Irish Lessors Fly Free Of Indian Tax

Following a prolonged period of uncertainty on application of the India-Ireland double taxation treaty (IIDTT) to aircraft leasing arrangement between Irish special purposes entities, particularly those availing of the Irish S110 securitisation tax regime and Indian airlines, in 2025 we finally received an encouraging decision from the Indian Income Tax Appellate Tribunal (ITAT) on the point.

The IATA's ruling resulted in greater certainty of application of the IIDTT to leasing arrangements between Irish companies and Indian lessees confirming that, subject to satisfaction of certain criteria, rental income on aircraft leases is not subject to withholding tax in India.

The challenge

The case arose following the Indian tax authority (ITA) launching challenges against several Irish companies leasing aircraft to Indian airlines who had declared no taxable income in India by virtue of reliance on the IIDTT. The ITA argued that the IIDTT benefits should be denied to companies leasing to Indian where the relevant entity was not a substantive Irish company. Following the ITA's initial ruling the cases were appealed to the ITAT.

The IATA ruling

Following a hearing in May 2025 the IATA handed down their considered judgement in August 2025 which ruled against the ITA, settling the matter in favour of the Irish lessors, confirming that the IIDTT protects all Irish entities leasing aircraft into India against, amongst other things, the application of Indian withholding tax on lease rentals.

The IATA judgement specifically addressed significant areas of challenge by the ITA and concluded:

• ITA cannot deny benefit of India-Ireland tax treaty by invoking anti-abuse rules (such as 'principal purpose test') because a separate notification had not been issued incorporating a multi-lateral instrument into India-Ireland tax treaty;
• the lessor structures were bona fide commercial enterprises, and not a mere conduit or treaty-shopping vehicle and that obtaining treaty benefit was not the principal purpose for incorporating the company in Ireland; and
• the lessors would not be considered to have a permanent establishment in India purely by virtue of the aircraft being leased and physically present in India. Further, even where the lessor in question had a permanent establishment in India, profits from leasing the aircraft in international traffic should not trigger Indian tax liability.

The detailed nature of the IATA's decision offers welcome guidance to lessors looking to avail of IIDTT benefits when looking to lease aircraft from Ireland to Indian in the future. As a result of the decision handed down going forward lessors should be focused on ensuring:

• the leasing enterprise in Ireland is commercially justified and not solely for tax reasons and that management and control of the lessor should remain in Ireland, affirming Irish tax residency; and
• the lease entered in to retain standard lessor protections, such as rights to inspect and repossess aircraft to safeguard against the existence of a permanent establishment in India;

Blues skies ahead

Irish lessors can take comfort from the favourable ruling of the ITAT as their decision shows a clear desire to align India's domestic tax rules with international treaty obligations, giving foreign investors confidence that treaty law will be respected and take precedent over any domestic legislation which may be in conflict. It further provides clarity and reassurance that, so long as Irish lessors operate genuine businesses and adhere to the standards of establishing a bona fide commercial enterprise, they can continue to rely on the protections of the II DTAA.
However, the IATA remains open to challenge on appeal and so whilst clarifying the law and providing helpful guidance for now, the aviation community needs to ensure that they continue to monitor proceedings and is ready for challenge any future ruling to the contrary.

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