of aircraft lease agreements, in particular the provisions of tax gross-up clauses”.

Again, a considerable number of respondents refrained from taking a view, underlining the lack of clarity around the impact of international tax reform.

If — as the survey indicates — aircraft leasing costs are set to go up, who will pay for it?

Lessors’ largest customers might have sufficient buying power to force lessors to absorb rising costs themselves. It’s an indicator for market expectations that 41% of experts believe (vs 25% who disagree) that the implementation of the BEPS Action Plan via the ATAD will result in a drop of lessor profits.


But that does not mean that the aircraft leasing business invented by Tony Ryan in the 1970s has seen its best days. Leasing aircraft offers more than just tax-related advantages, and therefore it is unlikely that its popularity with airlines will change significantly. “Ultimately, the amount of leasing will depend on wider market and business factors,” comments Etihad Airways’ Haroun Asghar.

And Markus Ohlert, Head of Leasing at Lufthansa, adds that this might be particularly true for companies that don’t have strong balance sheets. For them, “leasing may be the only way to get access to aircraft,” he says.

The survey and report “Game Changer not Game Over: Aviation Finance and International Tax Reform” has been prepared by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte. The complete research is available for free download here.