in the US
With some 300,000 aircraft registered on the N Registry, it is clear the N Registry continues to offer many benefits for aircraft owners.
THAT IS THE view of Jeffrey Towers at TVPX and Scott McCreary at McAfee & Taft – a view that has clear value.
Many aircraft are regularly operated in multiple jurisdictions and aircraft owners have a plethora of choices as to where they will register their aircraft. So, once the pros and cons of each registry are fully considered, owners often choose to register their aircraft on a registry that is different than the nationality of the jet owner. One of the most frequently chosen aircraft registries is the United States Federal Aviation Administration (FAA) Aircraft Registry, commonly referred to as the N Registry.
The FAA is the primary US regulatory agency that governs and oversees registration, maintenance and operation of aircraft. The FAA provides safety oversight for all US-registered civil aircraft, and anyone providing air transportation must receive authorisation from the FAA in the form of Air Carrier Operating Certificates. In addition, anyone engaging in air transportation must obtain economic authority from the United States Department of Transportation (DoT) in the form of a certificate for interstate or foreign passengers and/or cargo and mail authority, a certificate for interstate or foreign all-cargo authority, or authorisation as a commuter air carrier. The DoT also protects consumers from unfair and deceptive trade practices involving the sale of air transportation.
The FAA Aircraft Registry located in Oklahoma City, Oklahoma, issues Certificates of Aircraft Registration both for commercial and for general aviation aircraft. To register an aircraft with the FAA, the applicant for registration must file documents evidencing ownership of the aircraft in the name of the applicant, as well as an AC Form 8050-1 aircraft registration application. In order to perfect interests in most aircraft, the parties must also register their interest in accordance with the Cape Town Treaty. To perfect liens or encumbrances against aircraft registered with the FAA, parties must (i) file the security documents with the FAA and (ii) comply with the registration requirements under the Cape Town Treaty, when applicable.
Why is the US a preferred jurisdiction for aircraft registration?
There are several advantages to registering an aircraft in the US. The FAA is widely respected for its easy, secure and inexpensive procedures for filing aircraft title transfer, registration and security documents. There is also a long history of court decisions and other legal precedents regarding the processes for registering with and cancelling aircraft from the N Registry, as well as the validity, priority and enforceability of security interests in aircraft. The US was one of the first countries to adopt the Cape Town Treaty, thus providing the additional comfort and assurance that interests properly created and registered under the Cape Town Treaty will be recognised in other Contracting States. The clarity of applicable law and the long history of legal precedents for enforcing rights of owners and lenders for US-registered aircraft appeals to aircraft lenders, lessors and borrowers.
The FAA provides an efficient system for owners and lenders to file documents and now accepts documents bearing appropriate digital signatures, which simplifies and expedites the closing process. There is a large pool of internationally-recognised aviation attorneys and other professionals in the US available to assist aircraft owners and lenders. Many parties also take comfort from the fact that the FAA, as part of the US government, has the resources and wherewithal to oversee and enforce its rules and obligations as an aircraft registry properly. Finally, there is ample evidence that registration with the FAA helps to preserve the value of aircraft, both because the FAA’s standards for aircraft operations and maintenance are among the highest in the world and because the US is the most active market for aircraft sales.
Who may register aircraft in the US?
To register an aircraft in the US, the owner must be a citizen of the United States, with few exceptions. The definition of a “citizen of the United States” (US Citizen(s)) is provided in 49 U.S.C. §44102(a)(1)(A), and is limited to: (i) an individual who is a US Citizen; (ii) a corporation or LLC formed in the US, but only if: (A) the president and at least two thirds of the board of directors or managing officers are US Citizens, (B) the corporation or LLC is under the actual control of US Citizens, and (C) at least 75% of voting interests are held or controlled by US Citizens; and (iii) a partnership in which all of the partners are individual US Citizens. This citizenship test applies not only to the applicant for registrations, but also to its parent, and its parent’s parent, etc., until one reaches the actual individual owners. Finally, individuals who are resident aliens (i.e. – permanent legal residents of the US) may register their aircraft in the US.
This means that all individuals who are not US Citizens or resident aliens and many business entities that do not satisfy the definition of a US Citizen may not register an aircraft in the US in their name. For example, non-US business entities, US corporations or LLCs that fail the management, control or voting interest tests, partnerships that include individuals who are not US citizens and partnerships that include corporations or other business entities as partners, will fail the citizenship tests. In addition, if the FAA registers an aircraft in the name of an entity that does not actually meet the citizenship test, the registration is considered invalid or, if the entity later has a change in ownership or management such that it no longer meets the test, the registration will no longer be effective. Finally, the FAA has opined that an aircraft may not legally be registered in the name of a US Citizen who is in effect merely serving as an agent or nominee for someone else.
