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Why should I hire U.S. counsel for the purchase of an aircraft I intend to operate outside of the U.S?
As part of the legal risk management for a company doing business internationally, it is helpful to consult legal advisors in applicable countries to try to avoid problems before they arise. Many aircraft are either bought or sold in the United States and delivered to the owner abroad. Many foreign-owned aircraft are registered in the United States as the regulatory requirements required for U.S. registration have historically helped an aircraft maintain its value upon resale. Even if two parties are from different countries, it is not unusual for U.S. law to govern at least a portion of the transaction.
Regarding my aircraft acquisition and use, what's the difference between federal and state tax requirements?
The United States has federal tax laws. Each of the 50 states has differing, independent tax laws. Yes, it gets confusing. Income tax and excise taxes are the federal taxes most commonly applicable to aircraft transactions and operations. Sales tax, use tax, property tax and income tax are the state taxes most commonly applicable to aircraft transactions and operations. At the state level, there may also be registration requirements and gross receipts taxes. Each state has different requirements and different exemptions. Some states may have partial exemptions for flights operated outside of the state, exemptions for flights operated in interstate commerce (be careful with this definition in your state) and if you purchase the corporate jet solely to lease it to others. Any state in which the aircraft spends a significant amount of time should be reviewed for possible tax issues. Certain states have always been aggressive about taxes on aircraft and this trend is accelerating. Note, if there is sufficient nexus with the United States, even non-U.S. businesses may owe U.S. taxes.
Can a company organized outside the U.S. register a corporate jet in the U.S. in its name?
No. Generally, a corporate jet may be registered in the U.S. only when the corporate jet is owned by a U.S. citizen. Per United States Federal Aviation Regulation (FAR) 47.2, with respect to an entity, a U.S. citizen is defined as a corporation or association created or organized under the laws of the United States or of any State, Territory, or possession of the United States, of which the president and two-thirds or more of the board of directors and other managing officers thereof are such individuals and in which at least 75 percent of the voting interest is owned or controlled by persons who are citizens of the United States or of one of its possessions. See the following Owner Trust FAQ for an alternative if the entity does not meet this definition.
Is there a way to register a corporate jet in the U.S. if the company does not meet the FAA's definition of U.S. citizen, such as utilizing an Owner Trust?
. If an entity does not fit the FAA's definition of U.S. citizen eligible to register a corporate jet in the U.S., the owner may place the corporate jet in a trust (commonly known as an owner trust) and have the corporate jet registered with the FAA in the name of the trustee (commonly called the owner-trustee). The owner trustee holds legal title to the corporate jet. There are several institutions which routinely act as owner trustee for aircraft in the U.S. The aircraft owner will need to select and engage a trustee. The tax department will need to confirm that they are comfortable that the trust utilized will be treated as a grantor trust for federal tax purposes. We strongly recommend using a trustee which is experienced in aircraft owner trusts.
What is the International Aircraft Registry?
This is also referred to as the Cape Town Registry. It refers to the Convention on International Interests in Mobile Equipment, and its Protocol on Matters Specific to Aircraft Equipment - November 16, 2001. The U.S. ratified this treaty and it became effective March 1, 2006. It recognizes the International Registry as an additional place for the filing of interests, including prospective interests, in certain airframes, helicopters, and aircraft engines. When researching the title to a U.S. registered aircraft, at a minimum, have the records checked at both the FAA Registry in Oklahoma City and the International Aircraft Registry (which is based in Ireland ).
. Does the aircraft title report prepared by the escrow agent reflect a search of all locations where liens could be filed?
. The title report from an escrow agent located in Oklahoma City will generally cover the FAA Registry and may cover the International Aircraft Registry filings. Most title reports do not cover any UCC filings or federal tax liens and may not cover other types of encumbrances (e.g. judgments) which were not filed with the FAA. That said, title insurance is available for aircraft. Historically, it has not been purchased by most aircraft purchasers. If the aircraft being purchased has had a long history, has a questionable prior owner or a prior owner who may have encountered legal or financial problems, the purchaser will want to investigate obtaining title insurance. There are two primary underwriters for aircraft title insurance and several agents in Oklahoma City which offer aircraft title insurance.
