1. General and Contractual
1.1 What are the typical structures available for financing the purchase of an aircraft?
Financing structures involving Irish entities often employ the use of a special-purpose vehicle ("SPV"), which is a company established specifically to hold title to the aircraft subject to the financing and to lease those aircraft to the operators. Ireland is a popular jurisdiction for the establishment of SPVs due to the numerous double-tax treaties in place between Ireland and other countries, many of which specifically refer to aviation in their text. Ireland is also attractive due to the confidence in the legal and court system (which is broadly based on English common law) and the number of aviation experts and leasing companies based in Ireland.
There are a number of options for financing both new and used aircraft in Ireland (many of which use SPVs) with the financing being structured as either on- or off-balance sheet and limited or full recourse. Both on- and off-balance sheet transactions can be full and limited recourse, although an off-balance sheet financing will be far more likely to be limited recourse to the aircraft and the related income and any security package. An on-balance sheet deal is a transaction where title to the aircraft being financed is held by an entity in a group structure and the income and liabilities associated with the aircraft are included in that group's financial statements, whereas off-balance sheet financings sit outside a standard group structure with the aircraft held in a ring-fenced structure, which is created via a trust arrangement.
1.2 What are the key advantages/disadvantages and main issues arising in relation to these financing structures?
The benefit of using an SPV in a financing structure is that the transaction can be structured in a bankruptcy-remote manner by limiting the activities of the SPV to the holding of title to specific aircraft being financed and the leasing of those aircraft. The SPV will grant security over the aircraft and any key contracts, and the shares in the SPV itself will ordinarily be charged in favour of the creditors.
On the borrower side, off-balance sheet financings result in the debts not being included in the borrower group's financial statements, which is viewed as beneficial where there is significant exposure under the financing, and limited recourse transactions have the additional benefit of preventing creditors from enforcing the borrower's obligation beyond accessing revenue streams related to the aircraft being financed, enforcing security following a default and in some other limited exceptions, such as fraud. Where debt is full recourse whether to the borrower itself or another entity of substance offering credit support, whilst the borrower loses the protection of no winding-up or enforcement claims (beyond those limited exceptions listed above), they would expect to benefit from preferential financial terms.
For lenders, if the transaction is structured as on-balance sheet, where security is properly granted, Irish insolvency would recognise the preferential interests of secured creditors over other third-party creditors of the group, but exercising the security may take longer in an insolvency situation due to the need to engage in the examinership or winding-up process. However, on the positive side, the enhanced credit would usually allow creditors to be made whole by another member of the group.
1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential characteristics?
Under Irish law, there are no specific tax arrangements that allow for tax-structured leasing arrangements, such as JOLCOs in Japan or leverage leases in France; however, both operating and financing leases are routinely entered into by Irish companies. The fundamental difference between an operating lease and a finance lease is that with an operating lease, no title passes at the end of the lease term, whereas with a finance lease, there is provision for title to the aircraft to pass to the lessee at the end of the lease term. For Irish tax purposes, the distinction between the two types of lease turns on who actually bears the risk on the aircraft in the event of a loss of value or destruction.
1.4 Are there any proposals for reform in the area of aviation finance?
International Tax Reform
A key source of potential reform is the OECD's Base Erosion and Profit Shifting initiative ("BEPS"). One of the main ambitions of BEPS is to align profits with economic activity. It has already resulted in significant changes to Ireland's tax legislation and further reforms are likely
Minimum Tax Rates
On 20 December 2021, the OECD published the draft Global Anti-Base Erosion Model Rules, which are aimed at ensuring that Multinational Enterprises ("MNEs") will be subject to a global minimum 15% tax rate from 2023 ("GloBE Rules"). The GloBE Rules are part of the OECD/G20 Inclusive Framework on BEPS, which currently has 141 participant countries.
The European Commission published a proposal for a directive to implement the GloBE Rules in the EU. This proposes to introduce minimum effective taxation for MNEs with revenues of at least €750 million, operating in the EU's internal market and beyond. It provides a common framework for implementing the GloBE Rules into EU Member States' national laws.
The proposal requires the unanimous approval of the EU Council before it is adopted. The GloBE Rules may be relevant to Irish aviation entities that are regarded as part of an "MNE Group" (or which form part of a large-scale domestic group) with revenues of more than €750 million a year.