What options are available to non-US Citizens who wish to register in the US?
Fortunately, there is a very common structure available to non-US Citizens who wish to register their aircraft with the FAA. US law allows aircraft registration through an owner trust, often called a non-citizen trust or NCT. The terms of the NCT arrangement must comply with the Federal Aviation Regulations (FARs) and published FAA requirements. The trustee must be a US Citizen as defined by the FAA, but a non-US Citizen may hold the full beneficial ownership in the trust. The non-US Citizen beneficiary may legally operate the aircraft under an operating agreement or operating lease and will hire the flight crew, pay all expenses and be responsible for all maintenance. Additionally, the non-US Citizen has the right to base and operate the aircraft anywhere in the world, as freely as any other owner of a US-registered aircraft. All the tax attributes associated with the ownership and operations of the aircraft pass through to the non-US Citizen beneficiary. Finally, the beneficiary has power to direct the trustee to terminate the trust.
NCTs are commonly used by large companies that either can’t determine with certainty that they qualify as a US Citizen or where they often have changes in their ownership or management structure that might affect the analysis. NCTs are also helpful in transactions involving financing, as the registration of the aircraft is with an independent third-party trustee who is available to address questions or concerns of the lender or the FAA regarding the registration.
There are two other less-common structures that a non-US Citizen might utilise to register an aircraft with the FAA. First, a corporation that fails the voting-interest test already described, but otherwise meets all the other elements of the citizenship test, may use a voting trust. The voting trust is entered into among the applicant corporation owning the aircraft, an independent voting trustee and the non-US Citizen shareholder holding the voting stock in the applicant corporation. In a voting trust, the voting trustee will hold the non-citizen’s voting interest in the corporation. The voting-trust structure is less popular than the owner-trust structure because many corporations owned by non-citizens do not meet the management elements of the citizenship test. Second, a non-citizen corporation may register its aircraft in the US if the aircraft is based and primarily used in the US (i.e. – at least 60% of its flight hours every six months are within the US). However, the non-citizen must form a US corporation and actually base the aircraft in the US. The corporation would further need to report its flight operations to the FAA every six months upon request and would be in violation of the registration requirements if it were to operate the aircraft outside of the US for more than 40% of its total flight time in any six-month period. This exception only applies to corporations and does not apply to individuals or other business entities. For these reasons, the “based and primarily used” exception is not frequently used.
What is the FAA’s current position on owner trusts?
The aviation industry has utilised NCTs for many years and the FAA has provided a great deal of guidance as to their validity and proper use. In June 2013, the FAA issued a Notice of Policy Clarification for the Registration of Aircraft to US Citizen Trustees in Situations Involving Non-US Citizen Trustors and Beneficiaries. The Policy Clarification confirms that a properly documented NCT meets FAA regulatory requirements for valid registration of an aircraft. The Policy Clarification also provides a pro forma NCT trust agreement acceptable to the FAA and further clarifies the FAA’s expectations as to what sort of information and disclosures the FAA may request from parties utilising an NCT.
Of note in the Policy Clarification, the FAA confirms that any party utilising an NCT must file with the FAA all documents legally affecting a relationship under the trust, such as any aircraft-operating agreement between the trustee and beneficiary. The Policy Clarification also requires that within two business days a trustee (and thus the trustor or end operator of the aircraft) must be able to provide the FAA with the following information:
- The identity of the person normally operating or managing the operations of the aircraft
- Where that person currently resides or has its principal place of business
- The location of maintenance and other aircraft records
- Where the aircraft is normally based and operated.
Within five business days, the trustee (and thus the trustor or end operator of the aircraft) must be able to respond to FAA requests for more detailed information about the aircraft and its operations, including the following:
- Information about the operator, crew and aircraft operations on specific dates
- Copies of maintenance and other aircraft records
- The current airworthiness status of the aircraft.
In the event of an emergency, the trustee must be able to respond to such inquiries more quickly than the timelines specified above.
What are the operating requirements for US-registered business aircraft?
Initially, one must determine which of the FARs will govern the operation of the aircraft. The FARs applicable to operating a US-registered aircraft can be complex and parties should engage competent US counsel and technical advisors to be certain they comply with US law.
