The execution of an aircraft/engine sale agreement (including sale of ownership interest in an entity owning such property) by itself does not give rise to taxes. The transfer of ownership, however, is relevant for income tax and VAT purposes (see 1.2.5 Taxes/Duties Payable upon Execution of a Bill of Sale) and location of aircraft or engine and the seller’s residence should be taken into account in this respect.
It is not necessary for a sale agreement in respect of an aircraft to be translated, certified, notarised or apostilled/legalised to be enforceable against a Russian party.
If the agreement is made in respect of an aircraft registered in Russian national register, the State Register of Civil Aircrafts of the Russian Federation (the Russian Aircraft Register), it must be in written form.
To be presented to a Russian court or to any Russian state agency, the sale agreement must be in Russian or have a notarised translation into Russian.
Title to aircraft registered in the Russian Aircraft Register as well as its transfer require registration in the Unified Register of Rights to Aircrafts and Transactions Therewith (the Register of Rights). Transfer of title is effective from the moment of such registration.
Generally, transfer of title to an aircraft under Russian law:
Hence, as a general rule, title to installed parts and accessories, including engines, auxiliary power units and removable parts, follows the title to the aircraft.
Sale of ownership interest in an entity that owns an aircraft or engine is not recognised as a sale of such aircraft or engine.
Transfer of title in respect of an aircraft registered in the Russian Aircraft Register must be governed by Russian law.
Transfer of title in respect of an aircraft registered abroad can be governed by foreign law and would be recognised in Russia. Russian law does not set any minimum requirements for this purpose.
It is not necessary for a bill of sale agreement in respect of an aircraft to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. If the agreement is made in respect of an aircraft registered in the Russian Aircraft Register, it must be in written form and governed by Russian law. To be presented to a Russian court or to a Russian state agency, however, the sale agreement must be in Russian or have a notarised translation into Russian.
The bill of sale is considered to be effective regardless of its registration. However, title to aircraft is deemed transferred only once the transfer is registered in the Register of Rights under the new owner. The transfer is registered within one month.
Antitrust consent may be required if the aircraft or engine’s balance sheet value exceeds 20% of the value of the main means of production and intangible assets of the seller.
The sale of aircraft located within the territory of Russia is subject to Russian VAT and income (profits) tax. However, there is uncertainty as to the determination of the location of the aircraft for tax purposes. Transfer of an ownership interest in an entity that owns an aircraft located within the territory of Russia could also trigger the obligation to pay the corporate profits tax at the 20% rate, depending on the structure of the assets of that entity.
Operating leases, wet leases, finance leases and leases concerning only engines or parts are not prohibited and, generally, recognised.
Under Russian law, a lease involving a Russian party may be governed by foreign governing law, provided there is a proper foreign element (nexus to a foreign jurisdiction, such as a foreign party or foreign asset) in the transaction. Russian courts should recognise the choice of law unless such choice of law contradicts Russian public policy, overriding mandatory provisions of Russian law or public law, eg, the domestic party must comply with local currency control regulations.
A lease in respect of an aircraft registered in the Russian Aircraft Register must be governed by Russian law.
There are reporting requirements relating to inbound or outbound payments from or to a foreign lessor: a Russian lessee must submit a certified copy of the lease agreement to a Russian authorised bank to ensure that such agreement is taken by a Russian authorised bank for monitoring and keeping records of payments under such agreement based on the information provided by the lessee. Russian residents must also repatriate all proceeds derived from foreign trade contracts and deposit the full amount in an authorised Russian account. Domestic lessees making payments to foreign lessors must ensure repatriation of payments (eg, advance payment) if the lessor materially breached its obligations (eg, failed to transfer the aircraft to lessee).
See 2.1.3 Restrictions Concerning Payments in US Dollars.
The execution of a lease agreement in Russia or the transportation of an executed lease agreement into Russia by themselves do not give rise to any taxes. However, as a general rule income resulting from a lease of aircraft or engine operated in Russia (including international traffic with the point of arrival or departure within Russia) is subject to Russian income (profits) tax irrespective of whether an original or copy of a lease agreement is brought into Russia.
No licenses or other qualification are required from lessor in relation to operational lease to a domestic lessee.
There is no awareness of any aspects of Russian law that enquire to be in a lease agreement governed by foreign law that would not typically already be included.
The Russian tax legislation has recently been amended to explicitly allow settlement of a taxpayer’s obligations by third parties. However, due to vague wording of the new regulations, there is still some risk that gross-up provisions may be unenforceable in Russia.
The terms of the lease can cover subsequent additions to the aircraft, including the obligation to replace parts. Aircraft or engine leases typically contain provisions relating to the replacement of parts, and alteration and modification of the aircraft.
The installation of the engine on an airframe itself does not grant title to an aircraft engine to the person holding the title to the airframe. However, if the title to the airframe and the engine is held by the same person, then sale, leasing and mortgage transactions by default will, generally, cover the engine and the airframe.
The concept of a common law trust and of an owner trustee of a common law trust is not recognised in Russian in rem law, because a separation of legal title from equitable title is not compatible with the Russian concept of title.
Russia has the following two types of aircraft registers:
Both registers are maintained by Russian aviation authority – the Federal Air Transport Agency (Rosaviation).
The Russian Aircraft Register does not permit any notations of rights or interests. In contrast, the Register of Rights serves as public evidence of in rem rights.
