Contributed By Basch & Rameh
No taxes are due based on the mere execution of a sale agreement for an aircraft or engine. On consummation of a sale, taxes may become payable depending on circumstances (eg if the buyer or seller is Brazilian, is an individual, or if the seller has realised a capital gain). Capital gains rates vary from 15% to 25%. If neither seller nor buyer is Brazilian, but the aircraft is located in Brazil, then capital gains tax might be due. Since 2004, however, the tax authorities have not assessed capital gains on sales. There is no clear definition of "location of the aircraft" for capital gains tax purposes. It might refer to a physical location or include any aircraft registered on the Brazilian register. Neither the sale of corporate interests in non-Brazilian special-purpose vehicles (SPVs) that hold title to aircraft or engines nor the sale of beneficial interests in owner trusts is subject to tax.
In most cases, sale agreements between non-Brazilian parties do not need registration. If the buyer or seller is Brazilian, then the formalities described in 2.3.8 Requirements for Documents Concerning Registration apply. Although sale agreements usually do not, bills of sale do require registration, as described in 1.2.1 Transferring Title.
To transfer title to an aircraft, a bill of sale must be registered with the Brazilian Aeronautical Registry (RAB). The RAB is a division of the Brazilian Civil Aviation Agency (ANAC). The aircraft includes engines and parts unless the bill of sale expressly indicates otherwise. To transfer title to a spare engine, registration of a bill of sale with the RAB is possible and advisable, however, not required. Auxiliary power units (APUs) and other parts require written documentation, however, RAB registration is not possible. Sale of the ownership interest in an entity that owns an aircraft or engine would not alter details of the registered owner of the aircraft or engine. Aircraft bills of sale must follow the formalities described in 2.3.8 Requirements for Documents Concerning Registration. In addition, they must be (i) executed by each seller and buyer, and (ii) notarised in the presence of a notary on the execution date. Due to the special notarisation requirement mentioned in (ii) the practice of signing and delivering undated bills of sale to be held in escrow does not work in Brazil.
The Brazilian Aeronautical Code stipulates rights in rem over aircraft are governed by the nationality of an aircraft. Consequently, aircraft bills of sale governed by New York or English law might not effectively transfer title. See 1.2.1 Transferring Title on the requirements for recognition of bills of sale.
See 1.2.1 Transferring Title regarding translation, notarisation, legalisation and registration requirements applicable to bills of sale.
Depending on the gross revenues of the seller and buyer, the approval of the Brazilian antitrust authority might be required. See 1.2.1 Transferring Title for applicable formalities.
No taxes or duties are payable for execution and registering of bills of sale. Translation costs will be incurred for documents not signed in Portuguese. RAB registration fees are nominal, approximately USD7 per page.
There are no express limitations based on the lease type. Dry or operating, wet and finance leases are all permitted in Brazil provided they abide by importation, registration, foreign exchange and other applicable Brazilian law regulations. There are restrictions on operators in Brazil. As a result, cross-border wet leases are rare.
Due to tax considerations, most commercial aircraft are on operating leases. Local airlines occasionally enter into finance leases and some spare engine finance is structured through traditional mortgages or chattel mortgages.
Leases governed by foreign law are recognised and enforced in Brazil provided they do not violate Brazilian sovereignty, good customs or public morality. Typically, aircraft finance documents do not violate these criteria with the exception of:
There are no material restrictions on lessees making rent payments to foreign lessors, however, there are foreign currency exchange controls (see 2.1.4 Exchange Controls).
Brazil is subject to strict foreign exchange controls. A lessee must register the terms of the lease with the Brazilian Central Bank (except leases with terms of less than 360 days).
The Central Bank registration is commonly referred to as a “ROF”. A ROF includes the amount the lessee may remit and the party to whom the remittances may be made.
ROFs approve regularly scheduled payments due under the lease (eg, rent). Irregular payments such as default interest or losses and damages must be approved by the Central Bank on an ad hoc basis before remittance.
Payees are obliged to obtain taxpayer registration numbers from the Brazilian Revenue Service (SRF), even though lessors may not be subject to Brazilian tax. Such numbers are called CNPJs. Obtaining a CNPJ does not, per se, create tax liability.
The process of obtaining a CNPJ requires the registrant to (i) appoint an agent in Brazil to undertake process from the SRF, and (ii) identify its ultimate beneficial owner to the SRF. This process can be expensive and time consuming; however, it is necessary for the lessor to receive payments. When aircrafts are leased through trusts, the trustee must have a CNPJ number.
Nominal local fees apply to notarisation and registrations, usually under USD100. It is customary for Brazilian airlines to bear the costs of registering leases. See 1.2.5 Taxes/Duties Payable upon Execution of a Bill of Sale on registration costs.
Except for the CNPJ requirement mentioned in 2.1.4 Exchange Controls, there is no prior qualification or licensing requirement for lessors in Brazil to do business with a local lessee.
The Aeronautical Code requires a description of the aircraft, confirmation of the registry (which must be Brazil for Brazilian operators), amount of rent and other charges, lease term and whether there are purchase or extension options. These terms would probably be included in most New York and English law leases.
Gross-up provisions are permissible and enforceable. For over 30 years, Brazilian income tax generally withheld on rental payments remitted abroad has been exempt. In May 2020, withholding tax (actually deemed Brazilian income tax) at the rate of 1.5% on aircraft lease rents falling due during the year of 2020 became due. Whether this tax will continue beyond 2020 is currently unknown. Brazilian lessees may possibly challenge this tax.
Many different import-related taxes are also reduced for commercial aircraft on operating leases to zero. These include:
An additional tax on imports called “COFINS” did not apply to operating lease aircraft until 2013. Based on a 2013 change in the law, the SRF began, in the last quarter of 2014, to assess part of COFINS tax on aircraft imports; however, the basis for those assessments is questionable and most airlines have so far avoided paying the COFINS tax by obtaining court injunctions. If and when applicable, the COFINS tax will be 1% of the value of an aircraft at the time of importation.