Generally, FAR Part 91 governs the non-commercial operation of aircraft with a passenger seating configuration of fewer than 20 seats and a maximum payload capacity of less than 6,000 pounds. In addition to complying with FAR Part 91, FAR Parts 121, 125, and 135 apply to commercial operations where there is some form of compensation, such as charter flights, or where the aircraft exceeds a certain seating or payload capacity. FAA rules and interpretations as to which operations are considered commercial or for compensation are complex and often restrictive. For instance, the FAA has confirmed that a company formed solely to operate an aircraft, and which has no other business or purpose is by definition a charter company that may not legally operate under FAR Part 91.
FAR 91.501 provides a narrow set of exceptions under which a person may share the use of certain airplanes and receive compensation for that use yet continue to operate under Part 91. Unfortunately, the compensation allowed under FAR 91.501 is limited and is almost never equal to the fully allocated cost of owning and operating the aircraft for the particular flights. The FAA construes FAR 91.501 strictly and will not permit its use in instances where a proposed operation should be conducted under one of the other FARs, such as 121 or 135, or if the proposed operation is not clearly covered under FAR 91.501. Therefore, any charges that a company makes or compensation a company receives for the use of its airplane must be carefully tailored to comply with Part 91.501.
The limitations of FAR 91.501 do not normally apply to those situations where a party properly “dry leases” an airplane to another person for business or personal use. It is important, however, that the lessee independently obtains its pilot services. If an aircraft were leased and pilot services were also provided by the lessor, the arrangement would likely violate FAR Part 91. The FAA has published an advisory circular Truth in Leasing AC No: 91-37B that addresses the wet lease/dry lease concepts in more detail.
An aircraft owner/operator is also free to engage a third-party management company to provide aviation services for operations under FAR Part 91. Care should be taken to make certain that the owner/operator, rather than the management company, remains in operational control of the aircraft and that the flights are within the scope of the business of the owner/operator which is not air transportation.
Sometimes parties prefer to operate the aircraft under FAR Part 135 to avoid the legal and regulatory liability associated with operational control, and/or to further allow third party use of the aircraft and payment for such use. This is most often accomplished by placing the aircraft with, and dry leasing to, an existing Part 135 certificated operator. Proper consideration should be given to any potential tax or cabotage issues that may result from operating under Part 135.
Scott D McCreary of McAfee & Taft at CJI Asia
Jeffrey Towers of TVPX at CJI Miami
What’s new with owner trusts?
The Aircraft Working Group, which supports the commercial aircraft-leasing industry and was the driving force behind the Cape Town Treaty, has undertaken a new project known as the “Global Aircraft Trading System” (GATS). GATS will be an online system for owning aircraft that is intended to be compatible with the aircraft registration processes in the US, with similar systems for Ireland and Singapore. All aircraft on the GATS platform will be owned through trusts. Among the key objectives of GATS is to facilitate the purchase and sale of interests in aircraft by creating a more-efficient and streamlined process for the transfer of beneficial interests in the trusts as an alternative to transfers of title. GATS is expected to be fully functional in early 2020.
The 2018 FAA Reauthorisation Act requires that FAA modernise and upgrade current FAA Aircraft Registry systems by October 2021. The Act mandates the upgrades shall include (i) the digitisation of non-digital Registry information; (ii) the digitalisation of Registry manual and paper-based processes, business operations, and functions; (iii) implementation of systems allowing public to submit information and conduct any transactions electronically; and (iv) allowing more efficient, broader, and remote access to the FAA Aircraft Registry. These upgrades shall further enhance and streamline access to the FAA Aircraft Registry and should benefit all parties involved with the ownership, operation and financing of aircraft on the N Registry.
There are many factors that should be considered when choosing an aircraft registry, and no one registry is the perfect solution for every owner. As with most other aspects of aircraft ownership and operation, proper planning is the key to a successful outcome. In addition to thoroughly analysing the intended uses of the aircraft to ensure compliance with applicable laws and regulations, including those of the applicable aircraft registry, other issues such as taxes and rules for importing and exporting aircraft should always be assessed in advance.
For many years, the FAA has been considered the gold standard for aircraft registration by many owners, lessors and lenders. These parties take great comfort that their rights and interests in the aircraft are properly perfected and can reasonably predict how those rights and interests will be recognised if there is a dispute. NCT structures help parties comply with US registration requirements. The airworthiness and maintenance standards for operating and maintaining a US-registered aircraft are well defined and are considered by most to help maintain the value and promote the marketability of the aircraft.
For many reasons, after careful planning, the FAA is often the registry of choice for aircraft owners, lenders and lessors, and owner trusts are a simple and broadly accepted method for non-US Citizens to benefit from US aircraft registration.