In Russia, an aircraft cannot be registered in the name of the aircraft operator if the operator is not the owner of the aircraft. The aircraft must be registered in the name of the owner.
Russia does not have specific registers for leases concerning aircraft or engines.
There are conflicting interpretations as to whether a lease must be registered in the Register of Rights. On the one hand, some legislative norms provide for registration of the relevant transaction. On the other, under the Russian Civil Code the aircraft lease should not be registered, and the Supreme Commercial (Arbitrazh) Court confirmed this latter position in one of its rulings. In practice, Rosaviation registers financial leasing (lease agreements with buyout provisions) as an encumbrance. In order to register a lease interest, the applying party must generally submit the documents creating the lease interest, identifying the aircraft and confirming the payment of state duty for registration, among others.
The estimated period for completion of the registration is one month from the day of submitting the necessary documents.
Antitrust consent may be required if the aircraft or engine’s balance sheet value exceeds 20% of the value of the main means of production and intangible assets of the lessor.
It is not necessary for a lease to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, when registering interests in aircraft, the submitted documents must be in Russian or have a notarised translation into Russian.
The duty for registering a lease in the Russian Aircraft Register depends on the type of the aircraft but does not exceed RUB5,000.
The most commonly used foreign registers in which aircraft habitually based in Russia are typically registered are the Bermuda Aircraft Registry and the Irish Aircraft Register.
Most of the commercial aircrafts manufactured abroad and operated by Russian airlines are registered abroad according to agreements concerning oversight functions and duties under Article 83 bis of Convention on International Civil Aviation (Chicago Convention) signed on 7 December 1944.
Documents must be in Russian or have a notarised translation into Russian. Documents should be submitted in original form for the purposes of registration.
If a foreign lessor leases an aircraft to a domestic party, Russia will likely not be deemed as the place of provision of services and, consequently, the lease payments will not be subject to Russian VAT. The VAT taxation of leasing an engine to a domestic lessee will depend on how this leasing is taxed in the foreign state. Income resulting from a lease of aircraft or engine operated in Russia (including international traffic with the point of arrival or departure within Russia) is subject to Russian income (profits) tax taxation as income from the source located in Russia.
Generally, these taxes should be paid by Russian lessee as a tax agent. However, in such situation a foreign lessor is treated as a taxpayer and from legal point of view where the lessee failed to withhold and remit withholding tax the lessor is still obliged to pay this tax. Currently, the law does not have a procedure for requiring payment of this tax from a foreign lessor.
The lease of an aircraft of engine by itself does not create a permanent establishment of a foreign lessor in Russia. Being a party to a lease may trigger obligations to pay the VAT and the corporate income tax payable by Russian lessee as a tax agent (see 2.4.1 Tax Requirements for a Foreign Lessor).
Under Russian tax law, taxable income may also include contractual fines and penalties if they were recognised by the debtor or were confirmed by a valid court decision.
Being a party to a lease does not itself impose any maintenance obligations on a foreign lessor. By default, the relevant liabilities are imposed on the operator.
Russian law does not impose any strict liability for damage caused by the asset on the owner, lessor or financier of an aircraft leased to a Russian operator. The person possessing the aircraft (ie, the operator), however, is liable for damage in the course of the aircraft operation unless they prove it to have been caused by a force majeure or the victim’s intent.
Generally, Russian law does not allow enforcement against an aircraft not owned by the debtor.
There is currently no awareness of any third parties’ rights that may take priority over lessor’s rights.
Although under Russian law domestic insurance activity requires a licence and such licences are issued only to Russian entities, engaging foreign entities directly for the insurance purposes (eg, in respect of international activities of the operator) is, generally, not prohibited.
The minimum amount of third-party liability cover is calculated as a fixed liability set by law (currently RUB100) multiplied by two and by maximum take-off weight of the aircraft in kilograms. The same formula is used for insurance against damage to cargo (multiplied by maximum cargo weight in kilograms).
Life and health insurance coverage of the crew members must be not less than RUB1 million per crew member.
Russian law requires the following minimum coverage of passengers:
Russian law does not prohibit reinsurance in an international market. However, there is a requirement to reinsure up to 10% of the total reinsurance amount with the National Reinsurance Company.
Russian law governed insurance/reinsurance documents in aviation do not provide for cut through clauses. There is a risk that such clauses may be unenforceable in Russia.
In general, assignment of insurance/reinsurance is permitted under Russian law.
Under Russian law, a lessor may not terminate a lease for convenience unless otherwise provided by the lease contract. The contract could be terminated by court upon the lessor’s request in case of material breach by the lessee and in a limited number of cases listed in the Russian Civil Code. Out-of-court procedure and specific grounds of contract termination may be provided by the contract.
Re-export and following sale of the aircraft are not subject to any additional restrictions connected with termination of the lease contract. However, in practice, cooperation of the lessee may be required to re-export the aircraft (eg, in connection with customs procedures).
The aircraft does not need to be physically located in the Russian Federation at the time of such actions.
There are no direct legal obstacles for repossession of an aircraft. However, co-operation of the lessee is likely to be required in a number of practical matters. In absence of the lessee’s consent court procedure for repossession will most likely be required.
Russian court system does not include specific courts for aviation disputes. Aviation disputes can be handled in courts or arbitration (in respect of aircraft registered in Russia, only in Russian courts).