Operators should check the jurisdictions of the lessors or other finance providers. Occasionally, over the past 30 years, payments remitted to lessors/creditors located or established in jurisdictions considered ”tax havens” by the SRF were subject to withholding tax (Brazilian income tax). The 1.5% withholding tax mentioned above, however, applies regardless of a lessor’s jurisdiction.
Tax havens are defined as jurisdictions with annual corporate income tax rates under 20%. The SRF also publishes a list of countries deemed tax havens for tax purposes. Since 2016, Ireland has been included on the tax haven list.
A lease may include parts installed or replaced on a leased airframe or engine during a lease term. Leases should be express in determining when replacement parts and engines become subject to a lease. Whenever an engine or APU is replaced the lease should be amended and that amendment registered with the RAB.
Brazil does not adhere to the concept of title annexation of engines installed on airframes. Nonetheless, leases should be express in determining if and when title to removed and replacement engines has transferred.
Brazil is a civil law country and the concept of a trust, as found in common law jurisdictions, is foreign to the Brazilian legal system. Brazil is not a party to the 1986 Hague Convention on Trusts. Notwithstanding this, the RAB and the Central Bank of Brazil are familiar with trust structures, and aircraft may be registered in the name of and leased by owner trustees. The trustee is considered the owner for all legal purposes. The trust beneficiary would have no registered interests in the aircraft. Owner trusts have been and continue to be commonly used with aircraft registered and operating in Brazil. Since 2013, ANAC has required parties using owner trusts to submit copies of the trust agreements to the RAB. Trust agreements filed with the RAB do not fall into the public domain; the filing is for ANAC’s internal purposes only. In bankruptcy proceedings airline debtors have occasionally confused the individuality of trusts and lumped the aircraft held by a particular owner trustee together. These misunderstandings have been resolved without difficulty.
The RAB is an owner register and the registration of the name of an aircraft owner confers title to an aircraft. When an aircraft title transfer occurs, registration with the RAB is necessary to perfect it. A lessor’s interest under a lease with a Brazilian operator must also be noted through the registration of the lease.
Foreign entities or individuals can be registered owners, lessors and mortgagees of a Brazilian-registered aircraft. Since the RAB has no nationality requirements, owners should always be registered as such. Operators are registered on the RAB in their capacity as operators.
There is no specific register for leases. Aircraft leases are registered on the RAB together with other documents, such as bills of sale, mortgages and lease assignments.
Aircraft lease agreements executed by a Brazilian operator with respect to a Brazilian-registered aircraft must be filed with the RAB for registration. The Brazilian Aeronautical Code provides that if an aircraft lease or, if applicable, a sublease is not registered with the RAB, the lessor, the sublessor and the sublessee shall be liable for any damages and losses caused by the aircraft. Assuming an aircraft lease is registered, the lessor should not be liable for operations of the leased aircraft.
Aircraft leases are not subject to any consents from government entities, however, the RAB assesses whether an aircraft lease meets the formalities described in 2.3.8 Requirements for Documents Concerning Registration. If the RAB verifies that a lease agreement does not meet these requirements, it may refuse to register the lease or ask the parties to arrange for the missing formalities.
Leases need not be in any specific form. Since leases must be registered with the RAB they must be translated and comply with the other formalities described in 2.3.8 Requirements for Documents Concerning Registration.
There are registration fees payable to the RAB. Registration fees for a lease are nominal, around USD7 per page.
Aircraft habitually based in Brazil are typically Brazilian-registered. As a general rule, Brazilian carriers have been required to operate Brazilian-registered aircraft. Recently, however, ANAC allowed registration of interchange agreements for aircraft with foreign registration marks where the interchangee is a Brazilian carrier. Aircraft interchange agreements between air carriers based in different states must be approved by each relevant civil aviation authority through a bilateral agreement. These interchange agreements are typically between a Brazilian and a Latin American operator.
Any agreement written in a language other than Portuguese or executed abroad, to be admissible in Brazilian courts and governmental agencies, must adhere to the following formalities:
Translations prepared by public translators are called “sworn” translations. If a document is signed in a jurisdiction that does not adhere to the mentioned Hague Convention (eg, Canada or Singapore), then the document must be legalised by a Brazilian Consulate abroad.
Foreign parties frequently grant powers to local attorneys to execute transaction documents which could require local registration. The power of attorney itself would have to follow the described formalities.
The foregoing are general rules for admissibility. The RAB further requires that registration documents be signed by two witnesses.
The RAB accepts documents electronically signed, provided that these signatures comply with the technical standards of ICP-Brasil. ICP-Brasil is a cryptographic platform developed by the Brazilian Institute of Information Technology. Documents signed electronically and compliant with ICP-Brasil standards are deemed notarised. The implementation of electronic signatures is relatively recent, but its usage has increased throughout the COVID-19 pandemic.
Only digital signatures compliant with the ICP-Brasil standards are acceptable to the RAB. The digital user must obtain a digital certificate via a token issued per the ICP-Brasil standards.
The RAB filing system for commercial aircraft is also electronic, which allows parties to file aircraft documents for registration while working remotely.
Other Brazilian Registration Requirements
In addition to the RAB there is another relevant type of registry, called a Registry of Deeds and Documents (RTD). Unlike the RAB, a singular specialised aircraft register, there are many RTDs in Brazil and they deal with documents of any nature. There is ongoing debate in Brazil concerning the need to register with an RTD a document already registered with the RAB. The majority view seems to accept that RAB registration is enough.
Not all aviation-related documents are registered with the RAB. Bills of sale, leases, local law mortgages and related amendments must be registered. Lease security assignments, notices of assignment and acknowledgments of assignment may be registered. Any document not registered with the RAB, should be registered with an RTD to be enforceable in Brazil.
