1 Legal framework
1.1 Which laws typically govern aviation finance transactions in your jurisdiction?
New York and English law are usually applicable to aviation finance contracts in Brazil.
1.2 If aviation finance documents are governed by laws other than your local law, what local law requirements (documentary and procedural) are required to ensure that foreign law documents are recognised and enforceable locally?
Agreements governed by the laws of other jurisdictions will be recognised and enforced in Brazil as long as they do not violate Brazilian sovereignty, good customs or public morality. Most typical aircraft finance documents do not violate these criteria, with the exception of:
- self-help remedies; and
- in certain cases, unilateral option provisions (including provisions that are subject to the sole discretion of a lessor).
Increasingly, the Brazilian judiciary also applies principles of equity when enforcing aircraft leases. As a result, enforcement of the literal terms of a lease – especially short timeframes for actions or default cures – may be delayed if a court finds that such terms are unconscionable.
To be enforceable in Brazil, most aircraft finance documents must be registered with the Brazilian Aeronautical Register (RAB). The RAB is a specific single national register for aircraft in Brazil. The RAB is responsible for the registration of aircraft, the registration of liens and encumbrances over aircraft and the issuance of registration and airworthiness certificates. The RAB is maintained by the National Agency of Civil Aviation, a regulatory agency of the federal government.
Generally, aircraft lease agreements, assignments, assumption agreements, novations and mortgages must be registered with the RAB. Such documents are usually written in English. Any document written in a language other than Portuguese must be translated into Portuguese by a licensed translator in Brazil. Such translations are called ‘sworn' translations.
As of 16 August 2016, documents that are signed outside Brazil in a state that is a signatory to the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents of 5 October 1961 must bear a certificate called an ‘apostille', issued by the competent authority of the original state.
Any documents signed in a state that is not a signatory to the Apostille Convention must be legalised by the Brazilian consulate responsible for the jurisdiction in which the document was signed. In most cases the consulate will require local notarisation as a prerequisite to legalisation. In some cases the apostille of a government officer is required for legalisation. The rules of the various consulates vary.
Documents signed in Brazil by attorneys in fact pursuant to notarised and apostilled or legalised powers of attorney need not themselves be legalised. The RAB requires the signature of two witnesses on all documents submitted for registration. Documents signed in Brazil with a digital signature that complies with Brazilian law are treated as notarised and do not require further notarisation. Exceptionally, during the COVID-19 crisis, the RAB accepts powers of attorney that have been notarised, but not yet apostilled. Such powers of attorney must be apostilled in due course, but in the meantime registrations can be completed prior to such apostille.
Specifically for bills of sale, the RAB also requires the signature of representatives of both the seller and the buyer. However, the RAB has not applied this policy to bills of sale for new aircraft – the RAB has accepted such bills of sale when signed by the manufacturer only.
The Brazilian Aeronautical Code and the RAB's regulations allow the RAB, after receiving documents for filing, to issue requests for clarification or additional documents if the filing is incomplete or otherwise incorrect. If such a request is not complied with within the specified timeframe (usually 30 calendar days), the priority from the filing date is lost.
Documents that are digitally signed in a particular format are accepted by the RAB without notarisation. Not all digital signatures are acceptable. The Brazilian government has published several standards in this regard. These standards usually require pre-registration of the signatory's personal details and the issuance of a small device (ie, a token) to authenticate a signature. The popular DocuSign platform does not meet the Brazilian requirements.
The RAB's filing system is also electronic.
There is another register of relevance in the context of aviation finance: the register of titles and documents (RTD). Unlike the RAB, which is a single specialised aircraft register, there are many RTDs in Brazil, which deal with documents of any nature. According to the Law of Public Registries (1973), any document signed in a language other than Portuguese or signed outside Brazil must be registered with an RTD to be admissible in Brazilian public offices, including the Brazilian courts, and to give public notice of such assignments to third parties. In the past, RTD registration costs were reasonable; although they were much higher than the RAB costs, they were nonetheless acceptable to most parties. However, around March 2016 the RTDs of the state of Rio de Janeiro changed their fee structure and began to charge exorbitant registration fees. The variations are so great that it is difficult to estimate these fees; however, the RTD registration fees for an aircraft mortgage could be equivalent to $10,000, $20,000 or even more.