Is it acceptable per the FAA for the company to sell flights to others to help cover the cost of the corporate jet? The company is just trying to cover costs and not to make a profit.
Generally No. Under the non-commercial flights rules which are in FAR Part 91, there are limited opportunities to sell flights to others. However, time sharing and dry leasing are possible options under some specific circumstances. Timeshare is defined in FAR 91.501(c) as " an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of this section." This option is generally available only to large aircraft, although the owner may still be able to utilize a timeshare arrangement if it complies with the special "NBAA exemption" to FAR 91.501 (available to NBAA members who also otherwise meet the requirements of the exemption). FAR 91.501(d) limits the amount an owner can charge for a timeshare flight. The charge is limited to a list of ten items, which in the past usually did not fully reimburse the owner for the full cost of the flight. Basically, the owner can charge two times the cost of fuel for that flight plus some miscellaneous trip-specific expenses. The Truth-In-Leasing requirements in FAR 91.23 also apply to a timeshare. And, there are other issues which can trip-up an unsuspecting aircraft owner. One of these is that a company which has no other business purpose other than operating the aircraft cannot timeshare an aircraft to another person or entity.
. What is a dry lease?
A dry lease is the lease of an aircraft without any crew. The term "dry lease" is not defined in the Federal Aviation Regulations, however, "wet lease" is defined in FAR 119.3 as the lease of an aircraft "and at least one crewmember." Under a dry lease, the lessee has "operational control" and the responsibility and liability that accompanies operational control.
Can I do a 1031 like-kind exchange with the corporate jet?
Yes. The same general rules and time frames that apply to real estate also apply to aircraft.
We are closing on the purchase of our new corporate jet on Thursday and the CEO wants to leave for Europe on Friday. Since the aircraft is now ours we can fly wherever we want can't we?
Not yet. At the time of the closing, you need to file a Declaration of International operations with the FAA. This should expedite the registration of your aircraft so that the FAA will issue you a "flywire". The aircraft cannot leave the continental 48 states without either the "flywire" or its permanent registration. The "pink slip" which you placed on the aircraft at closing as a temporary registration only allows operations in the Continental 48 States. Although not a legal point, you need to check with your pilots and management company as this timing is generally too soon for a new owner to stock an aircraft, obtain all of the authorizations and obtain the aircraft's RVSM certification.
If I lease my aircraft to a charter company and it is chartered most of the time, will this affect depreciation of the aircraft for federal tax purposes?
Yes. Aircraft operated primarily under the Part 91 noncommercial rules are generally depreciated over 5 years using MACRS depreciation. Aircraft operated primarily under the Part 135 commercial rules are generally depreciated over 7 years using MACRS depreciation. Varying the operation from year to year means that the depreciated amount can change from year to year.
I need to explore the options for utilizing my corporate aircraft while keeping it off of the company's balance sheet.
Our experienced aviation attorneys can assist with structuring aircraft ownership, financing, leasing and operations in order to be compliant with the FARs and tax laws and to satisfy the company's current financial regulations.
I would like to have the confidentiality afforded by an off-shore registration. Can you assist with this?
Yes. The security and confidentiality that some owners desire may be possible with registration in Bermuda, the Cayman Islands, the Bahamas, Aruba or Isle of Man. There may also be tax exemptions, relaxed noise restrictions and flexible citizenship requirements of which a non-U.S. registration can take advantage.
Our company plans on drafting policies on usage of the corporate aircraft in order to be considered for TARP funding. How can you help?
Jackson & Wade assists companies with the creation of company wide policies for aircraft expenditures, to be adopted by the board of directors and posted on the company's website, regarding the acquisition and usage of the corporate aircraft. The policies help to fulfill the "transparency" requirements of the Treasury Department guidelines associated with the TARP funds.
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