Please refer to 2.2.2 Tax and Withholding Gross-Up Provisions for discussion of withholding tax now applicable during calendar year 2020. The Brazilian lessee is responsible for withholding and paying such tax when remitting the rent payments. The withholding is usually accomplished automatically by the bank handling the wire transfer.
Foreign lessors are not deemed tax resident in Brazil. Applicable Brazilian taxes, if any, would be imposed on the Brazilian lessee (see 2.4.1 Tax Requirements for a Foreign Lessor).
Even though foreign lessors are not deemed resident in Brazil they must obtain Brazilian corporate identification numbers to enable the Brazilian lessee to remit rent abroad. The relevant requirements are summarised in 2.1.4 Exchange Controls.
A lessor would not be liable in respect of aircraft or engine maintenance and operations provided the lease was registered, as described in 2.3.4 Registration of Leases with the Domestic Aircraft Registry.
A foreign aircraft or engine owner, lessor or financier, when financing an asset on lease, would not be liable under the doctrine of strict liability (or similar domestic doctrine) as a result of damage or loss caused by the asset provided the lease has been registered, as described in 2.3.4 Registration of Leases with the Domestic Aircraft Registry.
The lessee’s indebtedness does not apply to an asset that belongs to a third party.
However, from time to time, airport authorities in Brazil have threatened to impose a fleet lien or hold leased aircraft grounded for overdue and unpaid airport charges. See 3.3.1 Third-Party Liens.
It is debateable whether tax authorities, airport authorities or navigational control authorities have priority claims over the interests of an owner or lessor in a leased aircraft or engine. Generally, owners’ interests have not been subordinated to third-party interests, however, the position is not entirely clear.
Brazilian operators must purchase primary insurance from Brazilian underwriters.
The Brazilian Aeronautical Code states a minimum obligatory level of liability insurance, which does not stand up to industry standards. Lease agreements usually require industry-standard cover to complement the statutory insurance.
A minimum of 40% of all reinsurance risks must be offered by Brazilian primary insurers to Brazilian-based reinsurers. Usually, Brazilian reinsurers take considerably less than the 40% offered.
Cut-through clauses are valid only if the primary insurer is insolvent. Otherwise proceeds must be processed through the primary underwriter. Nevertheless cut-through clauses are common in aviation insurance policies.
Assignment of insurance/reinsurance are permitted in relation to aircraft leases or finance agreements. Increasingly parties rely on loss beneficiaries named in policies in lieu of assignments.
Upon the occurrence of an event of default under a lease agreement, the lessor has the right to exercise remedies provided thereunder, including, without limitation, terminating the lease. This right is covered by the Brazilian Civil Code and the Code of Civil Procedure, as well as by the Cape Town Convention, Articles 10 and 13. Termination, however, must be preceded by a notice of default extending a last opportunity to cure the default. Subsequently, should the lessee not remedy the event of default, a new extrajudicial notice should be sent, unilaterally terminating the lease agreement.
Self-help remedies, other than the irrevocable deregistration and export request authorisation (IDERA), are not valid or enforceable in Brazil. If an airline does not voluntarily tender the aircraft and it is in Brazil, then a lessor would have to file a lawsuit seeking repossession. In most repossession cases, lessors are not authorised to deregister a leased aircraft from Brazil with a preliminary injunction, only once a final decision on the merits of the case is rendered, granting definitive possession of the aircraft to the lessor. If the aircraft is physically located in another jurisdiction then the repossession rules of that jurisdiction might apply for the taking of physical possession.
Since the implementation of the Cape Town Convention, it has been important to separate the deregistration and exportation processes. For deregistration process through the use of IDERAs, ANAC acts expeditiously and issues the deregistration confirmation within five working days.
With regard to the exportation process, the tax authorities have never issued regulations relating to export clearances that are one of the authorisations covered by IDERAs. Where an export authorisation is required must be considered on a case-by-case basis.
There are no restrictions on a lessor’s ability to sell the aircraft following termination of the lease, however, a sale would not necessarily relieve the buyer of export authorisation requirements, were any to apply.
Aircraft need not be physically located in Brazil for deregistration purposes.
If a lessor requires a certificate of airworthiness for export to the next jurisdiction of registration, it must be obtained while the aircraft is physically located in Brazil.
See 2.6.1 Restrictions on Lessors’ Abilities for discussion of the unenforceability of self-help remedies.
No specific competent courts decide aviation disputes. Aviation disputes between private parties are adjudicated in State Courts in Brazil.
A summary judgment is possible but rare in Brazil and almost unheard of in aircraft repossession cases. It is common to obtain an interim repossession order quickly if the lease default is objectively demonstrated. These orders are not equivalent to summary judgments because they are issued before the lessee has had an opportunity to present a defence. According to Brazil’s Cape Town Convention Declarations, lessors are entitled to “speedy relief”, defined as ten working days.
In theory a pre-judgment attachment for a monetary award based on a lease default should be possible, but only a reduced number of cases exist where a lessor has sought or obtained one.
See 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards for discussion of the re-applicability of foreign laws.
Brazil’s declarations to the Cape Town Convention reinforces the principle of parties’ contractual freedom to elect the governing law for lease agreements.
Likewise, submission to a foreign jurisdiction should be binding and upheld by domestic courts. The Brazilian judiciary, however, would not necessarily stay a similar action first filed abroad. The procedure to enforce foreign judgments (described in 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards) is a slow one and rarely appropriate in aircraft lease defaults cases.
See 2.6.11 Lessees’ Entitlement to Claim Immunity on immunity.
A foreign judgment will be valid in Brazil only after ratification by the Superior Court of Justice. The procedure does not re-examine a judgment's merits, provided it meets the following formal requirements:
An urgent interlocutory decision given by a competent foreign court against a Brazilian entity would be recognised and accepted by the Brazilian courts without re-trial or examination of the merits after ratification by a federal court with proper jurisdiction provided these formal requirements (with the exception of not being subject to appeal), are met.
Judgments can be rendered in foreign currency; however, defendants are entitled to satisfy such judgments by effecting payments in Brazilian currency at the exchange rate effective on the payment date. The foreign plaintiff needs to withdraw the amount in Brazilian currency and request authorisation from the Central Bank to wire the funds in foreign currency. Due to currency fluctuations, a discrepancy in the amount awarded and the amount finally wired is possible.
Lessors are entitled to charge interest rates and/or compounding amounts under foreign law governed leases.
Usury rates applicable in Brazil are twice the Central Bank of Brazil’s interbank rate. As part of the government’s emergency measures in response to the worldwide COVID-19, pandemic the SELIC rate (the Central Bank's overnight rate) is at historic lows, in the region of 2.2% per annum. Whether that rate would apply to a cross-border lease is uncertain. Charging a premium for holdover rent is not prohibited, though uncommon. Whether local usury restrictions apply to cross-border leases is uncertain.
Charging rent following the redelivery of an aircraft might be deemed unenforceable. Damages, however, should be enforceable.
No taxes are due in connection with lease enforcement. Notwithstanding this, many services and significant expenses might arise. For example, a customs broker might be needed to obtain an export authorisation. Aircraft parking fees and ground maintenance costs during the course of litigation would be for the account of lessor from the date repossession occurs. Legal fees can be significant.
To terminate a lease, a lessor must give a lessee written notice in a manner that complies with the lease and local law. In most cases the notice should provide the lessee a cure period of not less than two business days.
No commercial airlines or air taxi companies currently operating in Brazil are entitled to sovereign or any other immunity.
Brazil adopted the New York Convention through Decree No 4.311 of 23 July 2002. Notwithstanding this, foreign arbitration awards must still be ratified as per the foreign judgments procedure referred to in 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards.
Non-Brazilian plaintiffs seeking to enforce a lease in Brazil must file a bond in court set by the judge, usually between 10% and 20% of the cause of action’s value. This bond is intended to cover opposing counsel’s fees should the plaintiff lose the action. Additionally, court filing fees equivalent to 1% of the action’s value are due. The Cape Town Convention allows parties to waive bond requirements.
Under Brazilian contractual law, concepts of assignment and novation are recognised and habitual in aviation transactions. A lessor of an aircraft on lease to a Brazilian lessee can assign its rights and benefits under the relevant lease agreement to a new lessor or lender or security trustee.
Both a New York law assignment assumption agreement and an English law novation would be valid and upheld, provided the agreement complies with the formalities described in 2.3.8 Requirements for Documents Concerning Registration.
The formalities described in 2.3.8 Requirements for Documents Concerning Registration apply to assignments, assignment assumption agreements and novations.
Lease assignments, assignment assumption agreements and novations relating to aircraft must be registered with the RAB. Similar agreements relating to spare engines may be registered, however, registration is not required. Failure to complete registration causes the document to be inadmissible in Brazilian courts or other governmental offices.
See 2.3.8 Requirements for Documents Concerning Registration for a description of the applicable formalities.
See 1.2.4 Registration, Filing and/or Consent from Government Entities and 2.7.6 Recognition of Transfer of Ownership Interests re possible antitrust authority authorisation required for an aircraft sale that might be connected to an assignment assumption agreement or novation.
No taxes or duties arise in connection with an assignment assumption agreement or novation. There are translation and registration costs. There is no consequence to an original or copy of any document being brought into Brazil per se.
Except for the aforementioned (in 1.2.4 Registration, Filing and/or Consent from Government Entities)antitrust considerations regarding the sale, the transfer of ownership of an entity would not require any particular registration or disclosure with the RAB.
Brazilian operators (in most cases lessees) usually obtain deregistration over leased aircraft. Currently, the basic requirements to export and deregister an aircraft, either on expiration or termination of a lease, are:
If a lessee is in default, the authorised party under an IDERA granted can also request deregistration. IDERAs must be granted in accordance with Cape Town Convention terms and registered with the RAB. In 2014 ANAC promulgated procedures for exercising IDERAs and since that time ANAC has regularly honoured them, despite opposition from a Brazilian lessee.
If no IDERA has been granted, a lessor may try to deregister by applying to ANAC and demonstrating that the circumstances of the request are similar to those of an IDERA. The Brazilian Aeronautical Code stipulates that owners have the right to deregister aircraft. But deregistering aircraft without IDERAs is less certain and a Brazilian court order confirming the leasing terminated and deregistration might become necessary.
If the receiving aviation authority requires an export certificate of airworthiness, the lessor (or the person requesting deregistration) must obtain it prior to the deregistration request.
Deregistration through use of an IDERA does not require lessee or operator consent. For a mortgagee that is not an authorised party under an IDERA it is advisable that an acknowledgment of assignment extend to the mortgagee the ability to enforce the rights of the lessor against lessee. To be enforceable, the acknowledgement of assignment should be registered (see formalities in 2.3.8 Requirements for Documents Concerning Registration).
A registered IDERA with the RAB is required so that either owner, mortgagee or lessor is authorised to deregister the aircraft. The applicant signing the deregistration request will need evidence of being appointed to act for the authorised party.
If deregistration is requested by an operator, approximately two weeks are necessary to conclude deregistration. Using an IDERA, according to the RAB’s regulations, an aircraft should be deregistered within five business days. The RAB may request the consent of any lien holder to confirm the deregistration process. If a lessor, owner or mortgagee is required to file a lawsuit the time period is less certain.
ANAC does not provide specific assurances as to the prompt deregistration of the aircraft. Deregistration pursuant to IDERAs is expressly covered in published ANAC regulations.
There are nominal fees chargeable for the deregistration of an aircraft.
Since 2014, when the effectiveness and efficiency of IDERAs was established, deregistration powers of attorney (DPOAs) have become less common in Brazil. In principle they are valid, though the five-day period stipulated for IDERAs might not apply to DPOAs.
The formalities described in 2.3.8 Requirements for Documents Concerning Registration would apply.
The enforcement of DPOAs has rarely been tested in Brazil and there is no specific rule for supporting documents.
See 2.8.1 Deregistering Aircraft in this Jurisdiction for details on IDERAs. It is advisable to stipulate a DPOA be governed by Brazilian law.
The Brazilian Civil Code allows irrevocability clauses in powers of attorney; however, some controversy surrounds their effectiveness. If the grantor revokes a DPOA without the express written consent of the grantee, such revocation should, in most leases, constitute an event of default.
The process of physically exporting an aircraft is entirely distinct from the deregistration process. While deregistration is regulated by ANAC with express regulations for the use of IDERAs, export is controlled by the SRF. No SRF regulations in respect of the export of aircraft by parties other than Brazilian operators has ever been issued.
In principle, any party (mortgagee, owner or lessor) in possession of an aircraft, either by a court order or amicable redelivery, may fly the aircraft out of Brazil. In the case of a court order, provided international movement of the aircraft is not restricted. Whether the consent of another party is needed depends on the terms of the court order or, in the case of an amicable redelivery, the terms of the relevant documents.
The best measures a mortgagee, owner or lessor can take at the time of negotiating a lease or mortgage are to require and register an IDERA with the RAB and to clearly stipulate rights to repossess and remove the aircraft from Brazil.
An aircraft does not need to be in Brazil at the time of deregistration.
See details on export authorisations in 2.8.12 Aircraft Export Permits/Licences.
An aircraft operating under an operating lease (as are most aircraft in Brazil) is imported under a set of customs rules called “temporary admission”. Aircraft operating in Brazil on finance leases, or aircraft purchased by Brazilian parties, are imported under definitive import rules. Regardless of whether an aircraft is operating under the temporary admission or definitive import rules, the only party that may deal with the SRF in relation to import and export matters is almost always the importer (ie, the Brazilian operator). When an aircraft is exported the import process should be closed through an export registration called a unified export declaration (DU-E). There are doubts, however, about the ability of parties other than the original importer to obtain DU-Es.
This has not prevented lessors and owners from exporting repossessed aircraft in the past. In most cases aircraft can be flown to locations outside Brazil without the prior issuance of a DU-E, which can be obtained after an aircraft has left Brazil. In 2019, this procedure was used with approximately 35 aircraft redelivered by a bankrupt airline. However, due to inconsistencies between the SRF offices in different locations in Brazil some problems have arisen with repossessed aircraft that lessors intend to move out of Brazil prior to the issuance of a DU-E. Most cases were resolved without litigation, however, there is a chance a lessor might need to seek a court order for removal. According to the Cape Town Convention the SRF should actually assist authorised parties named in registered IDERAs to export aircraft. This has not yet occurred. Consequently, export procedures should be carefully reviewed on a case-by-case basis.
A DU-E cannot be issued in advance and, once issued, is valid for a limited number of days after issuance.
There are nominal fees for DU-Es.
As mentioned in 2.6.1 Restrictions on Lessors’ Abilities, a lessor should confirm if it will need a certificate of airworthiness for export that can only be obtained prior to deregistration. Therefore, when dealing with repossessed aircraft, it is preferable that the next registry be one that does not require a certificate of airworthiness for export.
Both a DPOA and an IDERA should survive bankruptcy restructuring. Conversely, in cases of liquidation, powers of attorney are usually deemed revoked. According to the Cape Town Convention IDERAs should remain valid. Since the Brazilian airlines that have been placed in liquidation no longer had possession of any aircraft, the validity of an IDERA after a declaration of liquidation remains untested.
There are two main types of insolvency proceedings provided by the Brazilian Bankruptcy Law. One is reorganisation under the auspices of a bankruptcy court called judicial recuperation (Brazil’s rough equivalent to Chapter 11) and the second refers to liquidation (similar to Chapter 7).
Article 199 of the Bankruptcy Law relates specifically to commercial aircraft leases. It stipulates that rights under aircraft leases (and aircraft engine leases) are not subject to suspension or stay due to a judicial recuperation proceeding. Additionally, claims arising under such leases are excluded from judicial recuperation proceedings. Thus, a lessee under judicial recuperation must not impose the rights of other creditors in priority to it or prevent/delay the ability of the lessor to repossess the aircraft on the termination of the leasing unless the lessee is current with its obligations under the lease.
Furthermore, the Cape Town Convention became effective in 2013 when Brazil adopted Alternative A. A close analysis of Cape Town Convention Aircraft Protocol Article XI (2) demonstrates that the stay period against lessor repossession should be the earlier of the declared “waiting period”, or the date lessors would be entitled to repossession prior to implementation of the Cape Town Convention. The period under the Brazilian Bankruptcy Law expressly provides that aircraft leases to airlines are not subject to any stay period. Therefore, it is arguable that in Brazil aircraft lessors should not be stayed from repossessing aircraft from an airline in judicial recuperation. This position relating to a possible zero-day stay would apply to leases only. Aircraft financed through other means, such as mortgages, are subject to the 30-day waiting period contained in Brazil’s Cape Town Convention Declarations.
If a Brazilian airline seeks judicial recuperation, protection leases will not be set aside.
In a recent case (Oceanair), however, where lessors were erroneously stayed from repossessing aircraft for approximately 120 days, during which Oceanair paid one month's rent. The last court decision on the merits in the Oceanair matter upheld lessor rights to repossess aircraft.
Leased aircraft are not deemed part of a lessee’s property during a bankruptcy proceeding. If an airline is placed into liquidation, the aircraft or engines would be returned to the lessors/owners, as applicable. In liquidation, claims of lessors would usually be grouped with unsecured claims.
No Brazilian airline has been fully liquidated for about 50 years so there is little precedent. There are six airlines currently in liquidation (Transbrasil, Varig, VASP, VarigLog, BRA and Pantanal), however, those proceedings move at an exceptionally slow pace. Another airline, Oceanair Linhas Aéreas (aka Avianca Brasil) may be placed into liquidation in the near future.
Brazilian parties are rarely borrowers in aircraft transactions. In the few cases where the borrower is Brazilian, an insolvency would result in the claims of the lender being grouped with other similar claims, secured or unsecured, depending on the loan terms. If a guarantor or security provider were to become insolvent the lender would lose the benefit of the guarantee/security.
The Brazilian Bankruptcy Law contains a 180-day moratorium to protect debtors generally. However, as per 2.9.2 Other Effects of a Lessee’s Insolvency, Brazilian aircraft and engine leases are subject to a special article thereunder that prohibits any stay period/moratorium.
See 2.9.2 Other Effects of a Lessee’s Insolvency.
There are no reported cases of ipso facto defaults forming the basis of a lessor request for repossession. Many practitioners doubt that ipso facto defaults alone are sufficient to obtain lessor relief. Payment performance defaults have been the most common causes of action.
To date, the Brazilian airlines under liquidation were not operating when the liquidation orders were issued. The impact on aircraft, rentals, security deposits and maintenance reserves has not arisen. Should a court determine that the lessee be wound-up and liquidated, a liquidator is appointed. The liquidator has discretion to terminate bilateral contracts (aircraft leases), or to preserve them. If the liquidator elects to preserve them, the airline, acting through the liquidator, would be obligated to comply with all of the terms thereunder, including payment obligations. In the context of airlines, the chances that a liquidator would maintain a lease for extended periods are remote, except possibly to continue operations for tickets already sold.
Since the aircraft does not belong to lessee, its creditors cannot encumber the aircraft to secure amounts due. The lessor would be entitled to repossess the aircraft. Thus, if the lessee does not redeliver the aircraft, the lessor may begin repossession action.
The Bankruptcy Law does not expressly deal with cash security deposits or maintenance reserves. In the past, airline insolvency cases lessors were able to retain security deposits and maintenance reserves.
The Bankruptcy Law includes a clawback provision that arises in cases of liquidation. Several types of transactions are subject to annulment after a company is placed into liquidation (eg, prepayment of obligations not yet due or gratuitous transfer of assets).
The Cape Town Convention (the Convention) and accompanying Aircraft Protocol have been in effect since May 2013. The RAB was appointed by Brazil as the State’s Authorised Entry Point (AEP) and AEP Codes are required to register international interests over airframes (the Cape Town Convention does not require AEP Codes to register international interests over engines). To obtain an AEP Code, the applicant must be previously registered and have a valid power of attorney from at least one party in interest. Brazilian AEP Codes cannot be disclosed by the professional user entity (PUE) or transacting user entity (TUE) that obtains them. Consequently, international interests over aircraft registered with the RAB are almost always made by PUEs based in Brazil. The RAB needs, on average, between one and four business days to issue an AEP Code, depending on the backlog of requests.
Declarations made by Brazil under the Cape Town Convention:
Declarations made by Brazil under the Aircraft Protocol:
According to Brazil’s Declarations under the Convention, the RAB will recognise and honour a request for de-registration based on an IDERA without the need for a court order (see 2.6.1 Restrictions on Lessors’ Abilities).
See 2.3.8 Requirements for Documents Concerning Registration and 2.8.1 Deregistering Aircraft in this Jurisdiction for IDERAs’ requirements and 2.8.4 Duration of Deregistration Process for the process’s timing. The authorised party in an IDERA should ensure it is registered with the RAB at the onset of the lease term or financing term. After an IDERA is registered, the RAB will, on request, issue a certificate confirming registration. The authorised party does not need to retain an original IDERA once registered.
After the Convention became effective there were a few repossession cases where the plaintiffs pleaded application of the Convention and the courts issued repossession orders within Convention time periods. In those early cases, however, the courts rarely cited the Convention as a basis for repossession orders. In November 2018, civil courts in Brazil issued repossession orders against Oceanair within two days after requests were filed. Thus, these pre-insolvency cases complied with the Convention’s “speedy relief” provisions despite the lack of reference to the Convention in the repossession orders.
In December 2018, Oceanair filed for judicial recuperation in a Sao Paulo Court. This was the first test in Brazil of the insolvency provisions of the Convention. See 2.9.2 Other Effects of a Lessee’s Insolvency for further details.
In February 2020, a civil court from the State of Paraná, expressly cited the Convention as the legal basis for a preliminary injunction ordering the repossession of two aircraft in favour of a lessor.
Brazil is a party to the 1948 Geneva Convention and the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft, however, implementation of the Cape Town Convention expressly states that the Convention prevails over both previous conventions to the extent there is overlap.
There are no particular restrictions on foreign lenders financing an aircraft, however, for various reasons, including repossession precedent and tax efficiency, financing aircraft and engines through loans is rare in Brazil.
The exchange controls and registration requirements applicable to leases (ROFs and CNPJ numbers), as described in 2.1.4 Exchange Controls, apply to loans.
Borrowers are permitted to grant security to foreign lenders.
Downstream, upstream and cross-stream guarantees are permitted in favour of lenders. Guarantees should be carefully drafted to ensure certain statutory benefits provided to guarantors are waived. The formalities described in 2.3.8 Requirements for Documents Concerning Registration are applicable to guarantees. Guarantees tend to be registered in RTDs and not the RAB.
Special purpose vehicles (SPVs) are rare in Brazil. Pledges over shares are recognised in Brazil. The pledge agreement should follow the formalities described in 2.3.8 Requirements for Documents Concerning Registration. Additionally, the pledge should be listed in the company’s share register. If shares are publicly traded the pledge may be subject to additional registration and disclosure requirements.