Since 2016, the general practice in Brazil has been to forgo RTD registration of documents filed with the RAB. The majority view is that RAB registration will suffice for the purposes of registration. However, RTD registration should be considered on a case-by-case basis, to ascertain whether a document must be registered with an RTD and whether the cost is justifiable.
2 Finance structures
2.1 What aviation finance structures are most commonly used in your jurisdiction?
Mainly due to tax considerations, most commercial aircraft finance structures are operating leases. Local airlines occasionally enter into finance lease agreements. Some spare engine finance is structured through traditional mortgages or chattel mortgages.
Business aviation transactions tend to rely on finance leases and chattel mortgages more frequently.
2.2 What are the advantages and disadvantages of these different types of structures?
For the lessor, the main advantage of an operating lease relates to repossession rights. Brazil has many precedent cases in which operating lessors were able to repossess aircraft relatively quickly. There are fewer precedent cases for other structures.
For the lessee, the main advantage relates to tax. For more than 30 years, Brazilian income tax that would generally be withheld on rental payments remitted abroad has been exempt. At present, there is a chance that aircraft rental payments due the 2020 calendar year will be subject to a 1.5% withholding tax. This depends on draft legislation that is pending at the time of writing. If such withholding tax is imposed, leases with gross-up provisions should be valid to allocate responsibility for this tax to the lessee.
Many different import-related taxes have also been reduced for commercial aircraft on operating leases, in some cases to zero. These include:
- the federal import tax;
- the federal excise tax; and
- the state circulation of goods and services tax (which is similar to value added tax).
An additional tax on imports (COFINS) did not apply to operating lease aircraft imports until 2013. Based on a change in law in 2013, the Brazilian Revenue Service began to assess part of the COFINS tax on aircraft imports beginning in the last quarter of 2014; however, the basis for those assessments is questionable and most airlines have so far avoided paying the COFINS tax by obtaining court injunctions. If and when applicable, the COFINS tax will be 1% of the value of an aircraft at the time of importation.
2.3 What other factors should operators bear in mind when deciding on a financing structure?
Operators should check the jurisdictions of the lessors or other providers of finance. On most occasions over the past 30 years, payments remitted to lessors or creditors located or established in jurisdictions that are considered ‘tax havens' by the Brazilian Revenue Service (SRF) have been subject to withholding tax (Brazilian income tax). Between October 2016 and December 2019, payments made by airlines to entities in tax havens were not subject to withholding tax. This exemption did not apply to payers that were not operators of regularly scheduled services. The exemption ended at the end of 2019 and the new rules are still being determined as of the time of writing.
‘Tax havens' are defined as jurisdictions with annual corporate income tax rates under 20%. The SRF also publishes a list of countries that are deemed ‘tax havens' for tax purposes. Since 2016, Ireland has been included on the list of tax havens.
2.4 Who are the most common providers of aircraft finance in your jurisdiction? Do any restrictions apply in this regard?
The most common providers are specialised leasing companies. Some banks with transportation portfolios are also active. The Brazilian National Development Bank has provided financial support to some local airlines with a commercial relationship with Embraer. Some local banks finance executive aircraft, although in general they are relatively uninvolved in commercial aircraft finance.
3 Title transfer
3.1 How is title to an aircraft legally transferred in your jurisdiction?
Brazilian law recognises the effectiveness of title transfer of aircraft by means of a bill of sale registered with the Brazilian Aeronautical Registry (RAB).
3.2 What are the formal and documentary requirements for transferring title?
As mentioned in question 3.1, title is transferred through registration of a bill of sale with the RAB. Mere delivery of a bill of sale does not effectively transfer title.
Certain provisions of the Brazil Aeronautical Code may be read as requiring the transfer of title to be governed by Brazilian law. Therefore, it is advisable that bills of sale filed with the RAB be governed by Brazilian law. In some cases, the parties have second bills of sale governed by New York or other foreign law.
A bill of sale filed with the RAB, regardless of the stated governing law, must contain the following elements:
- the full qualification of the parties (both the buyer and the seller);
- a full description of the aircraft which is being bought/sold;
- reference to the price which is being paid. In this regard, a reference to ‘good and valuable consideration' will be accepted by the RAB; and
- the signatures of the seller and the buyer and of two witnesses (all of which must be notarised).
