Ireland: Jolco Rides The Wave

Last Updated: 12 October 2018
Article by Caroline Devlin and Laura Cawley
Most Read Contributor in Ireland, September 2018

The Japanese operating lease with call option goes where banks fear to tread. By Caroline Devlin, partner, co-head of tax and leasing, and Laura Cawley, associate, aviation group, of Irish law firm Arthur Cox.

After a dip in popularity during the economic downturn, the Japanese operating lease (Jol) and Japanese operating lease with call option (Jolco) structures continue their rise. It is perhaps obvious because they offer up to 100% financing to airlines, and produce an attractive internal rate of return to investors with interesting tax allowances, a level of finance which is beyond the appetite of banks.

Both new and traditional airlines are using this financing arrangement, and it is becoming increasingly popular in Asia, including with airlines with no Japanese routes.

Jolco structure – tax considerations

From the Irish perspective, the fact that the Irish lessor does not own the aircraft does not present any particular Irish difficulties, and Irish lessors are frequent users of Jol/ Jolco structures. Looking at the Irish tax position, it is not necessary that an Irish entity owns an asset in order to obtain tax depreciation (or capital allowances). Rather, the allowances are given to the entity that bears the burden of wear and tear.

Also, there is no Irish withholding tax on rent (or interest) paid from Ireland to Japan. While there is a double-tax treaty between Ireland and Japan, it is not required here, because there is no Irish withholding on aircraft lease payments in any event.

Interestingly, the treaty between Ireland and Japan permits a withholding of up to 10% on interest payments between the two territories; however, as a matter of domestic Irish law, Ireland does not levy withholding tax to recipients in double-tax territories. The same is not the case for payments of interest from Japan to Ireland.

Irish leasing companies are traditionally either trading companies – subject to tax at 12.5% on their net profits, after all expenses and allowances, including capital allowances – or "Section 110 companies" which are technically taxed at 25% but, in practice, would have a negligible profit.

Irish companies will typically satisfy the substance requirements set down in BEPS (base erosion and profit shifting), and will have their centre of control and management in Ireland. It is increasingly common that airlines will be concerned to ensure that their lessor has the required level of substance, and is the beneficial owner of the rental income stream, in order to ensure that the airline can safely pay rent free from withholding tax in its own jurisdiction.

The Jol/Jolco structures do not impact on this analysis, because the Irish lessor will typically maintain the same level of substance and overview of its portfolio, whether financed through a Jolco or otherwise.

Part of the attractiveness of the Jolco is the tax allowances available under Japanese tax laws. As with any product that derives value from tax breaks, the sustainability of the Jolco is, to some extent, dependent on Japanese tax rules, and rules can change. This is relevant when considering how the risk of tax changes is to be shared between the parties, whether funding might terminate early, and what inventive solutions might be found should a change occur. However, it is clear that the structure is well known to legislators and, for the time being, enjoys popularity. In any market, this can seem like a lifetime.

Aircraft mortgage registrations

The aircraft mortgage will generally be considered to be the primary protection available to a creditor in the senior secured portion of the Jolco financing transaction.

In taking an aircraft mortgage, the creditor will be mindful to ensure that it procures the most robust protection in each jurisdiction that the aircraft, the owner and the lessee are operating in, subject always to the commercial realities of each particular transaction.

As in a Jolco, the owner of the aircraft is generally located in Japan, so in the interests of certainty, familiarity and speedy accessibility to remedies and enforcement mechanisms, it would generally follow that the aircraft would be registered in that jurisdiction.

An aircraft mortgage in Japan will be registered with the Japanese Civil Aviation Bureau (JCAB), which is a department of the Ministry of Land, Infrastructure, Transport and Tourism in Japan. The JCAB aircraft registry is open to the public. (In the case of an equivalent Irish company granting a mortgage over an aircraft, details of the aircraft mortgage would also be filed in the Irish Companies Registration Office, which is also open to review by the public.)

There is a two-step optional process to registration of the aircraft mortgage in Japan:

  1. A provisional registration of the aircraft mortgage, which will secure priority; and
  2. A full registration, which is required to enforce against the debtor which is more costly.

In most cases, the provisional registration will be made as a matter of course, and if and when there is a real risk of default, the full registration will be made in order to support enforcement. The mortgage registration must disclose information on the secured obligations amount, the interest amount and conditions to the secured obligations which, given the increasingly competitive marketplace, is not ideal if this creates a scenario whereby other industry players can deduce the terms of lending from the publicly available registration document.

