If your company is purchasing a business aircraft that the seller has registered an aircraft in one country and you, as buyer, will register the aircraft in a different country, you have a lot of work in front of you. Cross-border aircraft transactions involve many hurdles that can be difficult to identify.
In order to establish a smooth transaction, follow these tips:
Original Documents–Right Place, Right Time
- Documents such as the certificate of airworthiness and certificate of registration must be on the aircraft anytime it is flown. Some aviation registries require original documents, such as the certificate of airworthiness and certificate of registration, be relinquished to that aircraft registry at closing in order for the registry to de-register the aircraft. The combination of these two requirements can affect the timing of flying the aircraft to the closing location. These issues should be analyzed prior to finalizing and signing a purchase agreement.
Aircraft Description –Make them Match
- A buyer will want to confirm that the aircraft description which will be on the de-registration notice provided by the aircraft registry in the seller’s country of registration (Seller’s Registry) exactly matches or is acceptable to the aircraft description to be utilized by the aircraft registry selected by the buyer (Buyer’s Registry).
Double the Transfer–Double the Tax
- Beware of a seller buying the aircraft from someone only to instantly “flip” it to the buyer. Unfortunately, this can initially be difficult to identify. A flip can create tax problems because your anticipated transfer tax exemption may no longer apply and now a jurisdiction might look to tax the transfer twice – double the title transfers, double the tax.
- A flip may cause the Seller’s Registry to issue a de-registration notice to the party in the middle of the transaction and not to the ultimate buyer. If inconsistent documentation arrives at the Buyer’s Registry it is likely that no registration will occur. If these issues are not identified and addressed in advance, you could be left with a grounded aircraft that is not registered anywhere, and worse, without a clear legal owner or insurable interest.
It Takes a Team–International Commercial Transactions Require a Team Approach
- A tax advisor may recommend that the transaction close while the aircraft is in a location which is favorable for taxes; but, after consultation with your technical advisor or pilot, you discover such location has few available aircraft parking spots, no hangar space and no facility able to make any technical changes required to obtain a certificate of airworthiness from Buyer’s Registry, making the location unacceptable for closing. Do you know how to perform a lien search in Singapore? Local counsel can be crucial to a smooth international transaction. Customs brokers, maintenance advisors, export/import specialists – all play critical roles and should be involved.
Listen To Your Team
- Your pilot knows about flying the aircraft and your tax advisor knows about taxes. Let them each do their job and let them work as a team. You may save money initially by taking tax advice from your broker or your pilot, but tax authorities around the world have become aggressive and business aircraft are an attractive target. A tax authority will likely net more revenue, penalties and interest with one aircraft audit than they will if they audit ten individual taxpayers.
Time to Plan
- You are anxious to close on your aircraft purchase. After you have decided to let each team member do his or her job, allow them time to work as a team and to each do their respective jobs. If your letter of intent says you will sign the purchase agreement for an international transaction within 5 calendar days you will either not sign a purchase agreement, extend the date or be forced to sign an agreement before you know all of the potential issues.
Lending Takes Time
- Lenders want a lot of documents signed by the buyer/borrower and they want all of the signatures in various locations in advance of closing. Due diligence requirements are extensive – especially for business aircraft transactions which may involve a buyer located in country 1, an aircraft to be registered by the buyer in country 2 (after it is de-registered from country 3), a lender based in country 4 and the aircraft to be in country 5 at the time of title transfer. If you have waited too long to obtain the loan documents for buyer’s financing, a buyer may be forced to acquiesce to a lender’s demands, however unreasonable they seem, because the buyer will have lost its bargaining power if it signed a purchase agreement that requires the buyer to close on the purchase by a certain date or be in default. Or you may have to pay cash and finance the aircraft purchase after you close.
It’s a Marathon, not a Sprint
- International commercial transactions take time, much more so than single-country transactions. Consider the difficulty you’ve had in setting a conference call between the New York and LA office to negotiate a contract. Now consider that same difficulty with a twelve-hour time zone difference, and throw in language and cultural differences, customs issues, export controls, international treaties, advisors on three continents, two governmental transportation regulatory schemes, and avoiding ambush by holidays in multiple countries. Set a realistic pace if you want to finish the marathon instead of collapsing at mile seven.
Avoid Tax Tunnel-Vision
- You will need to consider all of the potential tax implications with an international aircraft transaction, for obvious reasons. Unlike other assets, aircraft are mobile. Merely landing in another country can subject the aircraft to taxation. This may come in the form of value added tax (VAT), customs fees and duties, or other charges. Because VAT is not a familiar concept in some countries, we often do not understand the scope and extent to which VAT may apply to and impact a transaction. Local counsel can help determine whether any taxes may be due in various jurisdictions. US transfer taxes such as state and local sales and use tax also need to be reviewed if they could impact the transaction. The US has 1031 tax-deferred exchanges which allow a taxpayer to defer paying tax on any gain when an aircraft is sold, and this tax deferral strategy is commonly used in the US in aircraft transactions. Many other countries do not have any similar tax deferral options so they will not understand why you need to assign the purchase agreement and why you have added a new party called a “qualified intermediary”.
The number of business aircraft involved in international commercial transactions is increasing, which is inherent in a mobile asset capable of globetrotting. A little bit of common sense, thoughtful planning, and acknowledgment of the value of experienced advisors can help you have a turbulence-free aircraft transaction.
Michelle M. Wade is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com. Michelle Wade (firstname.lastname@example.org)