The location of the aircraft is not relevant for the purposes of transfer of title (although it may be relevant for tax liability purposes). What is relevant for the purposes of recognising the transfer of title is registration of the title transfer document with the RAB.
3.3 What is the process for transferring title?
Registration of the bill of sale with the RAB, as discussed in question 3.2.
3.4 Are any charges, fees or taxes levied on the transfer of title?
The RAB's fees are nominal – less than the equivalent of $100. All registration fees in Brazil must be paid in Brazilian reals.
3.5 Other than in case of insolvency, are there any laws under which the registered title holder may be forced to relinquish ownership of the aircraft (eg, expropriation, confiscation)?
In a few isolated cases the Brazilian Revenue Service (SRF) has sought to confiscate private or corporate aircraft due to violations by lessees of customs and import regulations. In such cases the SRF has not offered compensation to the owners. The SRF's expectation was that the Brazilian lessees would indemnify the owners. These cases are uncommon. However, there is a danger that a leased commercial aircraft may become subject to such an initiative on the part of the SRF, in which case the owner might have to make a claim under confiscation insurance or proceed against the Brazilian lessee or the SRF.
In general, the Brazilian government is required to pay compensation for confiscation of assets. The reason why compensation was not offered in the cases mentioned above is that they were based on alleged violations of laws or regulations.
4.1 What body administers the aircraft register in your jurisdiction?
The Brazilian Aeronautical Register (RAB), which is maintained by the National Agency of Civil Aviation (ANAC), a regulatory agency of the federal government as described in question 1.2.
4.2 What information is included in the aircraft register? Is this publicly accessible?
The RAB registers the name of the aircraft's owner, register and operator. Leases, mortgages and related documents are also included in the register.
The RAB is a public register. On request, the RAB will provide certificates with a brief description of all documents registered with the RAB in respect of a particular aircraft. All documents registered with the RAB are available for public consultation.
4.3 What are the formal and documentary requirements for registration of an aircraft? What is the process for registration? What is the effect of registration? What is the effect of deregistration?
The process to register an aircraft begins with reservation of a Brazilian registration mark. This requires submission to the RAB of information identifying the aircraft by manufacturer, model and serial number. The applicant must also be fully identified. Brazilian operators register aircraft with the RAB. Foreign parties may be registered as owners; however, the applicant must be the operator and must be Brazilian. During the registration process, the applicant must submit to the RAB:
- a certificate of airworthiness for export from the prior register;
- the results of a Brazilian inspection;
- evidence of ownership;
- evidence of customs clearance;
- a deregistration message from the prior register; and
- payment of the RAB's fees.
As regards ownership evidence, if the prior register is an owner register and identifies the last registered owner, the RAB usually does not require further evidence of title.
For leased aircraft, evidence of registration of the lease with the Central Bank of Brazil is also required.
In the case of new aircraft, a certificate from the country of manufacture affirming that the aircraft was never registered is accepted in lieu of a certificate of airworthiness for export and a deregistration message.
The RAB is an owner register, so one effect of aircraft registration with the RAB is that the registered owner holds and continues to hold title unless a transfer is registered or the aircraft is deregistered. The effect of deregistration is to free ANAC from any responsibility for supervising the operations of the aircraft. In addition, in case of deregistration, Brazilian law no longer applies to title and liens.
Question 1.2 describes the formalities applicable to any document registered with the RAB.
Once an aircraft has been deregistered, it is not possible to register any document with the RAB in relation to that aircraft.
4.4 If your jurisdiction has ratified the Cape Town Convention, can a local law deregistration power of attorney be acquired by a lessor/financier, and if so, does it provide any additional protection for such parties?
Brazil has ratified the Cape Town Convention and implemented the convention in May 2013. Brazil's declarations under the convention include the validity of irrevocable deregistration and export authorisations (IDERAs). In April 2014 ANAC promulgated regulations for deregistration of aircraft through IDERAs. Since then, IDERAs have been used for deregistration of multiple aircraft in Brazil (probably in excess of 100). IDERAs must be registered with the RAB and adhere to the same documentary formalities described in question 1.2.
Local law deregistration powers of attorney were once commonly provided by Brazilian lessees; however, since the use of IDERAs has become common, they are now seldom used.
4.5 What are the formal and documentary requirements for registration of an aircraft lease? What is the process for registration? What is the effect of registration? What is the effect of deregistration?
