Given the bucks or the ability to borrow them, buying a business jet ought to be a straightforward affair. And if you don’t care about the potential downsides, it may be. But the typical business aircraft transaction involves a multinational cast of players and a plethora of contracts to go with them.
Stefan Müller, CEO of Lausanne-based Fortis Lease Suisse, said that its structured air finance offering is based on a tripartite agreement with the first element being a leasing agreement. This is the main contract that establishes the relation between the lessee, typically a special purpose vehicle (SPV) that acts as the representative of the economical owner, and the lessor. The beneficial owner will supply guarantees and will pledge SPV shares, since the aircraft is the property of the lessor.
Normally the airplane is then sub-leased from the SPV to an operator, a company responsible for providing the crew and flight planning and for ensuring that maintenance is carried out according to the applicable rules. The operator pays per hour or mixed mode and is an essential part of the tripartite agreement since the airplane will need to be repossessed in case of default.
The operator invoices flight hours to his client, which is a company belonging to the economical owner and, to reduce costs, the economical owner allows the operator to carry out taxi or charter flights for third parties.
The structure can be set up and closed in as little as four weeks if the client is in a hurry, but the process typically takes 12 weeks. It is normally concluded with a conference call lasting several hours among all the parties and their lawyers.
The choice of location for the SPV, trust and operator is significant. Each country has different tax and customs rules and some can be very advantageous–in the UK, for example, aircraft weighing more than 17,600 pounds are exempt from value added tax. And every client has a different personal tax position.
“All lawyers say you should never hold an asset in your own name,” agrees Steve Malley, who used to collect taxes on behalf of UK Customs and now helps people keep their money out of the hands of his successors on behalf of Isle of Man-based Fortis Intertrust Aircraft Group. That is especially applicable to aircraft because of the potential liability. “If something goes wrong an individual’s wealth can be at risk,” he said.
The choice of location for a trust is partly a matter of tax efficiency. But there are also legal implications. “Luxembourg is very helpful, for example, and you can set up a structure very quickly, but the aircraft has to be operated by a Luxembourg company.”
The client’s own jurisdiction also has an impact. “Non-European Union residents get a lot of tax benefits EU residents don’t, so there is no need for a special tax vehicle if they don’t have to pay tax in the first place,” Malley said. Non-EU clients can use a non-EU structure in a jurisdiction such as the Cayman Islands, “but it’s beneficial to go for EU structures now because of the image.”
There are significant variations, too, in official attitudes, he said. In the UK, for example, “they think anybody with an airplane is [super rich], whereas in France and Luxembourg they have a more lenient attitude.”
The use of the airplane, whether it is for private or business purposes and whether it is to be dry leased to an operator, also has a bearing on the structure. “Nowadays 75 to 80 percent of aircraft are operated commercially to bring cash into the structure,” Malley said. “They are not necessarily run at a profit, but the income reduces the cost.”
For a small aircraft or a yacht, the cost of the structure can outweigh the cost of the asset. “Fortis Lease can do plain leases where the aircraft is owned by the bank and leased to the client,” he said. “We can also do mortgage finance, where we lend to the SPV and ask for a guarantee that the loan will be repaid.”
Companies can buy their own aircraft, but normally keep them in a separate company to avoid being liable in the event of an accident. Malley described the structure as a corporate veil. “It can be used in a bad way to hide things. But Fortis tries to hide them from liabilities. Often companies don’t want people to know they own a big airplane, so it’s normal to have a structure where the beneficial owner’s name doesn’t appear anywhere in the paperwork.”
Fortis Entities
With a market capitalization of $56.7 billion and nearly $110 billion in assets, Fortis combines retail, private and commercial banking with leasing and insurance, said Bas Rijka, Fortis Banque Suisse’s deputy chief executive and head of private banking. Its various entities used to operate under 80 different brand names but now “We act as one,” he said.
“Our philosophy is to offer not just private or merchant banking but a full range of corporate and private services,” Rijka said. “Often companies are led by entrepreneurs with their own assets, and often there is an interrelation between their corporate and private assets. So our services include private wealth management as well.”
Fortis Banque, he added, adheres to an open product architecture. “We offer not just our own products but the best brains in the business. So we select the best products from our competitors if we can add more value that way. The biggest value we add is the added value of others, since we can offer integrated solutions tailored to each client.”