EU Proposal Anti-Tax Avoidance Directive III ("ATAD
On 22 December 2021, the European Commission published a proposal for a Council Directive to prevent the misuse of shell entities for tax purposes. The new ATAD III proposals are aimed at legal entities that have limited substance and economic activity in their jurisdictions of residence. Where the rules apply, the proposal is that such entities should be denied the benefit of double-taxation agreements entered into between EU Member States as well as certain EU tax directives, including the Parent Subsidiary Directive and the Interest and Royalties Directive.
As currently drafted, the proposals contain exemptions for certain entities including "securitisation special-purpose entities" and entities that have a transferable security admitted to trading or listed on a regulated market or multilateral trading facility.
ATAD III continues a trend towards incentivising taxpayers to increase and centralise their economic activity, employment and resources in the jurisdictions they operate from. In the aviation finance sector, Ireland's established reputation as the global hub for aircraft leasing means that such increased resource and "substance" requirements can be facilitated.
Interest Limitation Rule
As evidence that BEPS reforms are already impacting aviation finance, one notable point is the recent adoption of the EU interest limitation rule ("ILR") as required by Directive 2016/1164/EU (the Anti-Tax Avoidance Directive). This applies to accounting periods commencing on or after 1 January 2022.
The ILR potentially applies where a taxpayer's interest expense exceeds its interest-equivalent income. The ability to claim a tax deduction for the excess interest is restricted to 30% of EBITDA (earnings before deductions for net interest expense, tax, depreciation and amortisation). As leverage plays a key role in aviation finance, the operation and management of the rules is a key focus.
Historic structures are adapting to the new provisions and it is likely that there will be some restructuring through 2022 and beyond to take account of the provisions. The ILR contains a number of relevant provisions, including rules governing the tax treatment of finance and non-finance leases. The ILR also includes certain grouping rules that may be relevant to Irish aviation leasing groups. Companies can elect to operate the ILR on a single entity or local Irish group basis (an "interest group"). Where the Irish taxpayer is part of a consolidated worldwide group for accounting purposes or part of an Irish loss group, the entity can elect to be a member of that interest group.
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?
Under Irish law, to have a binding contract there are three essential requirements: agreement between the parties; consideration; and intention to create legal relations. As such, if parties wish to set out heads of terms or similar in a non-binding letter of intent or term sheet, it is absolutely key to state in clean and unambiguous language that the parties are not concluding a contract or creating a legal relation by virtue of the document. Often this is achieved by stating that the terms of the document are conditional upon certain further actions being taken, whether board approvals, aircraft inspections, payments or similar. If the document is unclear and the terms are sufficiently clear, the Irish court may hold the document to be binding, especially where executed by the parties thereto.
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?
It is a common misconception among parties to commercial agreements that Irish law imputes a mutual duty of good faith or fair dealing between them, whether or not this is expressly stated. However, whilst under Irish law there are certain types of agreement to which a duty of good faith applies, including partnership agreements and insurance contracts, Irish courts have held that there is no general principle of good faith and fair dealing in Irish contract law.
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?
The Revenue Commissioners of Ireland ("Irish Revenue") is the Irish government authority with primary responsibility for the collection of taxes and supervision of taxpayers.
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?
The sale, lease or financing of an aircraft or engine can attract the following taxes in Ireland:
- Value-added tax ("VAT") on the acquisition of an aircraft or engine;
- Irish withholding taxes on cross-border payments of interest and dividends;
- VAT on a lease or sale of an aircraft; and
- Irish capital gains tax or corporation tax on the disposal of aircraft.
Irish withholding tax at a rate of 20% is required to be withheld from payments of Irish source "yearly" interest to non-residents. However, there are a large number of exemptions available, including for interest paid to a company that is resident in an EU Member State or a country with which Ireland has signed a double-tax treaty.
A similarly wide range of exemptions are available from the requirement to withhold tax at a rate of 25% on the payment of dividends to non-resident persons. Such exemptions include where payments are made to:
- companies resident in, or controlled by residents of, an EU Member State (other than Ireland) or a country with which Ireland has concluded a double-tax treaty; and
- companies, or 75% subsidiaries of companies, whose shares are substantially and regularly traded on a recognised stock exchange in an EU or double-tax treaty state.
The Irish transfer taxes and VAT implications of a sale, lease or financing of an aircraft or an engine are discussed further under questions 2.7 and 2.8 below.
Originally published by ICLG.com.
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.