To which major air law treaties is your state a party?
Brazil is a signatory to the Cape Town Convention (2001). There is some controversy over the effective date of the Cape Town Convention, which may have been 1 March 2012 or 15 May 2013. The Brazilian regulations concerning the use of irrevocable deregistration and export authorisations (IDERAs) and filings of international interests with the International Registry were not promulgated until late April 2014. Consequently, many of those two features of the Cape Town Convention were not effective until that time. No additional regulations or rules are needed to complete implementation of the Cape Town Convention; however, the tax authorities have never issued regulations relating to export clearances that are one of the authorisations that should be covered by IDERAs. See question 14 for a description of the precedent uses of IDERAs.
Brazil is also a signatory to the Chicago Convention (1944) and the Geneva Convention (1948). Brazil is also a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).
Brazil was a signatory to the Rome Convention (1939); however, when Brazil approved the Cape Town Convention, the Rome Convention approval was superseded.
As of mid-August 2016 Brazil has adhered to the Hague Convention relating to recognition of apostilled documents.Domestic legislation
What is the principal domestic legislation applicable to aviation finance and leasing?
Legal authority concerning aircraft finance and leasing is contained in several laws. The principal domestic legislation is the Brazilian Aeronautical Code (1986). The Brazilian Congress is currently considering a complete overhaul of the Aeronautical Code. The Cape Town Convention is the most recent legal authority approved by Brazil relevant to aircraft finance. The Brazilian Bankruptcy Law contains a special article relating to aircraft leases, which may eventually be deemed revoked or amended by the Cape Town Convention (see ‘Update and trends’ at the end of this chapter for a description of the current airline bankruptcy case involving Avianca Brasil). Laws relating to foreign exchange controls and import approvals also affect aviation finance and leasing, and the Brazilian Code of Civil Procedure still governs many aspects of aircraft repossession.Governing law
Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?
According to the Brazilian Aeronautical Code, contracts that deal with rights in rem over aircraft are governed by the law of registration of the aircraft. Consequently, mortgages and bills of sale over aircraft on the Brazilian registry have traditionally been governed by Brazilian law. According to Brazil’s declarations to the Cape Town Convention, the freedom of parties to choose governing law may have been expanded to agreements that deal with rights in rem, though this has not yet been tested. Generally, parties have freedom to elect the governing law of their choice for other aircraft finance agreements, such as leases and purchase and sale agreements. The Brazilian judiciary will apply the terms of foreign laws provided such terms do not violate Brazilian sovereignty, good customs or public morality. Two common provisions found in leases that are usually unenforceable in Brazil under these criteria are self-help remedies and unilateral option provisions that leave determinations to the discretion of one party.
Title transferTransfer of aircraft
How is title in an aircraft transferred?
In most cases title to aircraft is transferred by execution and registration of a bill of sale. The Brazilian Aeronautical Registry (RAB) has a few peculiar requirements, in particular a requirement that a bill of sale be signed by the transferor, the transferee and two witnesses. Mere delivery of a bill of sale does not effectively transfer title. A bill of sale must be recorded with the RAB to transfer title. Sales should also be recorded with the International Registry.Transfer document requirements
What are the formalities for creating an enforceable transfer document for an aircraft?
The general rules of documentary formalities (see question 16) apply to bills of sale subject to one important distinction, which is that bills of sale must be notarised by a notary who has witnessed all signatures. This makes the execution of undated bills of sale virtually impossible.
Registration of aircraft ownership and lease interestsAircraft registry
Identify and describe the aircraft registry.
The RAB is an owner register in the sense that ownership is obtained through registration with the RAB. Any change of ownership will be effective only upon registration with the RAB. A security interest created under Brazilian law is effective only upon registration with the RAB (international interests are effective upon registration with the International Registry). The RAB is occasionally referred to as an operator register because the Brazilian operator makes most of the applications.
