Engaging in Aircraft Transactions Abroad-Key Issues Confronted in

Buying, Selling, Leasing or Financing Aircraft Outside of the U.S.

Wednesday, October 23| 1:00 p.m. – 2:00 p.m. Presented By: Sean Fitzgibbons James Meyer

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Engaging in Aircraft Transactions Abroad

• Different Types of Transactions – Sale of aircraft inside of the U.S. for export – Purchase of aircraft outside of U.S. for import or for use outside of the U.S. – Leasing aircraft outside of the U.S. (as Lessor/Lessee) – Leasing aircraft from a foreign Lessor – Lending to a non-U.S. borrower to purchase aircraft – Borrowing from a non-U.S. lender to purchase aircraft for use in the U.S. – Chartering aircraft outside of the U.S. – Overflight – Combination of one or more of the above in multi-aircraft transactions,

including “trade in, plus cash” deals

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Key Issues Confronted When Engaging in Aircraft Transactions Outside of the U.S.

• Aircraft Transactions conducted abroad are usually more complex, take more time, and cost more then domestic transactions.

• Cross border aircraft transactions involve multiple U.S. and foreign government agencies and the parties to such transactions must comply with a host of U.S. and foreign laws and regulations

• Accordingly, the parties to such transactions must carefully consider the following key issues:

– Selection of appropriate local counsel – Requirements for export aircraft from the U.S. into another jurisdiction – Requirements for importing aircraft into U.S. from another jurisdiction – Applicability of VAT and other aviation taxes – Cultural Differences and potential challenges faced in different regions

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Retaining Counsel and Determining Scope of Retention

• Who has internal responsibility, oversight, and authority over transaction? • Available resources, in-house knowledge & expertise? • Time constraints and other limitations? • General Contractor vs. One-Stop Shop? • Alternatives to outside counsel? • Complexity of transaction? • Scope of engagement?

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Strategies for Selecting Local Counsel What to Consider when Choosing Counsel:

• References • Affiliations • Credentials • Membership in professional

organizations (e.g., NBAA Tax Committee)

• Presentations and publications

• Experience • Bench strength • Communications • Language (interpreters, document

translations) • Fees (alternative fee arrangements?) • Written materials (e.g., differences and

common challenges, example closing checklist)

•Responses to the following questions…

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Strategies for Selecting Local Counsel Questions for Local Counsel: De-registration/Export

• What are the costs and practical difficulties of de-registration/export? • Who should apply for de-registration/export • Is there a particular time period within which application for de-

registration/export should be made? • How long does the de-registration/export process take?

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Strategies for Selecting Local Counsel Questions for Local Counsel: Registration/Importation

• What documents are needed to register/import the aircraft and what are the costs of registration/importation?

• How long does the registration/importation process take? • Once aircraft is registered in the state of registration’s aircraft registry, will

any liability be imposed upon the aircraft’s owner or lender with respect to aircraft operation, maintenance, or insurance?

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Strategies for Selecting Local Counsel Questions for Local Counsel: Lease

• Does the state of registration recognize the concept of a lease over the aircraft?

• Which governing law is best? • Should parties agree to arbitration? • If aircraft must be insured locally, can re-insurance be placed overseas with

a cut-through clause?

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Strategies for Selecting Local Counsel Questions for Local Counsel: Taxes

• Would payments made pursuant to any agreement relating to the aircraft be subject to any tax? If so, is there a jurisdiction where such payments could be made to avoid the imposition of such tax?

• Is prior Central Bank approval required for such payments?

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Strategies for Selecting Local Counsel Questions for Local Counsel: Other

• Which Conventions has the State of Registration ratified? • Are there any legal idiosyncrasies to be aware of?

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Exporting Aircraft from the U.S.

• Obtain Export Certificate of Airworthiness (Export CofA) • De-registration from FAA Registry • Re-registration in foreign Registry

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Exporting Aircraft from the U.S. Compliance with U.S. Export Controls: Key Questions

• What is being exported/re-exported? • Where is it being exported/re-exported? • Who is the end user/ultimate consignee?

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Compliance with U.S. Export Controls Export Administration Regulations (EAR)

• Most aircraft, its engines, and aviation components are controlled for export purposes by the U.S. Department of Commerce Bureau of Industry (BIS) under the EAR

• EAR controls all civil aviation products even after they are exported from the U.S.

• Licensing Requirements are based on cross referencing the Export Control Classification Number (ECCN) found on the Commerce Control List (CCL) with the Commerce Country Chart.