A lessor can obtain interim measures, such as freezing of funds, prohibition to perform certain actions relating to the subject of the dispute, etc. The court applies interim measures if failure to take these measures may make it difficult or impossible to enforce a judicial act. The court considers applications for interim measure no later than the next day after the day of submission of the application to the court.
Upon the request of the defendant or the court the claimant has to provide the counter security, ie, to wire the money to the deposit account of the court or to provide a bank guarantee, personal guarantee or financial security. The defendant also may provide security by way of wiring the money to the deposit account of the court instead of the interim measures. The Russian courts quite rarely approve interim measures, especially if counter security is not provided.
Parties to a contract may choose foreign law if there is a sufficient foreign element in the deal (eg, foreign legal entity), or if choice of law does not contradict public policy or overriding mandatory provisions of Russian law (eg, the domestic party shall be compliant with the currency control regulations). If the court failed to establish substance of foreign norms within a reasonable time, the court may apply Russian law.
If the aircraft is registered in the Russian Aircraft Register, lease agreement should be governed by the Russian law.
The parties generally may agree on the submission to a foreign jurisdiction courts if there is a foreign party in the contract. Due to recent anti-sanctions legislation, arbitration clauses/choice of court agreements concluded by Russian persons or entities targeted by foreign sanctions may be disregarded by the Russian courts, if a Russian court finds that such agreements may become incapable of being performed due to foreign sanctions. Title claims for aircrafts are in the competence of the court of the place of registration. If an aircraft is registered in the Russian Aircraft Register, claims that may entail changes in state registration are in exclusive competence of Russian courts. The Russian courts also have exclusive jurisdiction over disputes involving Russian persons targeted by sanctions or arising from anti-Russian sanctions.
Russian courts uphold a waiver of immunity by the parties of the lease.
Russian courts will recognise a judgement of a foreign court if it is provided for by the international treaty of the Russian Federation or on the basis of the principle of reciprocity, unless there are grounds for a dismissal of an application to enforce such judgement (eg, if there was an exclusive competence of a Russian court, as is the case with the disputes over Russian aircrafts). There are a few bilateral treaties on mutual legal assistance concluded by Russia which envisage the mutual recognition and enforcement of the court judgements, but not with USA, UK or the foreign jurisdictions in which commercial aircraft-based Russia are most often registered.
Russia is a party to 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), therefore, Russian courts recognise and enforce arbitral awards subject to conditions set in the New York Convention. However, Russian courts sometimes use the “public order clause” in the New York Convention to refuse to recognise and enforce the arbitral awards. The public policy criterion is vague and unclear and the court practice of its use is unstable.
It should be also noted that certain categories of disputes may not be arbitrable under Russian law (eg, insolvency disputes), though they are not usually connected with aviation finance transactions. Under recent amendment to Russian procedural law, if foreign sanctions impede access to justice for Russian persons, such persons may refer the dispute to Russian courts to be resolved on the merits and/or seek an anti-suit injunction prohibiting their counterparties to commence or continue foreign proceedings. Foreign judgments rendered in parallel with a judgement of a Russian court and/or in violation of an anti-suit injunction will not be enforceable in Russia.
It is possible for a lessor to obtain a judgement in a foreign currency, if it is permitted by Russian law to denominate the obligation in such currency (eg, it is permitted in an obligation between a Russian resident and a non-resident).
Russian law does not limit default interest or other charges; however Russian courts may reduce its amount in case of it is clearly disproportionate to the consequences of the default.
The lessor as a plaintiff should pay the court fees that limited to an amount of RUB200,000 (approximately USD3,000). If a lessor’s claims prevails, the lessee must reimburse the court fees paid on filing.
If a lessor intends to terminate the lease agreement the lessor should send the lessee a written notice on the need to fulfil the obligation within a reasonable time.
A claim for termination of the contract may be filed to the court only after receiving the refusal of the counterparty to terminate the contract or not receive a response within the time period specified in the proposal or established by law or contract, and in its absence - within 30 days.
The Russian Federation has no immunity from suit in civil matters in the Russian courts. Russian state-owned companies do not enjoy sovereign immunity in Russian courts. Foreign sovereigns have judicial immunity in Russian courts to the extent that the transaction is connected with exercise of sovereign authority. Sovereign immunity can be waived.
See 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards.
Currently, there is no awareness of any other major relevant issues in relation to the enforcement of lessor’s rights.
Russian law recognises the concepts of contractual assignment of existing and future rights and transfer of debt. An obligee can assign all or part of the rights. Assignment of rights does not require the consent of the obligor, unless otherwise provided in the contract.
Transfer of debt by the obligor always requires the consent of the obligee. However, the concept of novation as termination of the existing contractual relationship and replacement by a new contractual relationship between the new parties does not exist in Russian law.
Under Russian conflict of laws rules permissibility of the assignment, the relationship between the new lessor and the lessee, the claims to the lessee by the new lessor and, the performance of the obligation by the lessee are governed by the law governing the transferred debt.
If both the lease and assignment and assumption agreement or novation agreement (or deed) are governed by New York or English law (as it is common with foreign lessors), Russian law does not require any mandatory terms to be included. If the lease is governed by Russian law, an assignment and assumption agreement or novation agreement (or deed) would require the consent of the lessee (unless prior consent is envisioned in the lease).
