Offshore Doesn’t Mean Off the Books

 - July 31, 2011, 10:00 AM

The word “offshore” can conjure images of money laundering, tax dodgers and oil spills, but in today’s business aviation world, as privacy and security become ever more precious commodities, offshore registry is becoming an acceptable alternative.

Most business jet owners continue to register their aircraft in the country in which they are citizens or, in the case of a corporate jet, in the country in which the corporation or its subsidiary is registered. But the question of whether to register an aircraft in the U.S. has taken on more importance this year since the FAA announced its decision to restrict the Block Aircraft Registration Request (Barr) program beginning August 1.

The Barr program provided a means for an individual or company to opt out of having flight operations details made public. The operations data is obtained through the Enhanced Traffic Management System (ETMC), aircraft transponders, flight plan filings and other sources and fed into the FAA’s computerized Aircraft Situation Display to Industry (ASDI). From there, it is made available to the public via a number of vendors, such as FlightAware and Flight Tracker. Data is not available for those owners or operators who chose to opt out of ASDI.

ASDI data typically includes the location, altitude, airspeed, point of origin and destination, identifying the aircraft by tail number. Further, according to NBAA, the ETMS provides information only on aircraft with U.S. N-register tail numbers–an important consideration when an operator is deciding whether to register offshore.

The FAA announcement–done-deal or not–was enough to send owners and operators to offshore Web sites and attorneys’ offices, seeking information on offshore registration possibilities that would protect their anonymity and offer some assurance of security.

As of press time, the question remained whether the court challenge by aviation groups will affect the final shape of Barr, and the FAA’s decision on who may opt out of ASDI.

VAT Changes in the UK Spur Interest

Also prompting interest in offshore registration was the 2010 requirement for the UK to bring its VAT (value-added tax) structure in line with that of the rest of the European Union. As of January 2011, the VAT exemption is based on the status of the business operating the aircraft rather than the aircraft weight. Previously, any aircraft with a max takeoff weight of 8,000 kg (17,540 pounds) or more was exempt from VAT for aircraft handling, maintenance and supplies, meaning that the UK had previously been a VAT-free loophole in the EU structure.

According to global flight handler Universal Weather & Aviation, to qualify for a zero-rate VAT exemption, an operator must meet at least one of the following criteria:

Ÿ 50-percent or more of turnover, profit, number of flights, passenger/seat miles or other applicable criteria result from operating for reward/payment transporting passengers or cargo chiefly on international routes (non-domestic UK flights).

Ÿ the aircraft is being used by a state institution, has an mtow of 17,540 pounds or more and has not been designed or adapted for pleasure or recreation usage.

Of greater concern is the new VAT as it applies to the import of an aircraft. Failure to meet the new eligibility requirements regarding the permanent import of an aircraft might attract VAT at the increased rate of 20 percent, a significant amount when applied against a new $59.8 million Gulfstream G550.

Universal Weather recommends that anyone who believes his aircraft might meet the definition of a permanent import should “seek professional advice to ensure that the risk is minimized.”

According to Steven Hofer, president of AerLex Law Group, the real rush to offshore registration following the VAT decision was by owners hurrying to have their airplane imported through the UK before the new VAT requirements went into effect.

According to Hofer, most aircraft owners and operators indicate that taxes, confidentiality and security are their primary concern.

Hofer said his Santa Monica, Calif.-based firm explored the issue of non-disclosure with nearly a half-dozen offshore jurisdictions; he found that nothing in offshore registration can prevent an aircraft being tracked in any number of ways (including ASDI), even though the offshore aviation authorities do not disclose ownership or other details.

In fact, he said, for a skilled and tenacious investigator, there is little an owner or operator can do to remain 100-percent anonymous; no matter where the aircraft is registered there is the possibility that anonymity and security might be breached.

On the other hand, the offshore tail number is nation-neutral and therefore does offer some level of anonymity.

Also, it should be noted that ADS-B, a cornerstone of NextGen ATC, will make flight information widely available too.

Thorn Air Registers Offshore

A recent offshore registration is a corporate G550 in Part 91 operation for Thorn Air out of Oxford, Conn. “Thorn is a major financial group with worldwide assets and they were concerned with security,” explained chief pilot Tony Barros.

Before working for Thorn, Barros had noticed that on the ramp at Paris Le Bourget Airport as many as 20 percent of the airplanes carried the VP-C Cayman registration on the tail. That was a detail he remembered when Thorn decided to acquire a new G550.

