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Avoiding the Pitfalls of Cross-Border Transactions

Following is an excerpt from an article written by NARA for publication in the April 2012 edition of World Aircraft Sales magazine. To read the full article, please go to page 106 of the digital April edition of World Aircraft Sales by clicking here.

More new aircraft are being delivered outside of the borders of the United States than inside the U.S. These growing international markets are great news for the business aviation industry and the global companies that have discovered the efficiencies realized through private air travel. They can, however, add to the complexity of aircraft sales transactions.

According to JETNET, a leading market research company for the business aviation industry and a member of the National Aircraft Resale Association, more than 41% of new aircraft were delivered outside of the United States in 2007. In 2010, that number was approaching 68%. This shift means that over half of the business aircraft fleet is now being sold outside of the United States.

Scott C. Burgess, principal of Aviation Legal Group, P.A., and a longtime member of NARA, has noticed another trend in the last five to seven years. “As late as the 2005 or 2007 timeframe, airplanes were exiting the United States and going on to the registries of other countries, like the European Union, but you didn’t see U.S. buyers purchasing them back into the U.S.” That has changed significantly.

“The worldwide market is far more accepting of aircraft on registries other than the Federal Aviation Administration (FAA),” Burgess says. “This includes registries for the Cayman Islands, Bermuda, Isle of Man, and the European Aviation Safety Administration (EASA). Historically, ten years ago and further back, the world said ‘If an aircraft is FAA-registered, it’s going to be a good aircraft, but if it’s not, you don’t know what you’re going to get.’ That’s not the case anymore.”

Burgess says Aviation Legal Group coordinates about 20 aircraft transactions every year and, these days, cross-border transactions outnumber domestic ones. “The upper end of the midsize market and the large-cabin, long-range market is nearly entirely cross-border right now.”

This has a huge effect on those who are looking to buy or sell a business aircraft. Chances are good that the transaction will be across country borders. Since every country has different tax laws, different civil aviation authorities with differing regulatory requirements, different legal requirements and different customs and ways of conducting business, an already complicated process can become even more so. Let’s look at some of the issues and traps buyers and sellers might face during a cross-border transaction.

Proper Planning Is Required

“Cross-border transactions are not necessarily trickier,” Burgess continues. There are more things to keep in mind during the process, though. “Just like with any domestic transaction, the purchase process should be carefully planned out.”

Brad Harris, Founder and CEO of Dallas Jet International and longtime NARA member, agrees that planning is crucial to a cross-border transaction.

“There are two major processes that have to take place if you sell an aircraft to a buyer in a different country,” Harris says. “First, you have to export the aircraft from the country of registration by performing an Export Certificate of Airworthiness. Second, you will have to perform an Import Certificate of Airworthiness into the new country of registration by conforming the aircraft to the local aviation authority’s regulations and requirements.”

Besides planning the C of A processes, you also need to nail down the details surrounding the pre-purchase evaluation, determine the aircraft’s home base, negotiate the delivery location and determine its effect on sales, use and other taxes, plan how you will move the aircraft through customs procedures, deal with currency fluctuations and understand potential cultural differences between the parties involved.

Let’s look at the airworthiness issues first. Typically, the seller is responsible for obtaining and paying for the Export Certificate of Airworthiness and the buyer is responsible for the Import Certificate of Airworthiness and any costs directly associated with the import of the aircraft.

Exploring the C of A Process

Harris says 15-25% of his business is aircraft export and import. The countries his company has exported or imported aircraft include Argentina, England, the United Arab Emirates, Brazil, Switzerland, Saudi Arabia, Canada, Ireland, Spain, Portugal, Mexico, Russia, Germany, Italy, Austria, Denmark and the United States. 

“In Europe, the European Union is fairly standardized and the FAA and EASA have some bilateral agreements, which really helps the process.

“The hardest is the import into the U.S. if the aircraft has been registered overseas,” he says. To do this, the exporting country will need to issue a de-registration from their country. A Designated Aviation Representative (DAR) or other FAA Representative will have to inspect the aircraft and its records for U.S. compliance. This inspection is comprehensive and is comparable to an annual-type inspection. We perform this inspection with our pre-purchase evaluation. A Certificate of Airworthiness is then issued for U.S. compliance and an Application for Registration is filed with the FAA.

One thing to be careful of in this process, Harris cautions, is that the importing country may require the installation of certain equipment or not recognize an upgrade or installation performed in another country. Dallas Jet imported a Falcon 50 from Switzerland to Dallas a few years ago. Harris says the seller had installed a TAWS (Terrain Awareness Warning System) system that tied the TAWS to a new Multifunction Display (MFD) from Universal. Switzerland’s Federal Office of Civil Aviation (FOCA) authorized the installation, he says, but the FAA didn’t approve it. Dallas Jet couldn’t obtain field approval for the installation, so the buyer had to pay to have the installed TAWS system removed and the original Collins MFD reinstalled--at a cost of $60-70,000.

Another pitfall can be found with the requirement for a Flight Data Recorder (FDR), Harris says. In the U.S., Part 91 aircraft don’t need an FDR. However, some countries require them. So the transaction team needs to check and make sure the aircraft has one if it is required.

In recent years, Harris continues, there have been some regulatory changes that affect aircraft that have been previously registered in the United States. These changes allow an aircraft that has previously been registered in the U.S. to skip the Export Certificate of Airworthiness. The new U.S. buyer just needs to show the FAA DAR that the aircraft is in compliance and has the required inspections for the Import Certificate of Airworthiness.

Aviation Legal’s Burgess clarifies that bridging an aircraft from its current registry to the purchaser’s registry isn’t always a direct process. “Sometimes, you can’t make a direct jump,” he says. Venezuela, for example, wants to see an Export Certificate, but not every agency issues Export Certificates.

He is currently bridging an aircraft from a Denmark registry to the FAA registry to the Venezuela Instituto Nacional de Aeronautica Civile (INAC) registry because they couldn’t go directly from Denmark to Venezuela.

There are Other Risks

Other potential risks in the export/import process rest with things like timing, currency fluctuations, local tax laws, applicable law, and Customs, to name a few. To read more about these potential concerns, read the full article in World Aircraft Sales here

Posted on: May 10, 2012

Written by: Brian Humes