The governing laws for transferring of debt are not directly regulated in the Russian Civil Code and there is no established court practice, however, there is a view in the legal doctrine that all provisions regarding transferring of debt should be governed by the laws governing the assigned contract. It is also advisable to include full details of the assigned contract (date, number, title, parties) in the assignment agreement.
To be filed to the Russian court or a government authority, a document should be in Russian, or a notarised translation into Russian should be provided.
Registration of lease assignment and assumption/novation is not required by Russian law. Change of owner should be registered. Lease assignment and assumption/novation in relation to an aircraft registered in the Russian Aircraft Register is not subject to government consents.
If such an assignment is subject to a record in the Russian Aircraft Register the duty will depend on the weight type of the aircraft but does not exceed RUB5,000.
Transfer of the ownership interest may, depending on specific circumstances, require government consent under merger control and/or foreign investment rules. It may take between two and seven months, or even longer, to obtain such consent (including time required to prepare the relevant filing(s)).
Deregistration should be performed by the owner of the aircraft or its representative on the basis of a power of attorney. The person with irrevocable de-registration and export request authorisation (IDERA) also should be able to deregister an aircraft; however, as the regulations in respect of IDERA were introduced into the Russian law relatively recently, their use remains largely untested.
For deregistration the person should file an application for deregistration and other documents (see 2.8.3 Required Documentation) to the Rosaviation.
The lessee’s or operator’s consent is not needed for deregistration.
The list of documents needed for the deregistration of the aircraft varies depending from the situation. Only the owner or its authorised representative may deregister the aircraft.
The following documents should be provided for deregistration of the aircraft if it was sold to a foreign state, foreign citizen or a stateless person (on condition that the aircraft would be exported out of Russia):
The term for deregistration should not exceed ten business days from the date of the filing of all documents to the aviation authority.
See 2.8.4 Duration of Deregistration Process.
Deregistration itself does not entail significant expenses. However, the export of the aircraft could imply some extra costs (see 2.8.14 Practical Issues Related to Deregistration of Aircraft).
According to the Russian Civil Code, if a power of attorney is issued for transaction in respect of immovable property and such transaction or the relevant rights are subject to mandatory state registration, the law of the country where the immovable property is registered shall apply to the power of attorney. As an aircraft registered in the Russian Aircraft Register is legally considered to be immovable property, the choice of foreign law governing a power of attorney will likely be deemed invalid.
Power of attorney governed by the Russian law should include the following:
No additional documents are required for enforcement of deregistration power of attorney.
See 2.8.7 Deregistration Power of Attorney.
Irrevocable power of attorney governed by the Russian law can be revoked by the grantor after performance of the obligation that it relates to or if the attorney abuses their powers or there are certain circumstances certifying that abuse might occur.
The lessee’s consent is not necessary for export of the aircraft. Nevertheless, counterparties could need the lessee’s assistance with getting possession of the aircraft and custom procedures. A mortgagee should be able to export the aircraft without consents of the owner and the lessor if it is the IDERA holder (however, IDERA has not been widely tested in Russia and its effectiveness is questionable).
There are no aircraft export permits/licenses. Export declaration should be filed.
No customs duties/taxes/fees should be payable upon export of an aircraft from the territory of the Russian Federation, other than customs processing fees.
Usually, exporters use services of customs brokers, whose fees should be taken into account.
The decision of the court on passing of bankruptcy procedure into a stage in which the grantor loses the right to independently issue powers of attorney (eg, administration, liquidation) entails automatic termination of all issued powers of attorney. This rule generally applies to all powers of attorney issued by a Russian company and there is no specific regulation in respect of IDERA in bankruptcy procedure. However, as the irrevocable nature of IDERA is provided in an international treaty, it could be argued that, notwithstanding the above provision, it would survive during a bankruptcy procedure under the principle of supremacy of international law. As there is no established practice of use of IDERA in Russia, it remains questionable how this issue will be resolved.
In case of winding up or corporate reorganisation of the lessee IDERA will remain in force until the date when the lessee is deemed to have ceased to exist as a legal entity.
Invalidating a Lease
Bankruptcy procedure does not automatically annul the lease. However, the court can invalidate it in certain cases, eg, if the lease:
In addition, the administrator may terminate the lease if it impedes the restoration of the lessee’ solvency, or its performance by the lessee entails losses in comparison with similar transactions concluded in comparable circumstances.
Terminating a Lease
Termination of the lease (and consequently repossession of the leased aircraft) could be prohibited if the rights of the lessee under the lease are deemed to be part of bankruptcy estate. If the lease right cannot be considered an asset of the lessee (for example, due to the lack of the necessary consent of the lessor to transfer the lease to another person), the lease could be terminated in the ordinary way. The aircraft is not deemed a part of the lessee’s property.
The following creditors’ claims have priority over the lessor’s claims which are not secured by pledge:
Claims of creditors whose rights are secured by pledge are satisfied from the moneys received from the realisation of pledged property in priority to other creditors. For ranking of claims for international registered interest, see 2.10.2 Declarations Made Concerning Conventions.
In case of insolvency of the borrower access to the aircraft, the aircraft documentation and the engines may factually be impeded in an insolvency.