The Brazilian Aeronautical Code requires that leases be registered at the RAB, so the validity of an unregistered lease might be questioned. Question 1.2 describes the formalities relating to notarisation, apostille, witnesses and translation.
The effect of RAB registration constitutes public notice to third parties.
Leases are not deregistered per se. A lease may be terminated through registration of the lease termination with the RAB. However, this is not required for the purposes of aircraft deregistration, especially if the aircraft is being deregistered through an IDERA. The deregistration of an aircraft will not necessarily terminate a lease.
4.6 What are the formal and documentary requirements for registration of an aircraft mortgage? What is the process for registration? What is the effect of registration? What is the effect of deregistration?
Brazilian law mortgages must be registered with the RAB to establish a lien over an aircraft. In addition, the effect of RAB registration constitutes public notice to third parties.
Question 1.2 describes the formalities relating to notarisation, apostille, witnesses and translation.
Mortgages are not deregistered per se. A mortgage can be released through registration of a written release instrument with the RAB. Mortgages need not be released for the purposes of aircraft deregistration, provided that the mortgagee consents to such deregistration. The deregistration of an aircraft might invalidate a mortgage lien over an aircraft; this issue has not been tested. This is one reason why the RAB will not deregister an aircraft without a mortgagee's express written authorisation.
4.7 Can aircraft be registered in your jurisdiction even if the operator is not from your jurisdiction?
Generally, no; although there is a limited exception for interchange agreements.
5 Operating leases
5.1 Are there any mandatory or advisable terms that should be included in an operating lease from a local law perspective?
The Brazilian Aeronautical Code does not require the inclusion of any particular terms. However, several advisable terms should be included, such as a list of pre-delivery (conditions precedent) and post-delivery registrations and approvals (conditions subsequent), since certain approvals cannot be obtained prior to delivery and importation into Brazil. Jurisdiction clauses should be reviewed and include the non-exclusive jurisdiction of the Brazilian courts. Self-help provisions and unilateral discretionary clauses should be reviewed with caution, as both are potentially unenforceable in Brazil.
5.2 What charges, fees or taxes arise from the execution of an operating lease?
Nominal local fees are applicable in relation to notarisation and RAB registrations, usually under the equivalent of $100. It is customary for Brazilian airlines to bear the costs of registering leases.
The cost of a sworn translation is approximately $30 per page. The actual cost is based on the number of characters in the Portuguese translation of the document. Currently, the filing fees payable at the RAB are approximately US$7 per page. The charge is based on the number of pages in the Portuguese sworn translation.
The fee for the issuance of a certificate of registration for the aircraft, in which the owner is registered as owner and the lessee is named operator of the aircraft, is approximately US$24.
The fee for obtaining an updated lien certificate from the RAB confirming all registrations is around US$10, excluding the fees of a lawyer to obtain and review such a certificate.
5.3 Can either the lessor or the lessee assign or novate its rights in an operating lease in your jurisdiction?
Yes. Lease assignments and novations are common in Brazil. They must be registered with the RAB and all registration formalities described in question 1.2 will apply.
5.4 What are the respective obligations and liabilities of the lessor and lessee under an aircraft lease?
The Brazilian Aeronautical Code imposes the following statutory obligations on the lessor:
- to deliver the aircraft at the agreed time in the agreed condition, with all documentation for flight operations;
- to maintain the aircraft, unless the lease expressly provides otherwise (nearly all leases to Brazilian lessees provide otherwise – that is, the Brazilian airline is usually responsible for maintenance); and
- to guarantee to the lessee quiet enjoyment of the aircraft during the lease term.
Lessees have the following statutory obligations:
- to pay rent on a timely basis, to the contractually negotiated location;
- to maintain the aircraft as it would its own property; and
- to redeliver the aircraft at the end of the lease term in the same condition as when delivered, fair wear and tear excepted.
5.5 In the event of default, what options are typically available to enforce the operating lease? Do all or some enforcement actions require court applications? If so what are the associated costs and timescales involved?
The basic options are repossession or an enforcement action in relation to undischarged obligations. In respect of repossession, if an aircraft is in Brazil and the lessee does not voluntarily redeliver the aircraft, the lessor must seek a repossession order from a Brazilian court. The only remedy that the lessor can pursue without leave of a court is deregistration pursuant to an irrevocable deregistration and export authorisation (IDERA). If an aircraft is located in another jurisdiction, the repossession rules of that jurisdiction might apply in order to take physical possession.
