Summary: With effect from 1 January 2017, a number of amendments to Russian law have come into force which will affect aircraft leasing arrangements for lessors and financiers that have aircraft leased or financed with Russian operators. These amendments have started to affect negotiations and re-negotiations of leases with Russian operators in recent months. Below we highlight the key amendments:

1. Beneficial ownership confirmations

In order to enjoy reduced withholding tax rates under any applicable double tax treaty (e.g. between Russia and Ireland or Russia and Cyprus), a foreign entity having a source of income in Russia (such as lease payments from a Russian lessee) will now need to provide its Russian withholding tax agent (e.g. the Russian lessee) with a statement confirming its beneficial ownership right to such income, in addition to a confirmation of its tax residency certified by the relevant foreign state authority and translated into Russian. Before these amendments the tax residency certificate was the only document explicitly required under the law for these purposes.

Both documents must be provided before the date of payment of the taxable lease income and, in the case of recurrent payments, before the first payment in each tax year. It is possible that the lessee acting as a tax agent may request other documents confirming the beneficial ownership right of the foreign lessor to the lease income to comply with the new requirements.

If the lessee is not provided with the above documents by the date of payment, it is obliged by law to withhold from the payment tax at the rate applicable under Russian domestic law (e.g. twenty per cent (20%) on lease payments in most cases). Otherwise, the lessee may be subject to substantial fines and late payment interest. Given the new requirements, it is likely that Russian lessees will insist on including in lease agreements with foreign lessors the lessor’s obligation to provide them with these confirmations.

It is worth noting that in some jurisdictions it might be difficult for a foreign lessor to obtain a tax residency certificate before the first lease payments in a tax year (e.g. in January). In such a case the parties may wish to adjust the payment schedule to bring forward a lease payment in the first month of the tax year to the last days of the previous tax year. Otherwise, the lease documents might need to give the lessor an appropriate grace period for providing the original tax residency certificate in each new tax year taking into account the actual time required for obtaining the certificate in its jurisdiction.

However, where a foreign lessor benefits from an unqualified gross-up clause in a lease, it may elect to remain passive on this subject. At the same time this may result in significant losses for a Russian lessee acting as its Russian withholding tax agent.

2. Compulsory reinsurance

New amendments to the Russian insurance law have introduced the compulsory reservation of up to 10% (ten per cent) of the reinsured risks under the vast majority of the reinsurance policies effected by Russian insurers. A Russian insurer is now required by law to offer 10% of the reinsured risks to Russian National Reinsurance Company (“NRC”). When NRC gets an offer, it is intended that it accepts, decreases or declines this 10% share for reinsurance within the period provided by the offer.

When accepting the risks for reinsurance, NRC is required to (i) comply with the terms of other reinsurance policies in place (including those provided by foreign reinsurers) and (ii) follow the decisions taken by the reinsured in case an insured loss occurs and in case an insurance claim is paid. However, for now it is not clear how these provisions, which on the face of it are favourable to international lessors, will work in practice.

As a result, this requirement could affect leases involving Russian lessees where (i) insurances in respect of an aircraft are effected with Russian insurers and (ii) a lessee is obliged to maintain a certain level of reinsurance of the insured risks with the leading international reinsurers or through recognised brokers. In our experience, most of the leases entered with international lessors in the Russian market provide for this type of requirement.

The amendments apply to the reinsurance policies effected in 2017, and, starting from 1 January 2018, to those effected before 2017 as well.

Such amendments have the potential to require changes in lease agreements with Russian operators. Lessors and financiers should assess both commercial and legal risks posed by the changes and either adopt a pro-active approach with their Russian lessees or expect them to request changes in documentation.