T he aviation sector, characterised by its international reach and importance to the global economy, is often significantly impacted by global tax developments. As aviation businesses operate across multiple jurisdictions, they must navigate a complex web of tax regulations that are continually evolving. Recent years have witnessed significant changes in tax policies worldwide, driven by economic, environmental, and political factors. These developments have far-reaching implications for the aviation industry, affecting everything from operational costs to strategic planning.
BEPS Pillar Two developments
In recent years, a significant focus has been placed internationally on ensuring a fair system of international taxation. Different tax measures have been introduced, most notably the BEPS Pillar Two global minimum tax measures developed by the Organisation for Economic Co-operation and Development (OECD). This is part of the OECD/G20 Inclusive Framework’s initiative to address Base Erosion and Profit Shifting (BEPS) and implements a global minimum tax rate of 15% for groups with consolidated turnover of greater than €750m. If the effective tax rate applied in a jurisdiction falls below 15%, mechanisms are triggered to “top up” the tax to the minimum 15% level.
In December 2021, over 140 jurisdictions approved, in principle, the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) Rules and, since 2023, implementation of these rules commenced in many jurisdictions with the rules taking effect from January 2024 (such as in the European Union) or from January 2025 in some cases (such as Singapore and the UAE).
However, several major jurisdictions, including the US, China, and India, have not yet implemented the Pillar Two regime, with the US in particular expressing repeated reservations about the regime, culminating in a US proposal to apply specific retaliatory tax measures targeting businesses based in jurisdictions that adopted the BEPS Pillar Two regime or adopted certain digital services taxes. These measures, known as “Section 899” measures, were included in the “One Big Beautiful” tax bill proposed by US authorities earlier this year. After discussions among the G7, an agreement was ultimately reached in July 2025 to allow the US tax system to operate alongside the BEPS Pillar Two regime in return for the US dropping the Section 899 proposals. The political commitment agreed would effectively exempt US-parented groups from certain aspects of Pillar Two.
While an agreement was reached politically, the specific mechanisms and adjustments to the Pillar Two rules that would be needed to make the commitment a reality remain outstanding and are the subject of extensive negotiations amongst the OECD Inclusive Framework (comprising 147 member jurisdictions). Timelines for reaching agreement are tight, with Pillar Two registrations open in certain jurisdictions and initial Pillar Two returns and payments due to be made by 30 June 2026 in some jurisdictions. Any modifications to the rules that are introduced could affect groups within the aviation industry with US ownership and / or operating in the US. Many questions require clarification, including:
- What will constitute a US-parented group?
- Will different rules apply to US subsidiaries of non-US parented groups?
- Will these changes apply retroactively to 2024, or only prospectively?
- Would a GloBE Information Return by US groups need to be filed for FY24 (or FY25)?
- Will Pillar Two registrations that have already been completed need to be adjusted?
For the rules to work effectively, some clarity on these questions will be needed in the coming months.
Impact of US tariff changes
In April 2025, the US imposed wide-ranging reciprocal tariffs on imports into the US from its trading partners. These developments have introduced global uncertainty, impacting various sectors, including aviation. In early 2025, this uncertainty led to delays in transactions due to the unclear tariff positions and potential unforeseen costs arising from evolving US tariff policy.
Fortunately, the European Union and the US have reached a political agreement on tariffs.
At a broad level, both parties have agreed to a 15% all-inclusive US tariff rate on most products originating from the EU, with certain exceptions—such as steel and aluminium—subject to higher rates, and a category of products to which a zero-tariff rate should apply. Although detailed specifics are pending, it is understood that aircraft and most of their component parts (including engines) will return to a zero-US tariff status, which is an important development for the aviation sector.
These zero tariffs for the aviation sector are due to come into effect in the US from 1 September 2025.
Under the political agreement with the US, it is intended that no retaliatory tariffs will be imposed by the EU.
Aircraft and aircraft parts originating from other countries may be subject to US tariffs depending on the country of origin and the particular agreement reached with the US. For example:
- The UK reached a similar deal with the US on aviation for zero tariffs in the aviation sector. This is important to engines and other parts manufactured in the UK.
- There are specific rules for imports from Canada and Mexico in order to benefit from reduced tariff rates for aircraft and parts.
- Imports of aircraft from Brazil currently attract 10% tariffs but this could be subject to
further changes.
For transactions involving aircraft, engines, and related parts it is essential to understand the item commodity code, and country of origin to carefully review the applicable tariffs to ensure accurate and current compliance.
Recent discussions regarding tariffs in 2025 have also reinforced the need for businesses in the aviation industry to understand their supply chains and the potential impact of tariffs on imports and transactions across the globe, and to develop documented customs process and procedures for dealing with imports and exports.
It is also critical to ensure early consideration is appropriately given to the potential impact of tariffs in transactions and in particular in commercial and legal documentation and agreements, e.g. leases, sales agreements, storage or maintenance agreements with MROs etc.
Aviation tax developments in India
Recently, significant ambiguity has emerged in India due to activities of the Indian Tax Authorities (ITA), and their particular emphasis on asserting Indian taxing rights in the context of aviation leasing arrangements involving Indian lessees and airlines, including where double tax treaty benefits are being claimed. The ITA have advanced several arguments to claim taxing rights over income earned by non-Indian resident aviation lessors, resulting in assessment orders that demand considerable attention and resources from affected lessors. Impacted lessors have appealed these assessments. The appeals process tends to be lengthy, often requiring several years to reach a resolution through the various levels of the Indian court and tax system. Depending on the contractual arrangements in place, Indian tax liabilities arising from these assessments may ultimately be borne by the Indian lessee.
There have been some positive developments for non-resident lessors leasing to India in recent weeks. Notably, both the Delhi and Mumbai Tribunals recently issued decisions which addressed arguments presented by the ITA concerning leasing arrangements in India. The case heard by the Delhi Tribunal focused on whether the ITA’s view is correct that certain operating leases should be regarded as finance leases for Indian tax purposes. The case heard by the Mumbai Tribunal examined several aspects, including amongst others, the operating lease versus finance lease argument, whether the lessors’ activity in India amounted to a permanent establishment, and the application of the principal purpose test to the relevant non-resident lessors claiming double tax treaty benefits. In these cases, both Tribunals ruled in favour of the lessors. It is hoped that future decisions will maintain this approach, thereby contributing to greater certainty in conducting business with and within India. The ITA does have the right to appeal these decisions to higher courts.
Enhancing EU competitiveness
Within the European Union, there have been calls to enhance the EU’s competitiveness and decrease administrative, regulatory, and reporting requirements in taxation. To address these issues, the Council of the European Union has approved a tax decluttering and simplification agenda. Initial steps taken as part of this agenda include the Council’s decision not to proceed with the so-called Unshell proposal, which had been intended to prevent entities that did not meet certain substance requirements from accessing the benefits of certain EU Directives; this decision will be welcomed by many European businesses as the proposal itself had been a source of uncertainty and could potentially have resulted in the imposition of disproportionate administrative burdens. Additional measures are expected in the future.
In conclusion, the aviation industry stands at a crossroads as it navigates a constantly evolving international tax landscape. The shift of focus from anti-abuse measures targeted at combatting aggressive tax planning towards a focus on competitiveness, protectionism, and bilateralism presents both challenges and opportunities for aviation businesses. As the remainder of 2025 unfolds, staying informed about these key tax changes and understanding their potential impact is crucial for industry stakeholders. By adapting to these developments and strategically planning for the future, the aviation sector can continue to thrive in an increasingly complex
global environment.