Prior to filing a lawsuit, a lessor must serve a formal notice of default against the lessee and in most cases give the lessee a period in which to cure the default.
If a lessee is in default under a lease, the lessor may seek an immediate repossession order from a Brazilian judge. In previous aircraft repossession cases filed against airlines that were not undergoing judicial reorganisation, the Brazilian courts were fairly efficient in granting preliminary injunctions that placed the leased aircraft in the possession of the lessor. Such orders are not equivalent to a summary judgment, since they do not always allow the lessor to export and deregister the aircraft until after the airline has had an opportunity to present a defence. After the presentation of such a defence, the court may grant the lessor definitive possession of the aircraft. At that point, such a ruling will be roughly equivalent to a summary judgment. In short, the lessor can usually obtain preliminary possession within a few days of filing a complaint. A summary judgment may be obtained in a matter of weeks or months, though much will depend on the lessee's defences.
It is not possible to estimate the costs of repossessing an aircraft due to the number of variables, such as:
- the defences raised by the lessee;
- interlocutory appeals;
- aircraft parking;
- ground maintenance; and
- contingent insurance.
Brazil has relatively little experience in cases where lessors have sought a remedy other than repossession.
5.6 Upon termination of the operating lease, how is repossession of the aircraft effected? Can airports assert a lien over all of the lessee's aircraft until unpaid charges have been discharged?
Actual repossession through a court action, as described in question 5.5, is effected by a court official taking possession of the aircraft and delivering it to a representative of the lessor.
In Brazil, there is some controversy in relation to liens for airport charges and air navigation charges. Some legal authorities support the right of the authorities to exercise such liens, while others support the position that no such lien in favour of the authorities exists. In practice, the airport authorities do not seek to exercise liens over aircraft. What the authorities have done on occasion, however, is seek to block the export of aircraft pending payment of airport navigation and parking fees. This is more akin to a detention order than the imposition of a lien, though the effect on the owner is similar (deprivation of access to the asset). To date, the airport authorities have usually sought to block the export of business aircraft for unpaid fees; however, they have not sought to block commercial aircraft from being exported. There is no logic for this distinction.
In Brazil's Cape Town declarations, Article 39 relating to non-consensual liens was preserved. Therefore, the Cape Town Convention will not necessarily change this position.
5.7 What disputes typically arise over operating leases in your jurisdiction and how are these typically resolved?
Most disputes arise due to lack of payment, and in most cases lessors and lessees agree to resolve the dispute amicably. Frequently, if a repossession case has been initiated, the parties enter into court-approved agreements allowing the lessee one last opportunity to cure its default within a previously negotiated timeframe.
5.8 What other considerations should be borne in mind when concluding an aircraft lease in your jurisdiction?
Brazil is subject to strict foreign exchange controls. The lessee must register the terms of the lease with the Brazilian Central Bank through a computerised system, called SISBACEN. The only common exception to such registration relates to leases with terms of less than 360 days.
The Central Bank registration is commonly referred to as a ‘registro de operação financeira' (ROF). The Central Bank must issue an amendment to the ROF for payments under the lease to be redirected to the new lessor because the ROF authorises the lessee to pay a particular person. There is no need to amend the ROF to change the bank account, provided that the payee does not change (eg, the lessor could change bank accounts without the requirement for an amendment to the ROF).
ROFs approve regularly scheduled payments due under the lease (eg, rent). Irregular payments such as default interest or losses and damages must be approved by the Central Bank on an ad hoc basis before remittance.
The lessors and any holders of registered liens are obliged to obtain a registration number (CNPJ) from the Brazilian Revenue Service (SRF), to enable the airline to pay rent to the lessor. In the case of non-resident registrants, CNPJs are created for informational purposes only. Therefore, obtaining a CNPJ does not, per se, create tax liability. The lessor will not be deemed to be doing business in Brazil as a consequence of obtaining a CNPJ.
Since 2016, the process for obtaining a CNPJ has become more stringent. The process now requires the registrant to appoint an agent in Brazil to receive process from the SRF. Another requirement is that the registrant identify its ultimate beneficial owner to the SRF. This process can be expensive and time consuming; however, it is necessary for the lessor to receive payments. When aircraft are leased through trusts, the trustee must have a CNPJ number. Most major trustees already have such numbers.