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Compliance with U.S. Export Controls Foreign Assets Control Regulations (FACR)

• Administered by U.S. Department of Treasury Office of Foreign Assets Control (OFAC)

• Implements trade embargoes against specific target countries and individuals

– Almost total embargoes on Cuba, Iran, Syria, Sudan, North Korea – Limited sanctions against other countries – Specially Designated Nationals and Blocked Person List (SDN)

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Compliance with U.S. Export Controls Other Export Controls

• International Traffic in Arms Regulations (ITAR) covers – Aircraft equipped with anti-missile technology – Certain night vision equipment and NVG compatible cockpits – Most former military helicopters

• Certain civil systems, including inertial navigation systems, may require a license to be exported, re-exported, or transferred to end-users in many countries.

• China military end user restrictions

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Compliance with U.S. Export Controls Practical Effects of Compliance

Generally, most civil aircraft, engines, and aviation components may be sold or leased to most entities in most countries without a license, However:

– Sale or dry lease to embargoed countries is prohibited – Sale or dry lease to a barred entity or for a barred end-use is prohibited – Sale where the seller knows or has reason to know the aircraft, aircraft engine,

or aviation component is intended to be resold or leased to an embargoed country or barred entity for a barred end use.

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Compliance with U.S. Export Controls Export and Customs Clearance for Sale or Lease of Aircraft • File Electronic Export Information (EEI) electronically through the

Automated Export System (AES) • File export manifest and e-APIS with customs • Be aware that export procedures differ from port to port

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Importing Aircraft into U.S. Importation is required when:

• Foreign registered aircraft enters the U.S. for the purpose of sale or purchase

• U.S. registered aircraft manufactured in a foreign country enters the U.S. for the first time

• U.S. registered aircraft temporarily imported into a foreign country returning to be based primarily in the U.S.

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Importing Aircraft into U.S.

• Obtain U.S. Airworthiness Certificate • De-registration from foreign registry

– Ensure that Foreign Registry’s Notice of De-Registration is “acceptable” • Re-registration with the FAA

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Importing Aircraft into U.S. Customs Requirements

• Customs declarations must be filed before the aircraft enters the U.S. for importation

• Notify CBP of intent to land and enter the U.S. a minimum of 2 hours and a maximum of 24 hours prior to arrival

• Have all necessary documentation on hand to show to custom’s agent upon entry into U.S.

• Complete Customs POA if utilizing a customs broker • Post import bond

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Changing Tax Regimes in Latin America

• Old Regime: Pay VAT or obtain overflight permits • New Regime: Operação Pouso Forçada • Overview of VAT and other aviation taxes in:

– Brazil – Venezuela – Mexico

• Potential effects of “new regime” to application of VAT tax in Latin America

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Recent Developments in Brazil Operação Pouso Forçada

• In June 2012, a task force of Brazilian tax police, federal police and ANAC (the Brazilian Civil Aviation Authority) seized 21 business jets for alleged tax evasion

– The authorities alleged aircraft was repeatedly flying in and out of Brazil to renew temporary admissions permits and that records indicated usage patterns consistent with Brazilian ownership and use

– U.S. Non-Citizen Trusts seen by authorities as a tax evasion strategy

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Recent Developments in Brazil Operação Pouso Forçada

• Brazilian authorities have since targeted a number of other aircraft • It has been reported that some of the owners have settled with the

government while others have appealed • As of August 2013, the Revenue Service issued a notice that some of the

seized aircraft will be sold at public auction – Such aircraft include a Bombardier Challenger 300 and a Bell Helicopter. The

owners of these aircraft have appealed to block the sale.

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VAT and Other Aviation Taxes in Latin America VAT taxes in Brazil

• VAT consists of: – IPI (federal VAT) – ICMS (state VAT) – Withholding tax

• IPI is either 10% or 5% of the value of the aircraft • ICMS varies up to 35% depending on the state the aircraft is imported into • Usual rate of withholding tax is 15% of the interest portion of a payment

– However, the rate is increased to 25% if the payee is located in a jurisdiction classified as a tax haven by the Revenue Service

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VAT and Other Aviation Taxes in Latin America Tax Implications of Leasing/Ownership Structures

• Finance Leases/Contracts of Purchase and Sale – Aircraft imported into Brazil under finance leases or contracts of purchase and

sale have been admitted into Brazil through a process known as “naturalization”

– Such transactions are subject to IPI, ICMS, and withholding taxes • Operating Leases

– Until recently, nearly all Brazilian cross border aircraft transactions have been structured as operating leases to avoid heavy tax burden

– Aircraft imported into Brazil under operating leases had been admitted into Brazil through “temporary authorization” which allowed aircraft to remain in Brazil for a fixed period of time (usually equal to the lease term)

– Import taxes were applied pro-rata according to the length of stay of the aircraft in Brazil.