Barros said he began working with the Director of Civil Aviation in the Caymans early last year “and when the aircraft was delivered in August, all the documents were ready, including RVSM.” Registration in the Cayman Islands normally requires about six weeks.

The cost of offshore registration is not necessarily cheap, especially compared with the $5 charge for a U.S. citizen or company to register an aircraft with the FAA. And certainly it is reasonable when seen as a percentage of the cost of acquisition of the aircraft and the cost of management and operation.

Registration in the Cayman Islands is one example. According to aviation attorney Jim Cooling of Cooling & Herbers, his Kansas City, Mo. law firm recently assisted in registering a client’s Bombardier Global Express XRS in the Cayman Islands at a cost of approximately $27,000–a tiny fraction of the $57.5 million list price for the airplane.

But the cost of offshore registration can vary considerably, depending on the aircraft and the offshore jurisdiction, along with other factors. The Isle of Man, in the Irish Sea between the UK and Ireland, is one of the more recent and more popular jurisdictions for registration. There, the cost of registration is approximately €2,000, about $2,795. (See Isle of Man offshore seminar story on page XX.)

Among the most active entities for offshore registration of aircraft are Aruba, Bahamas, Bermuda, British West Indies, Cayman Islands, the Isle of Man and the island nation of Malta. They are politically and economically stable and have well regarded legal systems. Harney Westwood & Riegels, a noted international offshore law firm, points out, for example, that the Cayman Islands legal system is based on that of Britain. In addition, English is the common language, and the process offers “a straightforward system of aircraft registration…based on the British model.”

According to David Biehn, director of safety regulations for the Cayman Islands Aircraft Registry, the agency has its own overseas territories aviation standards (OTAR), which he described as “similar to those of the EASA, the FAA and Transport Canada.”

Biehn said most of the offshore registries, including the Caymans, have similar standards for initial acceptance of aircraft for registration, including EASA, FAA and Transport Canada certification. Those requirements also include proof of crew credentials, and following registration there are annual inspections to ensure continuing conformity with the requirements.

As for questions regarding the resale of an aircraft with an offshore registry, it is not an issue with Cayman registration as the aircraft are held to the standards of those three main aviation authorities, explained Biehn. But he acknowledges that there are some “flags of convenience” that might be suspect and cause a buyer some concern.

Robert Briant, a partner in Conyers, Dill & Pearman in Tortola, British Virgin Islands, explained that Aircraft Safety and Support International, a wholly owned entity of the British Civil Aviation Authority, is the source for aviation regulations in all the British Overseas Territories of the UK, including the Cayman Islands, British Virgin Islands and Bermuda. He also explained that banks holding notes on aircraft also have a voice in whether they may be registered offshore.

David Biehn, director of air safety regulations for the Caymans, further says that the offshore registry there accepts only aircraft already certified by EASA, the FAA and Transport Canada. “And we also require that maintenance and modifications to aircraft be approved by one of those agencies.

Approximately 1,000 Offshore Aircraft Registrations

The exact number of aircraft registered offshore is elusive, but numbers are available for some jurisdictions–154 private aircraft are registered with the Cayman Islands, and more than 250 on the Isle of Man. It is estimated that there are close to 1,000 business and private jets registered offshore, primarily from the U.S., Europe and the Middle East, though aviation attorneys are reporting growing interest from Asia and Russia. In fact, said one attorney, “The Russians are particularly fond of the British Virgin Islands.”

Aviation attorneys note that, as might be expected, most of the aircraft being registered offshore are large-cabin, long-range types traveling the globe.

While aircraft owners and operators most often note taxes, confidentiality and security as reasons for offshore registration, the jurisdictions themselves trumpet other benefits for consideration, among them:

* high regulatory standards

* high service levels and quality international reputation

* neutral nationality registration prefix

* secure mortgage register

* low or no insurance premium tax

* professional infrastructure with experience in aviation finance

* clear and simplified taxation regime

* a stable legal and political environment

* advice on VAT and customs duties (Isle of Man)

* ensuring adequate insurance.

Offshore registration of a business or private jet might indeed offer some advantages, particularly for those owners and operators for whom taxes, anonymity and security are a major concern, but it’s no more difficult or complex than registration anywhere else. In addition, the standards are often as strict as those found in the FAA FARs and the EASA JARs to ensure that safety is not compromised.

“People are not registering their aircraft to be at the bottom of the barrel,” said Briant.

In conclusion, aviation attorneys, international aircraft handling services and tax consultants emphasize that this is most definitely not a “do-it-yourself” process.