The RAB maintains an engine registration book; however, entry of an engine in that book does not carry the same significance as registration of aircraft. In practice, the book is used mainly for the registration of spare engines. The RAB accepts engine contracts for registration (eg, engine leases). Engines connected with leased aircraft are rarely entered into the engine registration book. Because Brazil has adopted the Cape Town Convention the registration of international interests in engines is one of the best ways for engine owners and lienholders to secure their rights in aircraft engines.Registrability of ownership of aircraft and lease interests
Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?
Ownership interests in Brazilian-registered aircraft must be registered with the RAB. Equally, aircraft leases must be registered with the RAB. There are no limitations on the types of entities that may be registered as an aircraft owner. Until recently all operators had to be owned by Brazilians; however, owners may be non-Brazilian entities. In late 2018 some of the restrictions on foreign ownership of Brazilian airlines were relaxed; however, as of this time no Brazilian airline is majority owned by non-Brazilian shareholders.
The RAB is a centralised national register for aircraft. There are no other mandatory locations for registration.
In the past most leases and other aviation finance documents were registered in general notarial offices (known as RTDs or RDDs). Such registration was considered necessary for the purposes of admissibility in courts and official offices. Over the past few years this view has evolved and currently in most cases documents that have been registered with the RAB (eg, leases, mortgages, bills of sale) are usually considered admissible based on their RAB registration and are no longer registered with RTDs.Registration of ownership interests
Summarise the process to register an ownership interest.
Ownership interests are established by registration of a bill of sale with the RAB. The applicable notarisation, apostille and consularisation requirements and costs associated therewith are described in question 16. Title to an aircraft presumes title to the engines associated with that aircraft unless agreements expressly contain provisions that override this general principle. For aircraft already on the Brazilian register, the date of title transfer is considered the date on which the bill of sale is filed for registration with the RAB.
The RAB requires incumbency documents for entities that are registering bills of sale. For non-Brazilian entities selling aircraft that are already registered with the RAB, this evidentiary requirement is usually satisfied by submission of an apostilled (or, if applicable as explained in question 16, consularised) power of attorney demonstrating that the signatory in Brazil had authority to sign the bill of sale. Express mention of the authority to transfer title is necessary. If title to an aircraft was acquired outside Brazil, then the last bill of sale should be apostilled (or consularised, as applicable) and submitted to the RAB.
Major aircraft manufacturers are aware of the RAB’s requirements, and when delivering new aircraft to Brazilian operators customarily execute duplicate bills of sale for the purposes of registration with the RAB.
For aircraft owned by owner trusts, see question 20 for an explanation of an additional document registration requirement.
For engines the RAB does not register title per se, however, the RAB has announced plans to create an engine registration system in the future. Engine sales may be registered on the International Registry, which provides some evidence of ownership, though not necessarily conclusive evidence.Title and third parties
What is the effect of registration of an ownership interest as to proof of title and third parties?
Registration of an ownership interest with the RAB constitutes proof of title. At any time a third party can request a certificate (essentially a registry extract) from the RAB that will confirm the name of the owner and the holders of registered liens, and will describe all documents and agreements filed in respect of a particular aircraft such as leases. Third parties are entitled to rely on the accuracy of ownership and lien information in such certificates. Although inaccuracies in such certificates arise from time to time, the RAB will correct manifest errors on request.Registration of lease interests
Summarise the process to register a lease interest.
The procedure and requirements to register a lease interest are similar to the procedures described in question 8 in relation to ownership interests. Aircraft leases must be recorded with the RAB. The applicable notarisation, apostilling and consularisation requirements and costs associated therewith are described in question 16.
As with bills of sale, the RAB requires incumbency documents for entities that are registering a lease. For non-Brazilian entities selling aircraft that are already registered with the RAB, this evidentiary requirement is usually satisfied by submission of an apostilled or consularised power of attorney, demonstrating that the signatory in Brazil had authority to sign the lease. Unlike powers of attorney for bills of sale, which must contain express powers, general powers of attorney are usually adequate for the execution of leases.
