Where some countries have, and successfully at that, positioned themselves as aviation finance hubs by setting a lower corporate tax rate, others, like France, take advantage of their higher taxation environment to offer a very competitive and advantageous financing product, the tax lease. Tax leases in France are used on a variety of assets, including ships, real estate, and of course, aircraft.

The resurgence of the aviation market post-pandemic has resulted in a significant increase in aircraft orders and a number of new operating airlines. Of course, the aviation industry is still in the process of recovering from a global perspective after the devastation of the pandemic on aviation.

Nevertheless, from the manufacturing side, the leading aircraft manufacturers are having to ramp up production and delivery to meet the significant number of new orders (which, unfortunately, is being hampered by, well publicized, supply chain issues).

From the operators’ side, many existing airlines are now looking to increase and/or modernize their fleets.  In addition, approximately 20 new airlines, based in a wide variety of geographic locations, commenced operations in 2023. 

As it is well-known in the aircraft financing world, most airlines lease the majority of their aircraft – for a variety of financing and fleet management purposes. Lessors, in turn, typically look to balance their aircraft portfolios to include new, as well as older, aircraft. It is with the market for new aircraft in mind that aircraft lessors may wish to consider creative lease structures, such as the French tax lease. 

Process & Benefits

In terms of structure, simply picture a traditional sale and leaseback, and add the fact that the lessor is, initially, owned by a French bank, or more accurately, by a corporate entity which is subject to corporate tax (or a syndicate of such qualifying actors). Under this ownership structure, the bank or other corporate entity will act as a tax investor. In addition to the tax investment, the lessor will obtain a subordinated loan from the beneficiary of the financing, be it an airline or a leasing company, and a standard term facility for the remainder of the debt. The tax investors may or may not also participate in the term loan, and other entities including foreign banks or financial institutions, can participate in the syndicate.

The benefit of the tax investment stems from two main principles. First, the lessor will be a tax transparent vehicle, whose accounting result every year will be consolidated at investor level. Second, the aircraft will be depreciated on an accelerated basis, disregarding the generally applicable straight-line method for a declining balance method. The latter allows for higher depreciation allowances to be deducted in the early years of use of the asset. Looking at the conditions for such accelerated depreciation, there is a single requirement—that the aircraft in question is new.

In particular, there is no restriction on the geography of the manufacturer of the aircraft, nor on any purported owner or the airline participating in the structure. Its widespread employment, however, is generally limited to beneficiaries operating from countries that have a bilateral tax treaty with France agreeing a reciprocal waiver of withholding tax. Such a treaty allows the parties to avoid leakage in the cashflow of cross-border transactions that would otherwise be caused by withholding tax.  Thankfully, a number of countries have entered into tax treaties with France, either limiting the withholding ratio like for Malaysia and China or waiving any withholding tax altogether, like with the US, UK, Uzbekistan, South Africa, Australia and Malta. However, a case-by-case analysis would always need to be conducted, as these treaties are susceptible to repeal or renewal.


The combination of these two principles results in losses at an accounting and tax level, and in turn, tax savings at investor level. Part of the benefit of this tax relief is then passed down to the investment vehicle via a loan instrument, which is often referred to as the ‘tax loan’. The tax benefits that are retroceded by the tax investor to the lessor contribute significantly in the financing of the purchase of the aircraft and result in lower rentals required under the lease. Under this process, the aircraft lessor will reach an accounting point, at year five or six, where the depreciation of the asset does not offset the benefits of the rentals under the lease. At that point, the airline will be incentivized to purchase the shares in the lessor from the tax investors, for a nominal price.

Additional loan elements 

A senior loan overarches these processes and is often completed with an export credit component, as well as interest and currency swap agreements (where relevant). Lenders under this facility should consider their investment as a two-stage transaction. During the depreciation of the aircraft, participating lenders are looking at a strict limited recourse facility – to protect the tax investors. The limited recourse component then falls away upon the exercise of the share purchase option by the beneficiary of the financing. At that point, the lessor (i.e. and borrower under the term loan) becomes a subsidiary of the beneficiary of the financing. The facility agreement needs to include bespoke provisions that anticipate this structural change during the life of the facility. The security package is standard for aircraft transactions, with some of the peculiarities of French securitization practice, such as the use of “delegations”, to create a pass-through contractual claim from the lender to the lessee.

The rentals under the lease are set to repay the senior loan only, since the subordinated loan is not-repayable until full repayment of the senior loan – and in practice will be compensated or waived upon the purchase of the shares in the lessor entity by the lessee. This allows for reduced rentals in relation to the overall value of the new aircraft, as compared with a standard lease financing.

Limitation of the French tax lease – availability

The beneficial structure of the French tax lease demands an inquiry as to why it is not more frequently employed. The answer lies in a number of factors unique to this structure. For example, the volume of tax lease operation that can be granted during a given financial year is limited in practice. The tax benefit relies on the tax investor facing tax liabilities for their other activities. The investors have to anticipate what that amount will be for the ongoing exercise and they usually take a cautious approach in setting the amount they are willing to expose themselves to.

In addition, the tax investor also has to spread its investing capacity across a variety of asset classes, including shipping, which has added benefits when combined with the tonnage tax of the shipowner. Currently the demand for this product is very high, which leads tax investors to also arbitrate between national and foreign customers. With the correct approach and risk mitigation, the French tax lease remains a very beneficial structure worth consideration in light of the current growth in aircraft and the aviation market.