The commencement of administration leads to moratorium on creditors claim satisfaction except for current payments. Generally, operating lease payments (in contrast to finance lease) for periods after commencement of the bankruptcy proceeding are deemed current payments.
Pursuant to recent amendments to Russian bankruptcy laws the Government of the Russian Federation is entitled to introduce in exceptional circumstances a moratorium on the initiation of insolvency proceedings by creditors. Such a moratorium entails, inter alia, prohibition of pledge enforcement. It is questionable if this rule effects pledge enforcement under the Convention.
In the context of measures following COVID-19 pandemic the Government of the Russian Federation has enacted a moratorium for number of companies, including airlines, for the period until 6 October 2020, but it may be extended.
Bankruptcy procedure could be initiated in court by a creditor, tax authorities, an employee (former employee) or by debtor itself. The court introduces administration or receivership on the basis of a decision of the meeting of creditors. The court may introduce the following without a decision of the meeting of creditors.
Receivership can be introduced the first meeting of creditors has not decided on the choice of one of the bankruptcy procedures, it is not possible to postpone consideration of the case to allow creditors to choose a procedure, and there is an application for receivership and sufficient security of schedule of repayment is provided; or (ii) the first meeting of creditors voted for administration or liquidation and there is an application for receivership and bank guarantee is provided to secure enforcement of schedule of repayment;
if the first meeting of creditors has not decided on the choice of one of the bankruptcy procedures, it is not possible to postpone consideration of the case to allow creditors to choose a procedure, the court has reasonable grounds to believe that the solvency of the debtor may be restored and there are no grounds for receivership.
The process of liquidation starts with the adoption by the court of a decision declaring the debtor a bankrupt. The decision of the court on the completion of liquidation is a ground for winding up of the debtor.
Voluntary liquidation (winding up) outside of bankruptcy may be initiated upon decision of the general meeting of the shareholders (participants) of the lessee.
Insolvency proceeding does not entail automatic termination of the lease. Performance default is required for termination of the contract and repossession of an aircraft. Moreover, termination of the contract could be subject to restrictions if the rights under the contract are a part of the lessee’s estate (see 2.9.2 Other Effects of a Lessee's Insolvency).
Winding-up of a lessee terminates lease contract and all payment obligations connected with it, including the lease rentals, payback of the lease security deposit, the maintenance reserves, if these obligations were not fulfilled (including through in bankruptcy procedures). The aircraft is repossessed by the lessor.
Both the Convention on International Interests in Mobile Equipment (the "Convention") and the related Protocol on Matters specific to Aircraft Equipment (the Protocol) are in force in Russia. However, authorised entry point (AEP) regime is not applicable.
In connection with the Convention, Russia has made the following declarations:
Under the Protocol, Russia has declared that it would apply:
Russia declared that it would apply Article XIII of the Protocol.
Russian law regulates IDERA rather lapidary. Based on the logic of the regulations, IDERA shall:
To be recorded, two counterparts of IDERA have to be submitted to Rosaviation: one for Rosaviation and one for the applicant.
There are rare examples of the use of IDERAs in Russia.
Both the Convention and the Protocol are very rarely referred to in the Russian court practice.
There has been one case where the courts invalidated the seizure of three aircrafts mortgaged to secure facility agreements effected by the bank (the creditor) during insolvency proceedings of the Russian airline PJSC Transaero. The mortgage agreements were entered into in accordance with the Convention. The courts found that the seizure of the aircrafts was a transaction that gave preference to one of the creditors which violated Russian insolvency law. As a result, the bank had to pay the airline the cost of the seized aircrafts (since it was impossible to return them).
Russia is neither a party to the 1948 Geneva Convention on the International Recognition of Rights in Aircraft nor to the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.
There are no restrictions on foreign lenders financing an aircraft locally or on borrowers using the loan proceeds.
Under Russian currency control regulations, a Russian borrower must submit the loan agreement (if the amount of the loan exceeds RUB3 million, or approximately USD38,000) to the authorised Russian bank within 15 days from the transfer of money under this agreement. All payments under such loan agreement are permitted only using the accounts of this bank or a non-resident bank.
Generally, borrowers are permitted to grant security to foreign lenders.
However, if a foreign lender decides to obtain pledge of participation interest or shares of a Russian airline as a security, the following restriction might be worth noting: the foreign participation at the charter capital of the Russian airline is permitted in the amount nor exceeding 49%.
Intragroup guarantees in favour of lenders are not prohibited. Under Russian law, there are two types of personal collateral in Russia:
Choice of foreign law in respect of such guarantees is also permitted, if there is a foreign element (eg, a foreign lessor). There are generally no consideration or corporate benefit or registration requirements.
Russian law allows to pledge shares in joint stock companies and participant interests in limited liability companies.
The structure when lender takes share security over a domestic special purpose vehicle which owns the financed aircraft is advisable and in fact required by the lenders. Such pledge will be governed by Russian law and subject to the jurisdiction of Russian courts.
The Russian Civil Code provides for a concept of negative undertaking. Accordingly, the parties to a Russian law governed agreement may provide for an undertaking of a party not to take certain actions, including not to create incumbencies with respect to certain types of its assets, and for consequences of breach of such undertaking. At the same time, it is unlikely that specific performance would be available in case of breach of such undertaking, and the security created in breach of such undertaking would be valid, including in Russian counterparty’s insolvency proceedings.