There are export authorisations that are needed at the time of export; however, it is not possible to obtain these at the time of delivery and likewise it is not possible to have a lessee sign undated forms for this purpose. The authorisations are obtained through websites of the Brazilian government and cannot be obtained in advance. IDERAs should be useful to enable an ‘authorised party' to apply for export. To date, IDERAs have been used for deregistration, but not for obtaining an authorisation of exportation from the SRF.
6.1 What types of security interests in aircraft are available in your jurisdiction? Which are most commonly used and which would you recommend (if different)?
Brazil implemented the Cape Town Convention in 2013, and since then international interests have been available and are common in Brazilian aircraft finance.
Some finance facilities also require a national security interest. This usually takes the form of a mortgage (see question 4.6).
Security assignments of leases are not security interests in aircraft; however, they are useful security interests. In particular, notices and acknowledgements of assignments of such rights from lessees are useful – especially if a security trustee or lender wishes to have repossession rights. Security assignments, notices of assignment and acknowledgements of assignment should be registered with the Brazilian Aeronautical Register (RAB) in case they need to be enforced in Brazil.
6.2 What are the formal, documentary and procedural requirements for perfecting a security interest in an aircraft?
For information on registering international interests, see question 6.9. For information on the requirements for national security interests, see questions 1.2 and 6.1.
6.3 Can security be taken over engines and/or any other aircraft parts in your jurisdiction? If so, how?
Security interests can be taken over engines and parts. In the case of engines, an engine mortgage may be registered with the RAB. Such registration is optional. For parts, stocks registration with a register of titles and documents (RTD) (described in question 1.2) is advisable.
6.4 What charges, fees or taxes arise from the perfection of a security interest in an aircraft?
The same fees described in question 1.2 for RAB registrations apply to engine mortgages.
It is difficult to estimate the RTD fees, as these vary significantly.
6.5 What are the respective obligations and liabilities of the owner and the secured party under the security interest?
Essentially, the obligations and liabilities are those negotiated by the parties and reflected in the security agreement. In the case of a mortgage, the Brazilian Aeronautical Code gives the mortgagee a statutory right to inspect the mortgaged asset.
6.6 In the event of default, what options are available to enforce the security interest? Is self-help available in your jurisdiction or does enforcement action have to go through the courts?
Under the Cape Town Convention, the holder of a security interest has the remedies of a ‘chargee'. However, these rights have not been tested in Brazil.
The basic remedy available to the holder of a security interest is a court order for the seizure and auction of the secured asset. For a variety of reasons, this remedy is relatively ineffective in Brazil in respect of aircraft.
If a security assignment has been entered into and properly registered, the holder of the secured interest may have the right to repossess the aircraft. It will be acting as the assignee of the lessor and such repossession rights are usually subject to the lessee's rights of quiet enjoyment.
6.7 Will local courts recognise a foreign court judgement in favour of a lessor/financier?
Any valid judgment for a definite sum given by a competent foreign court against a lessee will be recognised and accepted by the Brazilian courts without retrial or examination of the merits of the case after ratification by the Brazilian Superior Court of Justice. In order to be ratified by the Superior Court of Justice of Brazil, a foreign judgment must meet the following requirements:
- It must comply with the formalities necessary for its enforcement under the laws of the place where it was rendered;
- It must have been issued by a competent court after proper service of process on the parties or after sufficient evidence of the parties' absence has been given, as established pursuant to the applicable law;
- It may not be subject to appeal;
- It may not be contrary to Brazilian sovereignty, public policy or morality;
- It must be apostilled pursuant to the Apostille Convention or authenticated by the competent Brazilian consulate and be accompanied by a sworn translation into the Portuguese language; and
- It may not be a decision on any matter over which the Brazilian judiciary has exclusive jurisdiction.
Any urgent interlocutory decision given by a competent foreign court against the lessee will be recognised and accepted by the Brazilian courts without retrial or examination of the merits after ratification by a federal court with proper jurisdiction. The same requirements listed above, with the exception of the third point, will apply to the enforcement of any such urgent interlocutory decision.
6.8 What other considerations should be borne in mind when perfecting a security interest in an aircraft in your jurisdiction?
