Ireland: Irish Aviation Sector - Airfinance Annual 2013-2014

Last Updated: 23 October 2013
Article by Chris Quinn and Gerry Thornton

Ireland continues to build on its reputation as a centre of excellence for aircraft financing and leasing and its position has been further enhanced in recent years. There are a number of reasons why Ireland attracts investment in this area which include its favourable tax regime, wide double tax treaty network and professional expertise.

These factors combined with a government which is committed to growing and supporting the industry means that it has become the obvious location through which to finance and lease aircraft.

Taxation developments. 12.5% tax rate. The Irish government has repeated its commitment to maintaining the 12.5% corporation tax rate for active trading companies. This commitment has been welcomed by the aircraft financing and leasing community.

Section 110 companies. Section 110 of the Taxes Consolidation Act 1997 is widely used for structured finance and securitisation transactions in Ireland. Section 110 has recently been expanded to include aircraft assets within the qualifying asset criteria. This expansion is very positive and will assist the aircraft finance and leasing industry in offering a wider range of structures. It is critical in any structured finance transaction to ensure that the return for investors is structured in a tax efficient way.

A section 110 company is a standard Irish resident special-purpose company which holds and/or manages "qualifying assets" and meets the other section 110 "qualifying company" criteria. From a tax perspective, a section 110 company is entitled to claim a tax deduction for all of its expenses, including (usually) any profit-linked interest payments. Therefore, it is possible to ensure that a section 110 company can achieve a tax efficient result by paying out all of its return as an interest payment to investors.

The definition of "qualifying assets" (i.e. the assets which a section 110 qualifying company may acquire, manage and/or hold) has recently been extended to include plant and machinery, which encompasses aircraft and rolling stock. This structure is now proving very attractive for private equity investors and also for bankruptcy-remote requirements of financing banks.

Expansion of double tax treaty network.Ireland has now signed 69 double tax treaties (64 of which are now in force). Ireland's most recently signed double tax treaties include treaties with Uzbekistan, Ukraine, Kuwait, Qatar, Bahrain, Saudi Arabia, Armenia and Egypt. The Irish tax authorities are very active in increasing the number of treaties to which Ireland is a party, particularly with emerging market and Middle-East jurisdictions.

New tax credit for non-treaty withholding taxes.Tax treaties play a key role in Ireland's successful leasing industry by reducing or eliminating withholding taxes on inbound lease rental paynies ments. Tax treaties allow Irish lessors to claim tax credits against their Irish corporation tax for any unrelieved foreign withholding taxes.

However, until recently, an Irish lessor could not claim a similar tax credit for foreign withholding taxes where no tax treaty applied.

In a welcome development, an Irish lessor carrying on a trade in Ireland may now also claim a tax credit for foreign withholding taxes on lease rentals where there is no applicable tax treaty. The relief is granted on a unilateral basis by Irish domestic law. This latest improvement will position Ireland as an attractive leasing jurisdiction for leasing aircraft and other assets into jurisdictions which do not have a wide tax treaty network.

Employee incentives. As part of the stated policy objectives of the Irish government for the aviation industry in Ireland, a partial tax exemption was introduced in 2012 for employees who travel abroad to develop markets in the BRIC countries and in South Africa.

Additionally, a special assignee relief programme was also introduced in 2012 to incentivise employees to relocate to Ireland. This relief operates by exempting a portion of qualifying employees' remuneration from Irish income tax, thus substantially reducing their effective rate of personal income tax. Ireland prides itself on its large pool of highly experienced professionals in the aviation sector and the introduction of this relief is aimed at attracting more talent to Ireland.

New investment. The Irish leasing market has been very active with strong investment from Japan and China in recent years. Set out below are just some of the new investments into Ireland in the aviation industry.

ICBC is the leasing arm of the Industrial and Commercial Bank of China Ltd, the largest bank in the world by profit and market capitalisation, and recently established an Irish leasing platform. The Irish platform is its first leasing operations outside of China. In addition, a number of the leasing platforms of other Chinese banks and leasing companies, such as CDB Leasing, have established sizeable leasing platforms in Ireland which will continue to grow over the coming years.

