US Tax Implications for Foreign Owners

Foreign nationals owning US-registered aircraft face various tax considerations at federal, state, and local levels. Proper planning during the acquisition phase can significantly reduce tax burden while ensuring compliance with all applicable regulations.

This guide provides an overview of key considerations. Given the complexity and constantly evolving nature of tax law, consultation with qualified tax professionals experienced in aviation and international taxation is essential.

The IRS generally does not impose income tax on non-resident aliens for aircraft ownership alone. However, if the aircraft is used in a US trade or business, different rules may apply.

FIRPTA (Foreign Investment in Real Property Tax Act) does not typically apply to aircraft, as they are not considered real property. This is favorable compared to real estate investments.

If the aircraft is sold at a gain, the taxability depends on factors including whether the seller has US effectively connected income and the nature of the asset in the seller's business.

State sales and use tax represents one of the largest potential tax exposures for aircraft purchasers. Rates vary significantly by state, ranging from zero in states like Delaware, Montana, and Oregon to over 9% in some jurisdictions.

Many states offer exemptions for aircraft, including fly-away exemptions (for aircraft immediately flown out of state), interstate commerce exemptions, and exemptions for aircraft above certain weight thresholds. Proper structuring and documentation are critical to qualifying for these exemptions.

The location of the transaction closing, initial basing of the aircraft, and subsequent use patterns all affect sales tax exposure. Planning should begin before the purchase contract is signed.

If the aircraft is owned through a US entity, that entity may be subject to state income or franchise taxes in states where it has nexus. For owner trusts, state tax treatment varies.

Some states impose annual registration fees or personal property taxes on aircraft based in the state. These recurring costs should be factored into basing decisions.

Tax treaties between the US and the owner's home country may affect certain transactions. Treaties can provide reduced withholding rates, exemptions from certain taxes, and procedures for resolving double taxation.

The applicability of treaty benefits depends on the owner's country of residence, the structure used for ownership, and the specific provisions of the applicable treaty.

Common tax planning strategies for international aircraft owners include selecting basing states with favorable tax treatment, structuring purchases to qualify for available exemptions, timing acquisitions to optimize tax position, and proper documentation of exempt use.

Working with tax advisors before finalizing the purchase structure allows for optimal planning. Post-acquisition restructuring is often more difficult and costly.