Under Russian law, it is possible to enter into intercreditor agreement in relation to the similar claims (eg, monetary claims). Such agreements do not create obligations for third parties (eg, for the borrower, unless it is a party to such agreement).
The loan agreement can specify that one of the members of the syndicate can act as the facility agent on behalf of other creditors. The facility agent is not entitled to act as security agent, unless it was expressly provided for in the loan agreement.
Debt subordination is possible by way of intercreditor agreement. Any amounts received from the borrower in violation of the provisions of such agreement must be transferred to the right lender, while the corresponding part of the of its claim will be assigned to the lender who received the moneys.
There is no prohibition to transfer or assign all or part of an outstanding debt under an English or New York law governed loan. Moreover, under Russian private international law, the possibility of assignment is by default regulated by the governing law of the agreement to be transferred or assigned, therefore, in this case, by English or New York law.
There are usury limitation laws only for b2c and c2c relations. There is no other legal limitation of interest rate. There is a remote possibility of the invalidation of the transaction, if the interest in the commercial transaction is unusually and excessively high; however, such cases are extremely rare.
The typical form of security in aircraft transactions would be the aircraft mortgage. It should be noted that, since most of the aircrafts used by large Russian airlines are registered outside of Russia and aviation finance transactions are governed by foreign law, the security interests over such aircrafts are typically regulated by foreign (English or New York) law.
The standard security is aircraft mortgage and pledges of rights and moveable property (such as an engine). No other security can be taken over an aircraft or related collateral from Russian law perspective.
The concept of trust and the role of security trustee are not recognised under Russian law.
Depending on the governing law of the primary finance documentation, there are two alternative structures that are most commonly used in Russian finance deals:
The principal difference between the joint and several creditor and pledge manager is that the pledge manager has no security rights and is just a representative, while the joint and several creditor is the only secured party in the transaction structure.
The concept of the security trustee is unknown to Russian law, though it is possible for the borrower to transfer the rights to the aircraft or rights under an aircraft lease to a third person.
It is possible to assign particular rights under the agreement if they are not connected with the personality of the party to the agreement (eg, the right to receive rent).
Subject to certain conditions, Russian law permits parties to choose law governing their agreements or unilateral transactions (see 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments). Therefore, the governing law of the security assignment or the guarantee may be chosen by parties.
However, the issues of admissibility of the assignment, relations between the assignee and the debtor, conditions for the assignee to claim the debt from the debtor, due performance of the obligation by the debtor are regulated by the governing law of the claim to be assigned. Therefore, if rights under Russian-governed contract are to be assigned under New York law or English law governed assignment, the above-mentioned issues would be determined by Russian law.
The concept of the security assignment is not fully regulated by Russian law but is not prohibited. The regulation of the regular assignment is applicable to such transaction.
The assignment shall be made in the same form in which the underlying agreement was made, eg, if the agreement was notarised, then the assignment of rights under such agreement shall also be notarised. Further, the debtor shall be notified on such assignment.
If the security assignment was made in a foreign language, it has to be translated (and the translation should be notarised) in order to be presented in Russian court.
The most typical security instrument would be aircraft mortgage and pledge of the engine, it is also possible to obtain guarantee ("поручительство") which is, as opposed to mortgage and pledge, a personal collateral.
If the aircraft is registered in Russia, then it is advisable to arrange domestic mortgages/pledges, since otherwise it would be impossible to enforce foreign security over Russian aircraft. The costs are determined on case-by-case base with the highest costs being the notary costs.
There is generally no need to register an English or New York law-governed security assignment or a similar instrument under Russian law in Russia.
However, there are conflicting provisions in regards of the registration of the aircraft lease (see 2.3.4 Registration of Leases with the Domestic Aircraft Registry). Therefore, if the security assignment relates to the aircraft lease, then the situation is vague: temporary change of the party to that agreement shall be registered in the Register of Rights according to the regulations, but there is no need to do it according to the position of the courts.
The security may be transferred (in part or in full) only if there is a simultaneous transfer of the rights under the underlying agreement (also in part or in full), since under Russian law security cannot be transferred independently from the secured obligation.
The change in the identity of the secured parties under a security assignment should not influence the security interests, unless the security was transferred without the rights under the underlying agreement.
Parallel debt structure is sometimes used in financings involving Russian borrower/Russian security. However, it is not recognised under Russian law and is therefore not used in purely domestic financings. The alternative structure of the pledge manager used in domestic financings (see 3.2.3 Trust/Trustee Concepts) does not provide for the independent right of the pledge manager to the secured debt.
The enforcement itself does not create any tax consequences for the secured party. However, the proceeds obtained by the secured party from the debtor may be subject to income tax and VAT.
The security over aircraft takes form of a mortgage, while the security over engine is a pledge. The requirements for these types of security differ in a number of significant details:
The mortgage agreement must be executed in written form and describe the secured obligation and the mortgaged aircraft in detail. Otherwise, it would be invalid. The notarisation thereof is not necessary, unless parties agree otherwise or the secured agreement was notarised. In latter cases, if the mortgage agreement is not notarised, then it would be invalid.
The mortgage over an aircraft registered with the Register of Rights shall be registered in the Register of Rights and it will be effective after such registration. If there are several mortgages, the priority of mortgage is determined on the basis of the date of its registration.