Mitsubishi UFJ Lease & Finance launched its Irish leasing platform in March 2012 called MUL Aviation Capital Limited. The Irish leasing company plans to acquire and lease narrowbody aircraft and lease to a variety of lessees in a number of jurisdictions.

Sumitomo Mitsui Banking Corporation's acquisition of RBS Aviation Capital for US$7.3bn which completed in May 2012 was the largest ever sale of an aircraft lessor. RBS Aviation Capital was renamed as SMBC Aviation Capital and is the world's fourth largest aircraft lessor by owned and managed fleet value.

Prime Minister, Enda Kenny, stated, in connection with the official launch of SMBC Aviation Capital on October 18, 2012, that: "SMBC Aviation Capital will help Ireland to strengthen its position as a leading hub for this sector, and demonstrates the attractiveness of our legal, regulatory, and taxation regimes."

Other investment. Ryanair, the Irish low-cost airline, finalised an order with Boeing, in June 2013, for 175 new B737-800 aircraft in a deal worth approximately US$15.6bn at current list prices, which will allow Ryanair to grow its fleet to more than 400 aircraft.

Transport financier Doric Lease Corporation, which in May 2013 established a subsidiary in Ireland, announced at the 2013 Paris Air Show it would buy 20 Airbus A380 aircraft in a deal worth US$8bn at current list prices.

Cape Town Convention and Aircraft Protocol. Aviareto Limited, an Irish limited liability company which is a joint venture between the Irish Government and SITA was, in 2012, reappointed as the Registrar to the International Registry for a further five years.

Ireland was one of the first Contracting States to the International Registry and Aircraft Protocol and this has been another reason why lenders favour Ireland as a jurisdiction for aircraft financing. If the borrower and mortgagor are located in Ireland, the lenders will get the benefit of the Cape Town Convention and Aircraft Protocol.

The added protection afforded under the Cape Town Convention and Aircraft Protocol has been increasingly relied on by lenders and in certain transactions has replaced the traditional local law mortgage where obtaining such mortgages was inefficient from a time and cost perspective.

The decisions of the Irish High Court in PNC Equipment Finance LLC v Aviareto Limited and Link Aviation LCC (unreported, High Court December 19, 2012) and TransFin-M, Ltd v Stream Aero Investments S.A. and Aviareto Limited (unreported, High Court (Commercial Division) April 18, 2013) illustrate that frivolous or unwarranted registrations made on the International Registry may ultimately be removed at the direction of the Irish Courts and at the expense of the registrant.

The decisions also illustrate the willingness of the Irish Commercial Court to accept jurisdiction to hear substantive causes of action in disputes relating to registrations originating entirely outside Ireland under the provisions of the Cape Town Convention on International Interests in Mobile Equipment (2001), which was given effect in Ireland pursuant to the International Interests in Mobile Equipment (Cape Town Convention) Act 2005.

The approach of the Irish Courts, coupled with the speedy resolution of such disputes by the Irish Commercial Court, will greatly aid the proper and efficient functioning of the International Registry, and provide comfort to parties seeking to discharge unwarranted International Registry registrations that such discharges can be done in a timely, effective and efficient manner.

Irish Aviation Authority. Many aircraft which are operated in countries such as Russia and Italy are registered with the Irish Aviation Authority. Owners and lenders choose Ireland as the State of Registration to remove deregistration risk and protect the residual value of the aircraft by having the aircraft registered with an EASA registry.

This trend has continued in recent years and has been further bolstered by the fact that registration of an aircraft in a Contracting State to the Cape Town Convention and Aircraft Protocol satisfies one of the connecting factors under the Convention and Protocol to create an international interest and a further protection can be afforded through registration of an IDERA with the Irish Aviation Authority.

Conclusion. Ireland's reputation as a centre of excellence for the aircraft financing and leasing sector remains strong and has been enhanced by the extension of Section 110 companies to include aircraft assets.

Combined with the existing taxation benefits, this is an additional tool in the box which permits the aviation financing structures required by aviation sector investors and lenders and Section 110 companies are now frequently used in aviation financing and leasing structures.

Ireland will continue to expand its double tax treaty network over the coming years demonstrating Ireland's commitment to the aviation financing and leasing sector.

This chapter appeared in the Airfinance Annual 2013/2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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