Closing the Deal: Getting Cross-Border Business Aviation Transactions Done Right

Differences in law as well as cultural differences can prolong international aircraft transactions. Assembling a good team of legal and technical professionals, as well as an aircraft broker familiar with international transactions, is essential for a successful transaction. Such a team can help potential buyers navigate the following key issues.

Technical Issues Can Create Major Costs/Headaches

It is critical to have knowledgeable technical experts experienced in international transactions to advise on a range of technical issues, such as:

• The aircraft may need an Export Certificate of Airworthiness and will need to be inspected by a Federal Aviation Administration (FAA)-Designated Airworthiness Representative (DAR). DARs can differ in expertise and opinion, so it is important that the same DAR who does the inspection also is available to issue the Certificate of Airworthiness upon registration of the aircraft with the FAA.
• There may be differences in equipment required between the FAA and European Union Aviation Safety Agency (EASA)-certificated aircraft.
• Changes to aircraft configuration approved by one authority may or may not need revalidation.

Be Aware of Legal Differences

Understanding and being flexible, where possible, on key legal issues can often resolve legal impasses. For example:

• While used aircraft transactions in the United States are typically "as-is, where-is" with broad disclaimers regarding the condition of the aircraft, that is not the norm in some jurisdictions, where there is an expectation that the seller will warranty the condition of the aircraft.
• In Europe and the United Kingdom, it is common for sellers to ask for "tail coverage" insurance covering the seller for some period following the sale. Although rare in U.S. transactions, this coverage is available in the United States.
• Some jurisdictions require original signature pages, notarized or apostilled documentation. This can delay a closing if such requirements are not identified early in the transaction.

Timing and Location of Closing and Deregistration/Registration

One common area of dispute is when and where title will pass. This is complicated for a number of reasons:

• Non-U.S. sellers may be uncomfortable closing in the United States because of a lack of familiarity with U.S. tax laws. Similarly, U.S. sellers will have concerns about value-added tax (VAT) and other potential taxes when closing abroad. When closing in foreign jurisdictions, we often recommend engaging local aviation counsel/tax experts to advise our U.S. clients.
• A seller typically wants payment when it files to deregister the aircraft from its jurisdiction, whereas the buyer will not want to release funds until the aircraft is registered in its country. Given that the deregistration of title process can take several days in some cases, this can create an impasse. Careful drafting of the "closing room" clause can often satisfy both parties' concerns.

Hammer Out Commercial Terms in the Offer/Letter of Intent (LOI)

While the LOI in a domestic transaction is often very short, the number and types of issues that may be potentially contentious in a cross-border deal are significant and should ideally be ironed out at the LOI stage. Such issues include the closing location, choice of law, which party pays for ferry flights and export certificates of airworthiness, and the scope of the prepurchase inspection.

Be Cognizant of Cultural Differences

Cultural differences also can delay a closing. Such differences can impact negotiations of the purchase agreement. For instance, although U.S. practice is to follow the terms of a nonbinding LOI, in some cultures, aggressive bargaining may continue on material terms – even during the delivery phase.

Being flexible and compromising on certain terms, without losing the overall value of the transaction, is important in order to not delay closing. In addition, prior to engaging in negotiations, it may be prudent to inform the U.S. party that such aggressive negotiations may occur.

Complying with Import/Export Requirements

Separate from the aviation regulatory requirements associated with international transactions (e.g., registration, deregistration, export certificates of airworthiness, etc.), aircraft being sold cross-border are treated as "merchandise" and subject to different export, import and tax considerations than when carrying passengers in the normal course of business.

• Aircraft entering the United States for the purpose of sale must generally be "permanently imported" for customs purposes at the time of entry, even if they are coming into the United States for a prepurchase inspection where the purchaser can and may reject the aircraft. This should be clearly documented in the purchase agreement and discussed with the broker/seller to ensure that the import process is followed.
• When exporting from the United States, all parties need to ensure that the export is in compliance with U.S. export control and export clearance laws, including making an Electronic Export Information (EEI) filing when required in connection with the export of aircraft. (See Holland & Knight's previous client alert, "Avoiding Pitfalls When Exporting Aircraft from the United States," for helpful tips and guidance.)
• When purchasing an aircraft from a foreign seller and the aircraft was originally exported from the United States, it is important to make sure that the aircraft was exported properly. In some circumstances, when the aircraft was not properly exported, a corrective EEI filing may have to be made prior to importing the aircraft.

Conduct Enhanced Know Your Customer (KYC) Due Diligence

With international aircraft transactions, increased compliance risks warrant enhanced due diligence:

• A number of business aircraft owned or formerly owned by Russian nationals are on the market. While it is possible to do such deals, where the Russian national is not sanctioned, these deals are complex and require substantial diligence, and in some cases authorization from the U.S. government may be required. (See Holland & Knight's previous alert, "Navigating Russian Sanctions in Corporate Jet Transactions.")
• The U.S. government believes that drug cartels are routinely buying older business aircraft to use for drug smuggling or other criminal activity. Hence, when selling older aircraft to South American and Central American buyers, additional diligence is required.

The Holland & Knight Difference

Holland & Knight has the depth and experience to handle cross-border transactions in many jurisdictions, with aviation attorneys in the United States, U.K. and Mexico who are supported by experienced aviation finance and international tax practitioners. Our attorneys have successfully navigated complex commercial and business aircraft cross-border deals around the world.

For more information or questions about a specific situation involving your organization, please contact the authors or another member of Holland & Knight's Business Aviation Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.