1 General and Contractual

1.1 What are the typical structures available for financing the purchase of an aircraft?⟩ 

  • Typically, aircraft financing structures involving Cayman Islands entities make use of special-purpose vehicles ("SPVs"), which are set up specifically to participate in aircraft financing and/or leasing transactions. The Cayman Islands' reputation for being politically stable, tax neutral and having a well-established legal system based on English common law principles has led to the jurisdiction's preferred status for the incorporation/establishment of such SPVs.
  • The SPV will typically hold title to the aircraft. SPVs are highly flexible corporate structures that can be utilised either as a single-aircraft owning company or to hold multiple aircraft in a single entity. The acquisition of the aircraft by the SPV will most commonly be financed by way of a loan from a third-party lender, which will in turn take security over the aircraft in the form of an aircraft mortgage and other security documentation. Other typical features include the granting of security over the issued share capital of the SPV itself.
  • Although these traditional debt financing arrangements remain the norm, other alternative forms of financing are becoming increasingly common and, in recent years, there has been a marked increase in the number of aircraft financing transactions accessing the capital markets (e.g. through bond issuances, asset-backed securitisations, use of the Enhanced Equipment Trust Certificates ("EETC") regime, or through direct equity injection from private equity firms).
  • There are two basic structures that are commonly used for the financing and leasing of aircraft through a Cayman Islands SPV. These are: (1) an off-balance sheet, insolvencyremote or "orphan trust" structure; or (2) an on-balance sheet direct ownership structure.
  • In a typical Cayman Islands orphan trust structure: (1) the issued share capital of the SPV will be held by an offshore trust company as share trustee on charitable or purpose trusts; and (2) the directors of the SPV will be provided by a third-party corporate administrator (which is often the same entity as the share trustee) pursuant to the terms of an administration agreement entered into between the SPV, the administrator and the airline or leasing company
  • The SPV will enter into the financing and leasing documents necessary to enable it to acquire the aircraft, and lease it to the lessee in the transaction (which is typically an airline).

1.2 What are the key advantages/disadvantages and main issues arising in relation to these financing structures?

A key advantage of the off-balance sheet structure discussed in question 1.1 above is that ownership of the aircraft does not vest with the airline but with the SPV, which holds title in an off-balance sheet capacity. This ensures that the SPV will not be consolidated on the balance sheet of the lender, airline or the share trustee. From the lender's perspective, the fact that the bankruptcy of the airline will not have an impact on the assets provides lenders a greater degree of control and certainty over the underlying assets that constitute the basis of their security. Additionally, as the SPV is entirely independent from both the lender and the airline, in a default scenario the lender is likely to experience a greater degree of cooperation from and (through the covenants in the financing documents) control over the SPV.

In a typical on-balance sheet structure, either the airline or operator, or the financier, will establish the SPV directly and will hold the shares in the SPV themselves (rather than these being held on the terms of a charitable or purpose trust). The directors are also commonly employees or nominees of the shareholder (although it is not uncommon for one or more of the directors to be provided by a third-party corporate administrator to act as an "independent director"). The choice of structure will depend on a number of factors including the jurisdiction where the airline is incorporated, the jurisdiction in which the aircraft will be operated, the desired tax treatment of the overall structure and the needs of the financiers. The on-balance sheet structure lacks bankruptcy-remote characteristics and there will be implications up and down the chain upon a default or winding up of one or other of the parties. There is also not the same protection from consolidation as that offered in an orphan trust structure as the assets of the SPV are likely to be treated as being consolidated onto the balance sheet of the parent shareholder.

1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential characteristics?

The two forms of leases generally used in asset finance would apply and are commonly entered into by Cayman Islands SPVs. These are: finance leases and operating leases. There is no detailed statutory definition of a finance lease or operating lease under Cayman Islands law. The key difference between a finance lease and operating lease is that with a finance lease, the lessee may have the right to acquire the aircraft at the end of the lease for a nominal sum; however, this will not be the case for an operating lease.

1.4 Are there any proposals for reform in the area of aviation finance?

We are not aware of any proposals exclusively related to aviation finance reforms under consideration; however, aviation finance in the Cayman Islands will be considerably affected by a number of broader factors/developments. These factors/developments would include the consequences of the COVID-19 pandemic, the impact of restrictions pursuant to United Nations and United Kingdom sanctions extended to the Cayman Islands, the exit of the United Kingdom from the European Union and certain reforms of Cayman Islands insolvency laws.

1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially binding pre-contractual agreements (e.g. 'letters of intent') that will NOT take effect as fully enforceable agreements?

The following are the requirements for a contract to be binding under Cayman Islands law: (i) agreement between the parties; (ii) consideration; and (iii) intention to create legal relations. As such, if parties wish to enter into non-binding or partially binding pre-contractual agreements, then it is important to state in clear language that the parties are not concluding a contract or creating legal relations by virtue of the document. We would note that it would be unusual for such pre-contractual agreements to be governed by Cayman Islands law.

1.6 Is there a doctrine of 'good faith' in your jurisdiction that applies to all pre-contractual agreement, financing and leasing transaction documents, and the conduct of parties connected to them?

Cayman Islands law does not imply a duty of good faith into pre-contractual negotiations. Pre-contractual negotiations are not normally legally binding on the parties and in general, either party may terminate negotiations whenever they choose. Each party to negotiations is entitled to pursue their own interest, so long as they avoid making misrepresentations.

However, there is a general principle that a person who has received information in confidence cannot take unfair advantage of it. So, Cayman Islands law may imply a duty of confidentiality in relation to any transaction documents received during negotiations.

2 Taxation and Related Matters

2.1 Which government authority in your jurisdiction has primary responsibility for the accounting for and regulation of revenue control and taxes?

This is not applicable – the Cayman Islands currently has no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax.

2.2 What are typically the taxes in your jurisdiction that may arise in relation to a sale, a lease or a financing of an aircraft or an engine?

This is not applicable. Please see question 2.1 above.

2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability?

This is not applicable. Please see question 2.1 above.

2.4 Has the advent of BEPS (the Base Erosion and Profit Shifting initiative of the OECD) had any effect as regards structures in aviation finance and leasing or their interpretation?

This is not applicable. Please see question 2.1 above.

2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered under the terms of any relevant double-tax treaty or similar?

This is not applicable. Please see question 2.1 above.

2.6 Is the authority at question 2.1 likely to establish a 'look-through' right or similar as regards a lender or a lessor that is a special-purpose vehicle involved for the purpose of tax treaty access?

This is not applicable. Please see question 2.1 above.

2.7 Will the import of an aircraft into your jurisdiction and/or the sale or leasing of the aircraft give rise to any VAT, sales or use taxes or any customs import or excise duties?

Generally, Cayman Islands customs duties will only apply if an aircraft is imported into the Cayman Islands on a permanent basis. If importation is on a temporary basis (which is the most usual basis that, for example, private jets enter the Cayman Islands), it is possible to obtain a waiver of such stamp duty upon application to the applicable Government authority.

2.8 Are there any documentary taxes (for example, stamp duty payable on the execution of documents)?

Stamp duty will be payable in accordance with the Stamp Duty Act (As Revised) if the original documents are brought into the Cayman Islands in fully executed "wet ink" form or executed in the Cayman Islands.

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Originally Published by ICLG

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.