Perfecting a security interest through registration with the RAB (in the case of an aircraft or engine) or an RTD (for spare parts) is not difficult or controversial. The main issue that a financier must consider are the available remedies. Please see question 6.6.
6.9 Has your jurisdiction ratified the Cape Town Convention? If yes, are there any notable exceptions to the ratification? If yes, in your opinion, could any conflicts arise between the Cape Town Convention and local law in an enforcement scenario? If yes, have any enforcement issues arisen in relation with regard to conflicts between the Cape Town Convention and local law?
Brazil has ratified and implemented the Cape Town Convention, which has been in effect in Brazil since May 2013.
There are no notable exceptions to the convention. One element of the convention that is unusual in Brazil relates to the registration of international interests. Brazil has designated the RAB as the exclusive ‘authorising entry point' (AEP) pursuant to Article XIX of the protocol. All international interest filings over airframes of Brazilian-registered aircraft require AEP access codes. The only parties that can obtain AEP access codes are professional user entities (PUEs) or transacting user entities (TUEs) which have registered with the RAB and given certain undertakings to the RAB. In practice, this means that Brazilian-based PUEs make most, if not all, international registry filings over Brazilian-registered aircraft.
To obtain an AEP access code, the PUE or TUE must have a notarised and apostilled or consularised (as applicable in accordance with question 1.2) power of attorney (unless it is acting for a Brazilian party, in which case it must have Brazilian incumbency documents). AEP access codes are treated as confidential by the National Agency of Civil Aviation, so it is not possible for the holder of an AEP code to share it with third parties.
The Cape Town Convention, like any other international treaty, has the same legal hierarchy as any other ordinary federal law. At present, the convention has primacy over national laws that might be inconsistent, because the convention is more recent. If any conflict arises between the convention and national law, the concept of lex speciali will also be relevant to preserve such primacy.
In relation to insolvency and restructuring, Brazil adopted Alternative A under the Cape Town Convention and provided for a declared waiting period of 30 days. This was not tested until December 2018, when Oceanair Linhas Aereas SA (doing business as Avianca Brasil) filed for bankruptcy reorganisation in a Sao Paulo court. The Brazilian judiciary failed to respect the timeframes of Alternative A of the convention, as well as certain rights accorded to creditors under Article 13 of the convention. This was not due to a problem in the way the convention was ratified and implemented in Brazil; rather, the judge in that case knowingly violated the convention's timeframe requirements.
7 Aircraft sale and purchase
7.1 How are aircraft sale and purchases typically effected in your jurisdiction? Are there any differences in the sale of airframe versus engines?
Sale and purchases are usually international (ie, either the purchaser or seller is usually not Brazilian). Question 3 describes the process and requirements for transfer of title.
There is no specific register for engines in Brazil. Engine sales do not require all of the formalities mentioned in question 3 and registration with the Brazilian Aeronautical Register (RAB) is optional.
7.2 What players are typically involved in an aircraft sale and purchase?
The usual players are the buyer, the seller, the financier and the RAB. Brazilian operators rarely own the aircraft they operate, so the lessees are not usually involved, except to consent to the assignment or novation of a lease.
7.3 Is the manufacturer/seller bound by a duty to disclose? What representations and warranties will it typically make?
This issue seldom arises. Purchase and sale agreements of commercial aircraft registered in Brazil rarely involve a Brazilian buyer or seller. Such agreements are usually subject to foreign laws. In most cases, buyers are given the opportunity to inspect and the sale is then completed with the aircraft in ‘as is, where is' condition.
To the extent that any warranties from manufacturers are still in effect, sellers usually assign such warranties.
7.4 What due diligence is typically conducted in an aircraft sale and purchase?
Due diligence usually involves:
- verification of title and liens at the RAB;
- verification of the import status of the aircraft;
- technical inspections to confirm airworthiness and other conditions of the aircraft; and
- if the seller is Brazilian, court searches to confirm that the seller is not subject to insolvency proceedings.
7.5 What are the formal, documentary and procedural requirements for conclusion of an aircraft sale and purchase?
Please see question 3.
7.6 What are the respective obligations and liabilities of buyer and seller during the transaction, and what are the consequences of any breach?
The buyer and seller have relative freedom to negotiate their respective obligations and liabilities. Most sales of used aircraft are concluded on an ‘as is, where is' basis.