If the aircraft was owned by an Irish entity, the registration of the charge in the Irish Companies Registration Office will be made for a fee of €40 (¥5,210) and the particulars described can be limited to what is needed for a third party to identify the asset being mortgaged and the parties involved.

Significantly, Japan is not a contracting state to the Cape Town Convention (Ireland is), so a route to registration, other than the location of the debtor, would be required.

Priority of security

In Japan, whereas the full mortgage registration protects against third parties and gives priority over subsequent registered security interests, the typical provisional registration will give priority over subsequently registered security interests only, but full registration is needed for the mortgage to be enforced.

The registration in the Irish Companies Registration Office will give priority over a liquidator and any creditor of the company which will run from the date of registration. Any mortgage registered ranks ahead of any mortgage or charge subsequently registered; however, a registered mortgage will not take priority over a possessory lien for work done on the aircraft, whether before or after the creation or registration of the mortgage and also any rights of detention (for instance, unpaid airport charges, air traffic control charges and Eurocontrol charges).

The international registry filings of course rank priority on a first-to-file basis, unless this is amended by subordination, which can only be achieved with the consent and knowledge of all parties which have a previously registered interest in the aircraft. This is the case, even if the first registered interest holder has knowledge of an existing unregistered interest. The international interest in the aircraft mortgage will be effective even if it is registered prior to the debtor's insolvency, although the timing of insolvency will be determined by the relevant jurisdiction.

Enforcement of security

Enforcement in Ireland is, on the face of it, more straightforward and appealing to the creditor. In the first instance, the legal aircraft mortgage in Ireland can be enforced without intervention from the court. The concept of "self-help" prevails under domestic Irish law, whereby, in essence, on an event of default under a mortgage, the creditor can take possession of the aircraft (or appoint a receiver to do so) without judicial intervention and subsequently sell the aircraft, provided this has been specified in the mortgage document or elsewhere in writing.

In practical terms, the creditor can go to court where the debtor resists repossession or where there is a dispute about whether there has been an event of default.

In reality, however, a court order will be sought for the purposes of certainty of title on resale of the aircraft. The Commercial Court in Ireland offers speedy court remedies.

In Japan, the creditor will need to perfect the registration of the aircraft mortgage in the JCAB, and pay the debt-geared fees as a prelude to enforcement.

Also, in Japan there is no concept of self-help. Unless there is cooperation between the lessee and the owner, the creditor will need to commence a court procedure to enforce the aircraft mortgage by way of public sale supervised by a court (a court sale).

Where there has been a filing of the international interest constituted by the aircraft mortgage in the International Registry, there are significant pro-creditor remedies that can be utilised – such as taking possession of the aircraft without obtaining a court order, deregistering and exporting an aircraft by exercising rights under an irrevocable deregistration and export request authorisation, selling or granting a lease of an aircraft object, collecting or receiving any income or profits in connection with the management or use of the aircraft and obtaining interim relief pending final determination of any claim.

In addition to these, the election of Alternative A under Cape Town in Ireland now allows, where there is insolvency, the creditor to take possession of the aircraft, if the debtor defaults and fails to perform its obligations under the aircraft mortgage for 60 days.

The limitations to the legal aspect of enforcement of an aircraft mortgage in a Jolco transaction may never come into play because once the aircraft is located outside of Japan, this jurisdiction can be relied on for enforcement and if this jurisdiction is a Cape Town Contracting State, the protections under the convention will become available.

More Japanese investment to come

Despite some of the potential hurdles described above, which can generally be structured around, it is clear that the Jolco is only increasing in popularity. High tides carry all boats, or perhaps aircraft even, and the strong steady flow of funding through Jolcos facilitates the growth of both airlines and lessors, while giving a Japanese investor tax advantages and access to the attractive aviation industry.

Although there was a reported slowdown in the Japanese market in the first quarter of 2018, GDP rose in the second quarter. The economy is projected to reach growth of 1.25% in 2018 and growth is projected to remain above 1% through 2019, according to the OECD Economic Outlook, Volume 2018 Issue 1.

These figures suggest there will be increasing Japanese equity investment available in the market. Any uncertainties over global trade tensions or the outcome of the Brexit negotiations are not obvious here.

Originally published by Airfinance Journal, Euromoney plc.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions