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Comment: HNW Private Jet Buyers Turn To BVI Vehicles

Simon Lawrenson

Mourant Ozannes

23 April 2012

Simon Lawrenson, a partner in the Hong Kong office of Mourant Ozannes, examines the use of British Virgin Islands companies as the corporate vehicle of choice for high net worth individuals and companies in the acquisition, financing and leasing of corporate and private jet aircraft and helicopters.

The business-jet market has seen remarkable growth over the past fifteen years, notwithstanding the significant challenges posed by the recent global financial crisis. The evolution of fractional ownership programmes (the period 1995 to 2010 saw delivery of over 1,150 business jets to fractional operators), the growth of a new class of millionaires and billionaires in emerging markets such as Russia, the Middle East and more recently China, and the increasing use of corporate jets by companies for highspeed business travel, have all contributed to the market's increasing maturity.

Chinese interest is relatively new, and growing quickly. Recently local media have reported a 45.3 per cent growth in private jet acquisitions in mainland China for 2011. Last month a high profile joint venture between NetJets and a consortium of Chinese investors led by private equity firm Hony Capital and Fung Investments took place.

Additionally, Embraer recently estimated a rise in demand for private jets up to 11,200 aircraft by 2021, with the Asia Pacific region contributing between 16-19 per cent of total demand.

With aircraft order books beginning to bounce back and more liquidity available from private banks and institutional lessors, more and more purchasers and financiers will be looking to structure acquisitions using vehicles established in tax efficient, creditor friendly and cost-effective jurisdictions such as the BVI.

Why BVI?

The BVI has become a leading jurisdiction for the establishment of vehicles in connection with the acquisition, financing, sale and leasing of private and business-jet aircraft. But why BVI? A few suggestions:

•  Investor confidence: HNWIs, leading aircraft purchasers, lenders, arrangers and lessors have been utilising BVI companies as part of their acquisition finance structures for many years. The BVI is widely recognised as providing political, economic and legislative stability. As a result, market participants have developed a clear understanding and confidence in a tried and tested jurisdiction.

•  Tax neutrality: Tax planning and management are important considerations in the establishment and operation of an aircraft holding company. Except for nominal fees for the optional filings discussed below, there are no taxes, fees or other charges (including stamp duty) that are payable (either by direct assessment or withholding) in respect of the execution and delivery of the aircraft acquisition and financing documents. BVI companies are also exempt from income and corporate tax, whilst the BVI Government does not levy capital gains tax on companies incorporated under BVI business companies legislation.

•  Modern and flexible legislative framework: The jurisdiction offers commercial parties a legal regime based upon English corporate and common law principles that is modern and flexible whilst providing creditor friendly security enforcement procedures.

•  Pricing: The cost of incorporation and on-going corporate administration of a BVI company, as well as BVI legal fees are extremely competitive when compared against other leading financial centres.

Lender Protection

It is not uncommon for business-jet purchasers to finance their acquisition by way of a secured lending arrangement. A typical secured financing would, for instance, contemplate the borrower's (i.e. the BVI company) obligations being supported by an aircraft mortgage, the usual assignments of insurances, aircraft/engine maintenance support agreements etc. and potentially a guarantee by a HNWI or other third party.

Where a lender has taken security over the shares of the BVI aircraft holding company (typically held by or on behalf of the HNWI or the corporate owner) then a notation can be entered on the company's register of shareholders to evidence the existence of such security. Again, this acts to place third parties examining the register on notice of the existence of such security. It is also possible, where the parties agree, to file the annotated register with the Registry of Corporate Affairs, thereby placing on public record the existence of such security.

The security package, together with the filings and annotations, combine to create a clear and effective security package that will be recognisable and enforceable under BVI law – and which is attractive and acceptable to borrowers and lenders alike.

The future

As emerging markets in Asia Pacific, Africa and Latin America continue to grow and with them, the numbers of billionaires and multinationals increase, business-jets are likely to continue to be much sought after "productivity tools". With confidence in, and knowledge of, the legal systems of such emerging markets still developing, purchasers and financiers will wish to structure acquisitions in a stable, creditor friendly, tax neutral jurisdiction. The BVI is well placed to meet this continued demand.

This article was originally run in a longer form in Corporate Jet Investor.