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VAT and Other Aviation Taxes in Latin America Recent Legislative and Regulatory Changes Place New Burdens on Business Aircraft Operators

• As of May 2013, operators that are not airlines or air taxi companies are no longer eligible for temporary admission, as a result, business aircraft operators cannot enter into operating leases.

• In order to directly import aircraft into Brazil, business aircraft operators must either purchase the aircraft or enter into finance leases and pay IPI, ICMS, and withholding tax

• It is likely that the legislative and regulatory changes will be challenged in the courts, but for the time being operators and financiers should adapt to new lease rules.

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VAT and Other Aviation Taxes in Latin America Venezuela

• VAT Taxes in Venezuela – IVA (VAT) is currently set at a rate of 12% – Additional 10% “luxury tax” added to IVA is applied to aircraft imported into

Venezuela for “recreational use” • Tax Implications of Leasing/Ownership Structures

– Operating leases are subject to IVA: the domestic lessee is obligated to pay IVA on behalf of the lessor

– Operating lease payments are subject to corporate income tax, except to the extent such taxes may be reduced by double tax treaties

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VAT and Other Aviation Taxes in Latin America Mexico

• VAT Taxes in Mexico – IVA is currently set at a rate of 16% – In bordering regions (i.e. with the United States, Belize, or Guatemala) IVA is

set at a rate of 11% – Exempt from IVA: Aircraft sold to an airline for the commercial transport of

passengers imported into Mexico on a temporary basis, not to exceed 10 years.

– Air taxi companies can mitigate IVA impact on aircraft purchases and imports • “Invoice-Credit” System

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VAT and Other Aviation Taxes in Latin America Mexico

• Tax implications of Leasing/Ownership Structures Tax implications of Leasing/Ownership Structures

– Finance Leases: 15% withholding tax applied to interest portion of payments – Operating Leases: popular and tax efficient

• US citizenship requirements must be met • IVA may apply in Trust scenario if Trustor is a Mexican citizen

• Other – Aircraft usage fees are increasing

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Potential Effects of “New Regime” to Application of VAT tax in Latin America

• In nearly all cross-border aircraft transactions, Latin American citizens have structured such transactions to avoid or mitigate payment of VAT taxes

• Other Latin American countries may follow Brazil’s example to recoup the VAT taxes which have thus far been avoided by their citizens

• Recently, the Mexican and Venezuelan Aviation Authorities have been diligently monitoring and enforcing overflight permits and occasionally seizing N registered aircraft

• It is possible that other countries may also start enforcing overflight rules in this manner in furtherance of VAT compliance by seizing N registered aircraft.

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Engaging in Aircraft Transactions in Asia Issues to Consider When Engaging in Negotiations

• Be aware of cultural differences – Different approaches to deals, negotiations, and due diligence.

• Understand that “different” ≠ “wrong” – Generally, personal relationships precede business relationships

• Language Barriers – Engage the services of a professional translator – Even with working knowledge of English, a party still may prefer to

communicate through a translator. Accordingly, never speak English with assumption that you are not understood.

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Engaging in Aircraft Transactions in Asia General Entry Requirements

• Landing permits and/or slots are generally required • Overflight permits often required • Visa requirements vary and should be examined on a case by case basis • Many ports require a stamped general declaration from the last point of

departure • Double check all dates and times

(Don’t forget about the International Date Line)

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Engaging in Aircraft Transactions in Asia Challenges to Be Aware Of

• Limited Infrastructure – Infrastructures built with airlines in mind not to accommodate business

operators • Limitations with regard to capacity (i.e. Japan and India)

– Very few FBOs – Lack of Hangar Space – Hong Kong is the exception

• Airspace Access – May require clearances to operate in airspace (i.e. military aircraft clearance

required in India)

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Engaging in Aircraft Transactions in Asia Challenges to Be Aware Of

• High User Fees – Navigation Fees per kilometer – Landing fees – Overflight fees – Ground handling fees – Passenger fees

• In China, new regulation imposes passenger fees for all flights originating in China (Rmb 50 for domestic flights and Rmb 90 for international flights)

• High Duty and VAT taxes • Government restrictions

– For example, a business entity in India must obtain government permission to purchase aircraft

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