There is no requirement to register foreign mortgages over aircrafts registered abroad. Russian law requirements are not applicable to the contents of the foreign aircraft mortgage agreement either.
The requirements for the pledge agreement are less strict. The pledge agreement has to be concluded in a written form, unless the law or the agreement provides for a notarisation. The pledge agreement shall specify the object of the pledge (eg, engine with features identifying it – serial number, manufacturer, etc), the essence, amount and term of the underlying obligation.
However, the terms relating to the underlying obligation are deemed to be agreed on, if the pledge agreement refers to the secured agreement. The object of pledge in agreements where the pledgor is a commercial entity or an individual entrepreneur, the secured obligation may be described in any way which allows to identify it as a secured obligation at the moment of the enforcement, including by way of specifying all existing and (or) future obligations of the debtor up to the specified amount.
The pledge does not require registration. However, there is a Notarial Register of Notifications of Pledged Moveable Property (the Notarial Register). It is recommendable to register the pledge there, since only after such registration the pledge has the effect erga omnes; without such registration, pledge relations exist only between the pledgor and pledgee. The priority of pledges is determined on the basis of the date of the record on such pledge in the Notarial Register.
See 3.2.14 Perfection of Domestic Law Mortgages.
Russian law envisages the pledge of rights under bank account agreement. For this purpose, the client has to open a special pledge account. The pledge agreement may be concluded even in absence of funds on that account.
The pledge is created when the bank was notified thereon and was provided with a copy of pledge agreement. If the bank is pledgee, then the pledge is created after the pledge agreement is concluded. Pledge agreement shall specify the pledge account, the nature, amount and term of the secured obligation.
All funds or a special amount may be pledged.
Under Russian law, there is a retention used by the obligee possessing the property to be transferred to the obligor or a designated person in case, where the obligor did not pay the costs connected with such property or (in b2b relations) did not perform any other obligation (ie, even if this obligation is not connected with that piece of property) owed to such obligee. If the debt is not paid, the obligee may levy the execution on such property as if it was the case with pledge. The retention does not need to be registered. There is no special regulation in relation to retention of the aircraft. In practice, there were cases where the aircrafts were retained due to unpaid repair or maintenance costs.
The aircraft may be also arrested (eg, where the court orders the arrest during litigation procedure as interim measure). Such arrest is registered in the Register of Rights, and the creditor has the rights similar to the rights of the mortgagee. While the aircraft is arrested, the owner cannot dispose of it in any way. The transaction entered into to dispose of the arrested aircraft in violation of this prohibition would be valid, however, the creditor still may exercise his rights and levy the execution on the sold aircraft, unless the purchaser knew or should have known about the interim measure.
It may be difficult in practice, however, to claim that the purchaser did not knew about the prohibition to dispose, as such prohibition is reflected in the Register of Rights.
The retention is in force until the debtor discharges its obligation owed to the creditor.
In relation to mortgage or arrest, except for the necessary formalities leading to such deregistration, it takes nearly a month to deregister such encumbrance.
The mortgages over aircrafts are registered in the Register of Rights. Without such registration, they are not valid. As noted above, the pledge manager does not obtain any interests in the security, therefore, they are not subject to registration.
See 3.3.1 Third-Party Liens.
To verify that an aircraft is free of encumbrances, a potential purchaser of an aircraft should search the Register of Rights and (for encumbrances over engines), the Notarial Register.
There are no special rules for enforcement of security assignment in Russian law. The procedure shall be regulated in the agreement, but in any case, the debtor shall be notified on any assignment.
Russian law does not envisage trust. For the information on enforcement, see 3.4.1 Differences between Enforcing Security Assignments, Loans and Guarantees.
Subject to certain requirements, it is possible to choose foreign law as governing law for financial or security documentation (see 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments).
However, it is most likely that the Russian courts would uphold the choice of foreign law for security documents, only if the aircraft is registered in foreign registers; in such situation, the enforcement shall also take place abroad. In respect of the aircraft registered in Russia, it is highly probable that the Russian courts would reject the choice of foreign law.
It is possible to choose the foreign jurisdiction. However, if the aircraft is registered with the Register of Rights, then the Russian courts would have the exclusive jurisdiction over disputes connected with the rights on such aircraft.
See 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards.
Normally, the possession of security vests in the pledgor/mortgagor, but the parties to security documentation may agree otherwise.
Theoretically, the secured party can take physical possession of the aircraft to enforce a security agreement without the lessee’s or operator’s consent, if it was provided in the security agreement. However, from the practical point of view, it is disputable whether it is possible to do without the cooperation of the owner/possessor of the aircraft.
Normally, aviation finance transactions would fall under category of business and economic disputes, so the competent court to decide enforcement actions would be the commercial (arbitrazh) court of a relevant constituent entity of the Russian Federation (the court of first instance). Regarding the territorial competence, the claims are usually filed in the court at the place of residence of the respondent; if the place of residence is unknown, then the lawsuit may be filed in the court at the place where the property of the respondent is located; it is also possible that the parties agreed on the competence of a particular court of the first instance.
If the security is governed by foreign law, it is difficult to say whether a Russian court is competent to decide enforcement actions thereunder. There has been no identified relevant case law, and it seems that the foreign court shall have the jurisdiction in such cases (most probably, the court of the country of registration of an aircraft).