Negative pledges are valid in Brazil.
Intercreditor arrangements rarely involve Brazilian companies as borrowers and lenders are usually located abroad. If any intercreditor arrangement includes any Brazilian party, it should abide by the formalities in 2.3.8 Requirements for Documents Concerning Registration. Intercreditor agreements would usually be registered with an RTD.
Facility agents and security trustees are readily accepted as parties in interest in loan and lease transactions. The RAB frequently registers interests in aircraft in the name of such agents or trustees (rarely Brazilian).
Subordination is achieved through written agreements and consents. Most debt subordination relating to aircraft and engine financing is achieved outside Brazil.
Assuming the debtor is Brazilian, the transfer or assignment of all or part of an outstanding debt under an English or New York law-governed loan is permissible and recognised in Brazil. For foreign exchange purposes the Central Bank registration (ROF, as described in 2.1.4 Exchange Controls) should be amended if the payee changes.
See 2.6.8 Limitations on Lessors’ Actions Following Termination on usury and interest limitation.
A combination of security deposits, security assignments of rights under leases, guarantees, letters of credit, promissory notes, mortgages and account pledges are typical in aviation finance transactions involving Brazilian-registered aircraft.
There are no specific restrictions on security forms that could be taken by a creditor over a Brazilian-registered aircraft.
See 2.2.5 Recognition of the Concepts of Trust/Trustee on trust recognition.
A borrower may assign to a security trustee, pursuant to a mortgage, its rights to an aircraft or under an aircraft lease (including insurance). See 2.7 Lease Assignment/Novationon security assignments.
Brazil allows for the assignment of rights and benefits without a lessor’s attendant obligations. For example, a foreign lessor of a Brazilian-registered aircraft on lease to a Brazilian lessee is allowed to assign, by way of security, its rights and benefits under the lease, including its rights and benefits under relevant insurance to a foreign security trustee located in the United States (who will hold such security on trust for a changing pool of beneficiaries), without assigning the attendant obligations of the lessor under an aircraft lease.
See 2.2.1 Mandatory Terms for Leases Governed by English or New York Law, 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards and 3.1.10 Transfer/Assignment of Debts Under Foreign Laws.
The Brazilian Aeronautical Code establishes that a mortgage, when registered with the RAB, creates a lien (right in rem) over a Brazilian-registered aircraft. Brazil is a contracting state under the Cape Town Convention and qualifying mortgages should be registered in the International Registry as well. The Aeronautical Code further provides that rights in rem over Brazilian aircraft should be governed by Brazilian laws. Since the Convention came into force in Brazil, it is arguable that parties are free to choose the governing law of a mortgage, however, to date, the validity of a foreign law mortgage in Brazil has not been tested. Nonetheless, lenders are increasingly relying solely on Cape Town Security Agreements as security. If agreements do not take the form of Brazilian law mortgages, they are not registered at the RAB and do not establish liens under the Brazilian Aeronautical Code.
Aircraft lease security assignments usually have no Brazilian parties and are rarely governed by Brazilian laws; therefore, the question of creation and validity of the contractual provisions must be addressed by counsel in the relevant jurisdiction.
To be enforceable in Brazil, a security assignment should be registered with the RAB or with an RTD, along with a notice of assignment to, and acknowledgement from, the Brazilian lessee. These should also meet the formalities in 2.3.8 Requirements for Documents Concerning Registration.
A security assignment of rights under a lease, an acknowledgement of the security assignment from the Brazilian operator should be obtained and registered with the RAB. The acknowledgement should include a description of the assignee’s right to exercise remedies the lessor is entitled to under the lease, including, without limitation, the right to repossess the aircraft, following the issuance of an enforcement notice.
Parties should also consider the need to take a Brazilian law mortgage (see 3.2.6 Choice of Foreign Law for details).
Domestic law security instruments and/or local law filings are not mandatory to enable Cape Town filings. Cape Town filings follow the requirements provided for in the Convention and Protocol to determine whether a security instrument creates a registerable international interest.
The average costs of executing a domestic law security instrument and complete local law filings vary. There are:
See 2.3.8 Requirements for Documents Concerning Registration regarding the applicable formalities.
A security assignment governed by English or New York law may be registered with the RAB. A security agreement governed as such, however, would not qualify for registration. See 3.2.6 Choice of Foreign Law and 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments.
The transfer of contractual rights is recognised, provided all formalities described in 2.3.8 Requirements for Documents Concerning Registration are met. As mentioned in 3.2.6 Choice of Foreign Law, Brazilian law mortgages are required to establish a lien under Brazilian laws. A transfer of security interest of a Brazilian law mortgage would require a written instrument, filed with the RAB.
If the identity of a security trustee under a security assignment changes, the new security trustee and the lessor must serve a new notice to, and obtain acknowledgement from, the Brazilian lessee. To be enforceable, each of these documents should be registered at the RAB. See 2.3.8 Requirements for Documents Concerning Registrationregarding required formalities.
As explained in 2.2.5 Recognition of the Concepts of Trust/Trustee,trusts are not recognised in Brazil per se. A parallel debt structure established in a common law jurisdiction would be effective in Brazil since the trustee/agent would hold the security under the secured debt. Parties would not be able to create a trust under Brazilian laws.
A security trustee will not be deemed resident or domiciled in Brazil as a result of being a party to or enforcement of a security assignment over Brazilian-registered aircraft. See 2.1.4 Exchange Controls and 2.4.2 Effects of Leasing on the Residence of a Foreign Lessor on the CNPJ number requirement.
A domestic law mortgage is perfected with its registration. See 2.3.8 Requirements for Documents Concerning Registration for formalities.