7.7 What charges, fees or taxes arise from the conclusion of an aircraft sale and purchase? Are there sales tax exemptions – for example, if the aircraft is being sold to an operator that will continue to use the aircraft to generate revenue?
Even if neither the buyer nor the seller is Brazilian, capital gains tax might be due if the seller realises a capital gain. Since February 2004, Brazilian law has provided that capital gain tax may be due on the sale of assets located in Brazil, even if neither the buyer nor the seller is Brazilian. This provision has not been applied in practice in relation to sales of Brazilian-registered aircraft. There is some discussion on the concept of ‘the location of the aircraft' for the purposes of capital gain tax. The location of aircraft may be considered simply the fact that the aircraft is registered in Brazil, even if it is not physically in Brazil.
If a sale involves Brazilian parties, local laws provide for different tax rates which will vary depending on whether the parties are individuals or companies. If the seller is an individual, capital gains tax will vary from 15% to 22.5% depending on the amount of the capital gain. There might also be a value added tax-style tax. Rates vary from state to state, but are usually around 4%.
7.8 What other considerations should be borne in mind when conducting a sale and purchase of an aircraft in your jurisdiction?
The main considerations are described in questions 7.4 and 7.7.
7.9 Are the payments of deposits refundable under term sheets if a sale does not proceed and do the parties have a duty of good faith in the conduct of sale and purchase negotiations?
The parties are under a duty of good faith. Whether a deposit is refundable depends on the terms of the relevant agreement. Escrowed funds are rarely held in Brazil.
8.1 What insurance requirements apply to aircraft in your jurisdiction?
The Brazilian Aeronautical Code states that certain insurance is obligatory. The statutory insurance required does not conform to industry standards. It is a minimal liability insurance requirement only.
8.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?
Brazilian operators must purchase all of their primary insurance from Brazilian underwriters. Brazilian primary insurers must offer 40% of all reinsurance risks to Brazilian-based reinsurers. As a matter of market practice (most likely lack of capacity), Brazilian reinsurers do not take up all of the 40% offered to them.
8.3 What other forms of insurance feature in the aircraft finance market in your jurisdiction?
An unusual provision of Brazil law is that cut-through clauses are valid only if the primary insurer is insolvent. To date, this has not caused any material problems in the payment of insurance proceeds. International payments are subject to approval from the Central Bank of Brazil. In the past, the Central Bank has approved such remittances with little or no difficulty. The Central Bank usually requires the Brazilian insurer or reinsurer to submit evidence of the policy and of the loss.
9 Trends and predictions
9.1 How would you describe the current aircraft financing landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The aviation industry has been significantly affected by the COVID-19 crisis.
The Brazilian government has announced a programme to financially support the country's airlines during this crisis. The aid will be provided by the Brazilian Bank for National Economic and Social Development, with the support of a consortium of private banks. The consortium, known as Bradesco, is reportedly leading discussions with the country's airlines. The terms of the support, which will probably take the form of convertible debt instruments, are still being negotiated.
As of 11 May 2020, the Brazilian National Congress is reviewing a draft law (PL 1397/2020), which would provide emergency remedies with temporary effectiveness from its entry into force until 31 December 2020. If PL 1397/2020 is approved in its current form, it will create two new consecutive 60-day stay periods that will apply to the enforcement of obligations arising after 20 March 2020. Obligations arising prior to 20 March, and obligations arising from new agreements or from contractual amendments entered into after 20 March 2020, will not be affected by PL 1397/2020. In addition, if enacted, PL 1397/2020 will allow debtors that have provided security in the form of revenue pledges or possibly security deposits to use half of that security to meet their obligations and then replenish the security over a period of 36 months.
10 Tips and traps
10.1 What are your top tips for the smooth conclusion of an aircraft financing transaction and what potential sticking points would you highlight?
- Pay close attention to local formalities (see question 1) to avoid surprises if the enforcement of rights in Brazil becomes necessary. For example, at this time many lessors and lessees are negotiating rent deferral agreements due to the COVID-19 crisis. These agreements should be registered with the Brazilian Aeronautical Register; occasionally, however, the parties erroneously conclude that the formalities are unnecessary or burdensome and fail to do so.
- Be wary of reliance on judgments of foreign courts, due to the time required to complete the process.
- Conduct thorough due diligence (see question 7.4) when purchasing aircraft.
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.