See 2.6.4 summary Judgment or Other Relief.
If the party violates its negative obligation, it is also possible to claim injunction to stop the respective action.
See 2.6.7 Judgments in Foreign Currencies.
If the pledgee enforces the security by way of judicial enforcement, then it has to pay court fee. If such claim goes simultaneously with the claim to the perform the secured obligation or after it, then the court fee will be RUB6,000 (less than USD100). Otherwise the court fees will depend on the amount of the claim but, in any case, will be limited to an amount of RUB200,000 (approximately USD3,000).
Since the enforcement of a security agreement is treated as sale for tax purposes, such enforcement may give rise to VAT and income taxation (see 1.2.5 Taxes/Duties Payable upon Execution of a Bill of Sale).
There are judicial and non-judicial procedures to enforce pledge/mortgage. To apply non-judicial procedures of enforcement, the parties should specifically agree thereon. It is also possible to enforce the pledge on the basis of the notary endorsement; the pledge agreement must be in notarised form for this purpose.
The usual choice of law in any agreement concerning aircrafts registered abroad is New York law or English law. Russian law is applicable to such transactions in terms of overriding mandatory provisions, public policy clause and public law, eg, the domestic party shall be compliant with the currency control regulations.
Certain transactions are regulated by Russian law, but they mainly concern aircrafts manufactured and registered in Russia (eg, Sukhoi Superjet). This is one of the key reasons for the lack of sufficient commercial and court practice in respect of certain Russian law concepts in aviation finance transactions.
From time to time Russian aviation authorities attempt to make Russian airlines to reregister their aircrafts in the Russian Aircraft Register. Back in 2015, draft law requiring registration of aircrafts used by Russian operators in the Russian Aircraft Register was submitted. However, no further official developments have been made.
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Russian State Register of Civil Aircraft
Since the end of 2019 the Russian government has actively started its campaign to attract more aircraft owners to register their aircraft with the Russian State Register of Civil Aircraft (the Register). This trend has been under discussion in the market for more than a decade, but now the Russian government has made certain changes to Russian law which bring the country closer to succeeding in registering foreign-manufactured aircraft in the Register.
Since 1 January 2020, a VAT rate of 0% has applied to all aircraft imported into Russia where such aircraft are either:
However, from 1 January 2023, the VAT rate of 0% will only apply to imported aircraft if they are registered with the Register.
There is still no clarity as to whether, after 2022, this tax remission will be applied to aircraft registered in countries having 83-bis agreements with Russia. One thing is certain for now: such tax remissions are aimed at promoting registration in the Register of foreign-manufactured aircraft leased by Russian airlines.
A growing number of Russian handling and maintenance companies are receiving certification from the European Union Aviation Safety Agency (EASA) with respect to preparing technical documentation, and the repair and modification of aircraft and aircraft systems, including for Boeing and Airbus aircraft.
This ensures that foreign lessors and lessees are able to apply to a Russian company to perform the technical inspection of an aircraft in Russia and receive service of an international standard. The increase in activity of Russian handling and maintenance companies also correlates with the country's plans relating to promotion of the Register.
Despite the changes highlighted, the outlook remains uncertain for registration of aircraft with the Register.
For now, from a legal, financial, commercial and technical standpoint, the Register may not appeal to companies registering aircraft for the following reasons.
COVID-19 v Russian Aviation Market
Starting from March 2020, almost all airlines around the world have had both international and domestic restrictions imposed on flights by their national aviation authorities and governments in order to curb the spread of COVID-19.
According to the International Air Transport Association's statistics, world airlines will incur record losses of USD84.3 billion by the end of 2020 due to the pandemic, with losses expected to drop to USD15.8 billion in 2021.
Consultancy firm Bain & Company estimates that the Russian aviation industry will need about RUB350–450 billion in 2020 to cover the cash gap. According to the Russian Federal Transport Agency, in April and May 2020, half the number of flights were undertaken by Russian airlines compared to the previous year, while the number of passengers decreased by 92%.
Owing to this disruption, many Russian airlines have tried to postpone and reschedule current aircraft deliveries and negotiate rent deferral requests. Some of them have tried to extricate themselves from rent payment obligations on the grounds that the COVID-19 pandemic has rendered performance of their obligations under relevant lease agreements impossible, as they are not able to operate the leased aircraft in the usual and planned manner. Some lessors have claimed the occurrence of a force majeure event by obtaining force majeure certificates from the Russian Chamber of Commerce, in order to cease performance of their payment obligations under the lease.
Government protective measures
The Russian government has imposed several sectoral measures in order to try to protect the interests of Russian airlines during the COVID-19 pandemic.
One such noteworthy measure is the introduction of an insolvency moratorium (the Moratorium), which relates to companies (the Entity/ies) included in the following lists:
The Moratorium has been imposed for a period of six months from the date of official publication of the relevant government order (ie, until October 2020) and stipulates a wide range of protective mechanisms for, and restrictions in respect of, Entities, including the following:
It is important to note that an Entity can waive the protections granted by the Moratorium by filing the relevant declaration with the Unified Federal Register of Insolvencies (by doing this, it will ensure that the Moratorium does not in any way apply to the Entity).
These are, in our view, the main current trends in the aviation sector in Russia. We believe that in the current unpredictable environment, things will change almost on a daily basis and new trends may therefore arise in the next couple of months.