Aviation Finance

The transition period for the new Global Aircraft Trading System (GATS) commenced on 15th July. Working with FEXCO and Aviareto, the registrar of the Cape Town Convention international registry, the Aviation Working Group intends to advance best practices on electronic systems and practices for the aviation leasing and financing sector ahead of the planned launch of GATS by the end of Q1 next year. In this article Deloitte tax partner Mathew Dolan outlines what is involved in the transition and why work will be necessary to expand the number of jurisdictions recognising trusts in the future.

Recognising the pain that lease novations cause airlines, lessors and financiers, the commercial aviation industry’s Aviation Working Group (AWG) announced earlier this year that it is pressing ahead with the establishment of an electronic trading platform – the Global Aircraft Trading System (GATS).

GATS is intended to facilitate the trading and financing of aircraft and engines on lease in an efficient, secure and predictable manner by reducing the burdens on lessees, lessors and financiers. GATS will increase the transparency of aircraft trading, protecting the rights of the parties involved by introducing a secure, live and searchable electronic ledger that contains details of ownership and security interests in all transactions. A voluntary system open to all industry participants, GATS will be fully digital, employing e-signatures, e-delivery of documents and a secure e-ledger to record transactions.

Each aircraft on GATS will be held in a trust and they and their associated leases will be traded by transferring the beneficial interest in the trust rather than in the underlying metal. This has the benefit of allowing for the contractual agreements to transfer without modification. To assist this process, the AWG has recently published draft terms for trusts established in Ireland, Singapore and the US (Delaware and Utah) with the laws of the applicable jurisdictions governing the instruments used to create, transfer and create security interest in such GATS trusts. In future other jurisdictions in which the trust might be established may be considered.

The use of trusts to hold legal title to aircraft is not a new concept. Indeed, it has been quite common in the industry for aircraft – in particular, for aircraft with FAA registration requirements – to be held in US trusts. More recently there has been a significant increase in the number of aircraft held by Irish trusts.

The effective ‘transparency’ of the trust is a key requirement from a tax perspective. This is important in determining a number of tax considerations, including the withholding tax treatment and corporate income tax treatment for both lessor and lessee. It is also an important component in determining the tax implications of transfers themselves. While many jurisdictions are very familiar with trust structures, in others it is an uncommon concept. Work will be required to expand the number of jurisdictions recognising trusts. While that work is ongoing certain lessee jurisdictions may be less suitable than others for GATS transactions. Lessor and airline tax advisors should be in a position to advise on problematic jurisdictions.

As GATS becomes more widely utilised it is hoped that tax authorities in various jurisdictions will become more <i>au fait</> with the concept. There is already helpful guidance from the OECD in the 2017 Model Tax Convention Commentaries. This broadly notes that where a partnership or a trust is treated as fiscally transparent by a State, the benefits of a tax treaty should still apply where the partner or trustee, as the case may be, are also resident of that State or potentially of another State where similar treaty benefits would accrue. This supports the initial plan for GATS trusts to operate under Irish, US or Singapore law (given the significant lessor presence in those jurisdictions). OECD tax treaty commentaries, coupled with anti-hybrid rules which may be widely introduced under both the EU Anti-Tax Avoidance Directive and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, will hopefully be sufficient to enable more and more lessee jurisdictions become comfortable with the use of trusts.

GATS has the support of vitually all the key industry players, which may become a critical factor in the uptake and success of GATS in the medium to long term. Indeed, given the quantum of aircraft trading undertaken by these participants, engagement with GATS may soon become unavoidable for anyone wishing to acquire an aircraft.

One element of the existing trading model that will not go away is the requirement for tax advice on the transfer of aircraft into or out of a trust or the transfer of the beneficial interest in a trust. Many jurisdictions will continue to view this as a transfer of the metal, in any event, or there may be tax implications on the transfer of the beneficial interest itself. A number of lessors are already looking to move existing aircraft into trusts in order to be ‘GATS ready’. Following the recent announcement by Wells Fargo that it intends to resign from many of its aviation trusts the AWG said it was making available the GATS transitional form draft documents for Utah common law trusts. This may be an opportune time for lessors to consider whether to transition to a GATS trust.

GATS is likely to be just the first step in a wave of digitisation within the aviation industry. The AWG has already stated that the plan is for the GATS platform to be created in such a form that a migration to Blockchain technology will be possible. In future the platform may house all documentation required for a lease, in effect creating a one-stop shop for novations and aircraft transfers.

This article was first published in Aviation Finance and kindly re-published on Deloitte website with their permission.