A tax regulation that was promulgated in 2016 has taken effect in ways that are now affecting aircraft lessors and lenders to Brazilian carriers, including by imposing requirements concerning the identification of lessor entities' ultimate beneficial owners and increasing the document disclosure requirements on lessors and lenders in cross-border aircraft finance transactions. While the full impact of the new rules is still unclear, lessors and lenders to Brazilian operators should prepare to comply.
Interchange agreements are relatively new and have been increasingly used by commercial aircraft operators in Brazil. In response to industry requests, the Brazilian Civil Aviation Agency and the Brazilian Aeronautical Registry recently clarified several applicable rules. Due to their novelty, interchange agreements are not always understood in the industry. While such agreements share some similarities with interline and code-share agreements, they have important distinctions.
For the past few months, the Brazilian Aeronautical Registry has experimented with a new electronic filing system that allows parties to file documents electronically 24 hours a day, seven days a week. This system is now operative for documents relating to commercial aircraft. Documents relating to private aircraft, business aircraft and helicopters are still being filed physically. The new electronic system is expected to become available to them during the second half of 2017.
In September 2016 the Brazilian Revenue Service unexpectedly promulgated a change in its treatment of Ireland, which had the potential to wreak havoc on the aircraft leasing sector for the entire country. After four weeks of considerable uncertainty, the changes – as they apply to commercial aircraft leases – were suspended. While the clarifications temporarily resolve the initial concerns regarding commercial aircraft leases, they provide no relief for other important sectors, such as the air taxi sector.
As the revision to the Aeronautical Code is taking longer than expected, the president promulgated interim legal measures earlier in 2016, including one change particularly relevant to air carriers – restrictions on foreign investment in airlines. Although ultimately vetoed, these measures still merit attention, as they are indicative of future legislation.
Brazil's airlines are facing unprecedented economic and financial pressures. With approximately 15 to 20% of their payment obligations fixed in US dollars, they have seen their operational profits drastically decline and are experiencing significant operating losses. Although no airline has sought bankruptcy protection, the risk that a major airline will do so is considerable and lessors should be aware of their rights and risks should this occur.
The Senate is undertaking a serious effort to revise and modernise the Aeronautical Code, which dates back to 1986. Although it is too early to know the special senate committee's final recommendations, the new code is expected to conform to the Cape Town Convention and relax existing restrictions on foreign investment in Brazilian airlines.
A common misunderstanding that arises in Brazilian aircraft finance transactions relates to post-closure requirements as, due to delays, a significant amount of the legal work on a transaction occurs after the closure date. As no magic solutions exist to avoid post-closure issues completely, lessors and financiers must accept that Brazilian transactions may take longer compared with those in other jurisdictions.
For decades, imports of aircraft and aircraft parts have been exempt from most taxes that apply to imports. However, the application of the contribution to the financing of social security tax has recently changed and some tax inspectors have begun applying the tax to aircraft imports. While most industry participants expect the courts to clarify that the tax does not apply to the import of aircraft, it is unclear whether and when this will happen.
The Cape Town Convention has now been in effect for six months, and has thus far been encouraging. The Brazilian Aeronautical Registry has become increasingly proficient at issuing authorising entry point codes. Further, the Civil Aviation Agency has demonstrated its knowledge of the convention and its willingness to enforce it, including deregistration of an aircraft on the basis of an irrevocable deregistration and export request authorisation.
A number of new regulations were recently promulgated relating to the functioning of the Brazilian Aeronautical Registry (RAB). The new regulations are a positive step towards achieving additional clarity on a variety of issues and demonstrate the RAB's responsiveness to the aviation finance community. They will be of interest to both Brazilian operators and non-Brazilian lessors and holders of security interests.
Bond requirements imposed on non-Brazilian plaintiffs in Brazilian aircraft repossession cases have been subject to uncertainties for some time. However, emerging court trends have increased the clarity of such issues and improved the procedures for the repossession of leased aircraft. While these trends and the decision have not eliminated all uncertainties, they have reduced them significantly.
Two recent changes - one legislative and one regulatory - have substantially altered the way in which aircraft may be financed for Brazilian operators. The changes affect virtually all new cross-border aircraft finance transactions, although the precise impact will depend on the type of Brazilian operator. For business aviation, the modifications are the most significant and sweeping to occur in nearly two decades.
Despite Brazil's position as a major emerging market, its transportation infrastructure is somewhat lacking. Ground-based alternatives are limited, which exerts tremendous pressure on the air transport system. As the government does not have the necessary resources to modernise its facilities, it has turned to privatisation to speed up renovation of the country's most important airports.
Despite committing to the Cape Town Convention over a year ago, Brazil's legal system requires publication of a further executive order before the convention can be fully implemented. Notwithstanding this, the government recently announced proposed rules and procedures concerning how international interests over aircraft registered in Brazil may eventually be made with the International Registry, among other things.
Mortgages given over aircraft registered in Brazil have been used for many years. However, there are several major differences between Brazilian aircraft mortgages and those given under New York or English law. An understanding of these differences assists lending institutions in deciding how to evaluate their security packages, when to require aircraft mortgages and what they can expect from such mortgages.
Since the early 1990s repossession of leased aircraft in Brazil has been a relatively efficient process, with most lessors able to secure possession of leased aircraft in a matter of days. However, over the past two years, several changes have occurred in the procedures that have resulted in longer periods for exporting and deregistering aircraft repossessed from Brazilian lessees.
In recent months Brazil has been inching closer to ratification of the Cape Town Convention on International Interests in Mobile Equipment and the attendant Protocol to the Convention on Matters Specific to Aircraft Equipment. The Senate recently approved both the convention and the supplementary protocol, completing the last legislative step in the approval process. The president is expected to ratify the convention shortly.
The National Civil Aviation Agency (ANAC) has recently made two changes in its practices that are causing uncertainty and difficulty in some aircraft lease deliveries and redeliveries. As in the past, changes in ANAC practices are subject to review and may be reversed, especially if airlines and other operators raise any problems relating to them. Occasionally, ANAC alters its policies without realising the potential consequences.
After the September 11 2001 terrorist attacks, many governments sought or were required to provide support to their national airlines in bearing the increased cost of insurance against certain war and terrorist risks. In order to deal with this, the Brazilian government passed a specific law providing certain cover to Brazilian airlines. However, the law generates many misunderstandings concerning the risks and parties covered.