Aircraft mortgages registered with the RAB establish and perfect security interests over the aircraft (including its engines). It is also possible to register a spare engine mortgage with the RAB, however, such registration’s effect is less certain since engines themselves are not registered objects. As explained in 2.3.3 Aircraft/Engine-Specific Registers,contracts relating to spare engines should be registered.
International interests arising from security agreements over aircraft engines should be registered with the International Registry, according to the Convention and the Protocol (see 2.10 Cape Town Convention and Others).
Lease receivables could be deposited in escrow accounts. Parties could enter into a receivables pledge agreement where a party would pledge its rights over receivables in favour of a creditor. Additionally, parties could execute an account management agreement with terms and conditions under which the bank is allowed to release the account funds. Since revenue coming into a Brazilian bank account will be in Brazilian currency and most leases require payments in US dollars, account management agreements tend to be complex and include provisions for the bank to convert and remit funds to the foreign creditor and to subsequently credit the balance to the Brazilian operator. A pledge over receivables and related security instruments must be registered with an RTD for security perfection purposes.
See 2.3.1 Notation of Owner’s/Lessor’s Interests on Aircraft Register for discussion of RTD filings.
As explained in 2.4.5 Attachment by Creditors and 2.4.6 Priority of Third Parties’ Rights,airport and navigational authorities have not sought to exercise liens over aircraft, but have occasionally sought to block export of aircraft pending payment of airport navigation and parking fees. To date, the airport authorities have usually sought to block the export of business aircraft for unpaid fees (akin to a detention order), but they have not sought to block any aircraft of an airline fleet (ie, commercial aircraft) from being exported. There is no logic for this distinction.
There have been a few scattered cases where the SRF sought to confiscate private/corporate aircraft due to violations by lessees of customs and import regulations. The expectation of the SRF has been that the Brazilian lessees would indemnify the owners. These cases are uncommon.
Generally, repairers do not have mechanic's liens over aircraft. This position is not entirely settled in Brazil, however, there are relatively few cases of mechanic's liens being exercised against leased aircraft. We have also never seen a crew assert a claim against an aircraft for unpaid wages.
See 3.3.4 Statutory Rights of Detention or Non-consensual Preferential Liens on non-consensual claims.
Liens are considered discharged on the date a release is filed with the RAB.
Similar to leases, there is no separate mortgage or other security register. See 2.3.3 Aircraft/Engine-Specific Registers.
Brazil made a Declaration under Article 39 of the Cape Town Convention preserving the supremacy of non-consensual claims under national law. No particular categories of non-consensual interests were mentioned in Brazil’s Declarations.
In Brazil, fleet liens have not been asserted in the past.
Certificates from the RAB and the International Registry enable a potential purchaser to verify that an aircraft is free of registered encumbrances.
There are relevant differences in enforcing a security assignment as opposed to a loan or guarantee.
Security assignments are typically accompanied by notices of assignment, and acknowledgements/consents from the lessee, given to a security trustee or the ultimate creditor, agreeing to redirect payments to a security trustee and recognising the exercise of lease remedies by the assignee.
The executed instrument must be registered with RAB to produce effects. If the lessee is in default under the lease and the lessor is in default under the security assignment then the security trustee (assuming the rights of the lessor under the lease) is able to bring proceedings against the lessee.
Remedies available to enforce a loan or guarantee are different.
Under Brazilian law, lenders or creditors generally, (whether secured or not) cannot apply for repossession of an asset pertaining to the borrower. The usual remedy in these cases is to start an action seeking a money judgment, this would involve a court auction regarding the encumbered asset; the proceeds would be used to pay the secured party’s claim. For a variety of reasons this remedy is ineffective with aircraft in Brazil.
Provided the security assignment, notice of assignment and acknowledgement of assignment have been registered with the RAB, the security trustee is able to exercise its rights in accordance with the registered documents.
See 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards.
See 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards and 2.6.12 Enforcement of Foreign Arbitral Decisions.
Self-help repossession is illegal in Brazil. In addition, under Brazilian law secured parties are usually prohibited from taking possession of aircraft. See 3.4.1 Differences between Enforcing Security Assignments, Loans and Guarantees for judicial remedies in this case.
The same state courts that decide other aviation disputes between private parties are competent to decide enforcement actions under a security agreement, see 2.6.3 Specific Courts for Aviation Disputes.
See 2.6.4 Summary Judgment or Other Relief on summary judgments and 2.6.12 Enforcement of Foreign Arbitral Decisions on bonds.
See 2.6.7 Judgments in Foreign Currencies.
See 2.6.9 Lessor’s Requirement to Pay Taxes/Fees.
We are not aware of other issues re the enforcement of lender rights.
There are no other material issues or material court judgments in this regard.
At the legislative level, there are three ongoing noteworthy matters in Brazil
COVID-19 State of Public Emergency
On 20 March 2020, the Brazilian government declared a state of public emergency due to the COVID-19 pandemic. The Brazilian President then issued an Executive Order deferring payment of airport charges and loosening rules applicable to airlines with respect to flight cancellation, rescheduling of flights and ticket refunds. The Executive Order is scheduled to expire on 16 July, unless the Congress passes it into law. The lower house of the Congress approved the Executive Order with a few amendments and submitted it to the Senate. Following the Senate’s approval, the Bill will be subject to presidential approval.
COVID-19 Emergency Legislation
The Congress is currently considering draft emergency legislation to deal with the COVID-19 crisis. A bill was approved by the lower house of the Congress and is currently (July 2020) in the Senate. If approved unchanged by the Senate and the President, the legislation would create new stay periods that might prevent aircraft lessors from repossessing aircraft and engines for 180 days. The new stay periods would apply to obligations arising from and after 20 March 2020. Debtors would have to meet certain criteria to qualify for the new stay periods.
The withholding tax described in 2.2.2 Tax and Withholding Gross-Up Provisions may be amended.
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