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As the world takes notable and promising steps to emerge from the pandemic, Walkers is pleased to see strong positive trends in aviation transactional activity in recent months. The industry has already seen an upturn in capital markets activity this year with several issuance of aircraft asset-backed notes, involving, among others, Castlelake, Air Lease Corporation, Falko and Sky Leasing. Along with the new investments underway in joint venture platforms, there is a growing sense of optimism for the future.
A common feature in the structuring of these types of transactions is the use of special purpose vehicles Irish tax residents incorporated in the Cayman Islands. For the purposes of this note, we will refer to such a vehicle as the KY-IRE SPV. In the context of an asset-backed bond issue, the KY-IRE SPV will generally act as the issuer of senior bonds to investors in the capital markets and, where applicable, of equity bonds. to equity investors. For a joint venture or warehouse finance structure, the KY-IRE SPV may act as the holding company or parent of the aircraft owning entities (“AOEIn each case, the KY-IRE SPV will generally be above Irish AOEs incorporated and Irish tax residents.
In this note, we describe some of the many benefits of using a KY-IRE SPV and how walkers can help.
Benefits of a Cayman Islands SPV
Incorporating a SPV in the Cayman Islands is flexible and fast; it can be set up in as little as 24 hours. This is particularly advantageous when time is of the essence and several counterparties have to complete ‘Know your customer‘due diligence process. The cost of incorporating and maintaining an SPV in the Cayman Islands is relatively low compared to other jurisdictions, allowing for a better allocation of transaction budgets for other costs and expenses. There are a number of other advantages for incorporating an SPV in the Cayman Islands, for example:
- Similarity of laws – Cayman Islands law is based on English common law, so the central issues of corporate power, directors’ fiduciary duties, legal personality, limited liability and employee benefits are substantially similar to the situation at hand. under English common law;
- Taxation – it is essential in structured finance and asset transactions that there is no tax leakage. In the Cayman Islands, there is no corporation tax for companies operating domestically or offshore and there is no tax withheld by the Cayman Islands government on payment of principal or interest (subject to nominal stamp duty which may arise under certain conditions). An exempt Cayman Islands company may apply for an undertaking from the financial secretary under which, for a period of 30 years from the date of such undertaking, no tax will be imposed;
- No restriction on business – in a structured finance or asset environment, there are usually no relevant restrictions on the activity that a SPV can do from a Cayman Islands perspective, for example, it can lend, borrow or issue securities. debt securities without any obligation to obtain a license and no government or regulatory approvals are required for incorporation;
- No exchange control – money and securities in any currency can be freely transferred to and from the Cayman Islands;
- Creditors friendly legislation – the Cayman Islands does not have a corporate rehabilitation system where a creditor’s rights can be “frozen” and there is no concept of an automatic stay of proceedings. Non-petition provisions, contractual subordination, and netting and compensation agreements are each recognized by an express legal provision;
- Non-consolidation – under Cayman Islands law, a bona fide sale will remove the underlying asset pool from the offeror’s bankruptcy estate and only in very specific cases will the separate legal personality of a SPV will be ignored in order to allow creditors to access either the SPV or its shareholders; and
- Evaluations – structured and asset financing transactions are often rated by major international rating agencies in order to increase their marketability. The Cayman Islands’ status as an overseas territory of the United Kingdom means that the sovereign ceiling for the Cayman Islands is high and that a Cayman-incorporated SPV will therefore not be the “weakest link” in a situation. noted transaction.
Benefits of Irish tax residency
Ireland has been at the center of the global aircraft rental industry for decades and currently holds a share of around 65% of the global rental market. Ireland is a very attractive jurisdiction for structuring aircraft finance and leasing transactions and is the preferred location for all major donors. There are many reasons for this, including Ireland having a large pool of industry expertise, being a signatory to the Cape Town Convention and having a common law system offering a Chapter-type restructuring regime. 11 known as the exam.
However, the main reason for using Ireland as a jurisdiction is taxation:
- Ireland has an enviable and extensive network of double taxation treaties which is unprecedented in terms of quality and quantity. Ireland has 74 double taxation treaties reducing most withholding taxes on rents to zero. This ability to eliminate or reduce foreign withholding tax on rents is critical to the business success of a lessor who rents to tenants in multiple jurisdictions;
- Ireland has a low corporate tax rate of 12.5% on trading profits, which is one of the lowest corporate tax rates in Europe; and
- The Irish tax regime also facilitates the rapid depreciation of aircraft, offers advantageous tax planning opportunities, liberal capitalization rules, a securitization regime extending to aviation assets and broad exemptions from withholding tax on interest. and dividends.
The practical implications
In practice, to be Irish tax resident, the central management and control of the Cayman-incorporated SPV must be in Ireland. Management and control relates to the high-level strategic decisions of the SPV (ie where the “head and brain” of the business is) as opposed to the day-to-day administration of the SPV. Therefore, to obtain Irish tax residency, the board of directors of the Cayman Incorporated SPV would need to meet regularly in Ireland and have a majority of Irish resident directors on the board. From the Cayman perspective, the SPV head office provider in Cayman Islands will transfer responsibility for maintaining the membership register to a business service provider in Ireland to support the residency analysis. The SPV will also need to register as an external company with the Irish Companies Registration Office and with Irish Revenue.
How can walkers help?
Walkers not only aims to help our customers “close the deal”, but also to partner with our customers throughout the life of a transaction. Walkers’ integrated legal and professional services offer is ideally suited to support transaction structures involving a KY-IRE SPV. The combination of legal, professional, tax, listing agent, managing agent, equity trustee, accounting and cash management services can truly provide a complete solution for the establishment and continued operation of aeronautical transaction structures. This combined service offering translates into significant operational and transaction execution efficiencies as well as cost savings.
Our multidisciplinary inter-office asset finance legal team has advised a number of award-winning and first-of-their-kind transactions, including the issuance of Thunderbolt II, JOL Air and AASET asset-backed notes as well as the establishment of numerous new leasing platforms, including PIMCO / GECAS JV, Dunas Capital, Lease Corporation International / SMFL and Stratos. The global team maintains close relationships with the major market players in this area, including financial institutions, lenders, fund managers, airlines and arrangers, and can additionally provide legal advice to Bermuda, BVI, Guernsey and Jersey on a wide range of aircraft finance transactions.
Professional services for walkers (“WPS“) has established a better professional services provider. WPS has dedicated and experienced Aviation CFOs and corporate services teams located in Ireland, Cayman Islands and Dubai. Tax backgrounds who have extensive knowledge of the various financing and leasing structures regularly used for aviation transactions, supported by significant experience in the sector.WPS works alongside the Walkers legal team and is well equipped and resourced to provide a highest quality at closing and supporting clients throughout the operating life of the transaction.
As we wait for increased levels of stability to return to the market in the coming months and funds to be directed to lenders, consolidation and capital markets, we all look forward to a continued increase in transactions. Walkers understand that proper structuring will be essential and that having market-leading advisors to provide dedicated support to both the establishment and continued operation of a transaction will also be of benefit. crucial importance. Our vast experience as well as our global network make Walkers ideally positioned to provide the specialist teams required as the market recovery continues. For advice or more information, please contact the authors below or your usual Walkers contact.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.