AINsight: Tips for Buying Jets Outside the U.S.

 - July 13, 2018, 6:22 AM

The recent buyer’s market for preowned business aircraft has become a seller’s market. U.S. buyers recognize this phenomenal change and, consequently, search the globe to buy the right preowned aircraft among an estimated 900 saleable units left for purchase.

New aircraft sales aside, there are several points to consider when buying an aircraft outside the U.S. primarily for return and registration of the aircraft in the U.S.:

  • Select the right aircraft with the support of experienced broker-advisors.

Not long ago, a client traded aircraft twice in a year; and, while the third time was the charm in that case, today’s global market might not offer such choices. To improve the chances initially to make the right purchase, a buyer should hire a quality aircraft broker or independent consultant with global market experience. This professional can support a buyer in all aspects of the purchase process and guide negotiations with sellers, including sellers emboldened by a strong market in their favor.

  • Inspect the aircraft thoroughly using well-qualified, technical experts.

These experts should develop a list of delivery conditions and oversee repairs needed to fulfill them. U.S. registrants should focus on obtaining a U.S. Standard Airworthiness Certificate (SAC). A private aircraft inspector authorized by the FAA—called a Designated Airworthiness Representative (DAR)—determines whether to issue the SAC. This approval is an indispensable precondition to U.S. registration.

Sellers typically pay for airworthiness repairs found in pre-buy inspections as determined by the inspection facility. The DAR and the inspection facility should confer and reach the same conclusion as to repairs needed to issue the SAC. In the seller’s market, sellers might insist on a narrow definition of “airworthiness” repairs as those specified by the DAR or inspection facility.

If delivery conditions in the aircraft purchase agreement specify more repairs than the DAR’s items, it seems plausible that sellers might make extra repairs to meet the aircraft delivery conditions, but only if the buyer pays for them. In other words, sellers might try to reallocate inspection costs to buyers more often than in the recent past.

  • Negotiate the timing of deregistration from the seller’s country’s registry and registration in the U.S.

The timing of the DAR inspection deserves close attention as a pacing item in the transaction. It plays into tricky timing of deregistering the aircraft as a condition of registering it in the U.S. The Chicago Convention allows only one registration at a time per aircraft.

The technical expert and the broker-advisor together can assist the buyer in finding and arranging an aircraft inspection by the DAR in a timely manner. They can coordinate with the DAR to deregister the aircraft at the seller’s national aviation authority (NAA) and register in the U.S. Buyers should be alert to sellers who try to shift deregistration timing risk to the buyers, though joint solutions exist that should minimize this negotiation.

  • Conduct extensive diligence to avoid disputes.

Absent credit support, the limited liability companies-sellers (LLCs) or the equivalent entities worldwide, generally have zero financial ability to defend the titles they transfer to buyers against anyone who has filed a lien or makes other claims against the aircraft being sold. Seeking such title defense outside the U.S. against an LLC or a creditworthy seller might be even more problematic in a dispute, depending on, among other factors, which laws govern the deal.

To help evaluate and mitigate these risks, the seller and the buyer should each engage lawyers in the NAA country. Diligence starts with typical searches of the NAA registry. For signatory countries to the Cape Town Convention, called “Contracting States,” the buyer should also search the “International Registry” for outstanding “international interests” of financiers such as security interests or leases, any “non-consensual right or interest,” where permitted, such as repair liens, and a clean title history that shows no gaps in the chain of title.

In addition, the lawyers should search filing offices and other NAA registries in countries frequented by the seller for filings by tax authorities, operators, and repair facilities. Ideally, at or before closing, the seller will pay all bills, discharge any adverse claim or interest and deliver documents that the buyer’s and seller’s lawyers concur will protect their respective clients from future disputes.

  • Export with assistance.

Aircraft operations, sales, and re-registration attract customs, tax, NAA, and other governmental authorities. Neither the seller nor buyer should tangle with any of these authorities as they have broad authority that can disrupt an aircraft purchase. Timing is important. A buyer can and should seek export guidance from an export specialist before signing the purchase agreement and making errors that result in paying avoidable taxes, duties, and penalties.

Plan ahead for state and federal taxes in the U.S. U.S. buyers (and others) might think that, when the buyer flies away from the delivery location exempt from value added tax (VAT) or other sales-type taxes, the buyer will likewise be exempt from sales tax in the state of the permanent U.S. base of the aircraft. This assumption may be wrong and, in certain states, expose a buyer to substantial use taxes such as in Texas where use taxes may amount to 8.25 percent of the purchase price.

One of the most frequently asked questions by clients since the inception of the new tax law in September 2017 has been: Can I use 100 percent “bonus depreciation” despite my anticipated personal use of the aircraft? That question requires in-depth analysis. The results have directly affected the choice of aircraft. Accordingly, federal income tax, as well as state tax planning should begin before, not after, an aircraft purchase generally without delay to complete international transactions.

  • Structure your flight operations documents before your flight to the U.S.

Purchasing an aircraft outside the U.S. does not change the buyer’s obligations to comply with the FARs in the U.S. For example, an owner should designate qualified “operators” to exercise “operational control” of the aircraft typically under FARs Part 91 or Part 135. Also, the buyer should avoid falling into the “flight department company” trap by letting an LLC or other owner with no other business activity illegally act as the “operator.” Buyers should, therefore, carefully structure and execute appropriate agreements that comply with the FARs before their first flight to the U.S.

Cross-border purchases of preowned aircraft produce complex issues for buyers and sellers. Although buyers might accept some increase in their risks or costs compared to long-standing norms, taking prudent risks differs from making avoidable mistakes. Still, buyers can purchase quality preowned aircraft outside the U.S. with confidence and success by hiring experienced, competent, and objective brokers or independent consultants, technical experts, export specialists, and lawyers to help them navigate through the international seller’s market.