In rare cases where leases are signed outside Brazil, the leases must be notarised and apostilled or consularised as described in question 16. Most cross-border leases are signed in Brazil by attorneys acting under apostilled consularised powers of attorney.
The costs to procure ‘sworn translations’ and to register leases are described in question 16. In most cross-border leases, lessees usually accept the responsibility for procuring translations of leases and registering leases with the RAB.Certificate of registration
What is the regime for certification of registered aviation interests in your jurisdiction?
There are two types of certificates of interest to financing parties: a certificate of registration and a registry extract (see question 9). A certificate of registration is the document issued to comply with article 29 of the Chicago Convention. A Brazilian certificate of registration identifies the name of the owner and the operator of an aircraft. It should be maintained on board an aircraft during operations. If an aircraft is mortgaged, a Brazilian certificate of registration will usually contain a notation that a mortgage exists; however, it will not provide details or even the name of the mortgagee.
A registry extract is a statement from the RAB confirming the name of the owner and any lienholders, and a description of all documents filed in respect of a particular aircraft. Parties can request registry extract certificates as often as they wish. There is no need for an original to be on board an aircraft at any time. In fact, there is no absolute need for a registry extract certificate to be issued at all. Financing parties usually require them because they serve as ‘bring down’ certificates to show the latest registration information on an aircraft and because they are more detailed than certificates of registration.
The RAB does not issue certificates of registration for engines. It is possible to obtain a registry extract certificate in respect of a spare engine that has a lease or other document filed in respect of it. Such certificates, however, certify the status of registered agreements but do not carry the same weight as certificates issued in respect of aircraft, which actually constitute aircraft ownership evidence.Deregistration and export
Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?
In normal circumstances, the Brazilian operator applies for deregistration and export authorisations. The RAB will not, however, deregister an aircraft without the express written consent of the owner and any registered mortgagee. The RAB rarely (if ever) gives notice to foreign owners and mortgagees. It simply does not deregister if the requisite consents are not presented with the deregistration application.
See question 14 for a description of the precedents involving deregistration by owners using IDERA. In principle, an operator may not block proposed deregistration based on the exercise of an IDERA; however, more detail is provided in question 14.Powers of attorney
What are the principal characteristics of deregistration and export powers of attorney?
Brazilian aviation finance transactions usually require the Brazilian lessee to issue a deregistration power of attorney. Most such powers of attorney purport to be irrevocable, and there is legal authority upholding the irrevocability of powers of attorney; however, the revocability issue is not entirely settled. A power of attorney would survive a bankruptcy restructuring, but it would not survive an order of liquidation. In practice, deregistration powers of attorney have been of limited utility; however, in a few cases they have been useful. Their utility has diminished significantly with the advent of Cape Town IDERAs. Now that the Cape Town Convention has been effective in Brazil for five years, most aircraft are covered by IDERAs.
The principal characteristic of deregistration powers of attorney is naming the lessor or owner as the lessee’s attorney-in-fact to act with the RAB and several Brazilian agencies involved in issuing export authorisations. It is prudent to mention the agencies by name.
Deregistration powers of attorney, if executed in English, should be registered with RTDs at the time of exercise of rights (see questions 7 and 16 for an explanation of RTDs).Cape Town Convention and IDERA
If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.
In Brazil’s implementation of the Cape Town Convention the use of IDERAs was approved. No leave of a court is needed to exercise rights under an IDERA.
To be effective an IDERA must be filed and registered with the RAB. The RAB will not countersign an IDERA as prescribed by the Aircraft Protocol to the Cape Town Convention; however, the RAB will mention the registration of an IDERA in a registry extract certificate (see question 11).
The RAB applies its usual filing requirements to IDERAs (ie, the requirements are described in question 16).
The RAB began accepting IDERAs for registration in late March 2014.
According to the RAB’s regulations, an aircraft will be deregistered within five business days of receipt of a request by an authorised party or its designee. The applicant must certify to the RAB that it has the consent of the holders of any superior liens. Since 2014, more than a dozen non-Brazilian owners have deregistered aircraft using IDERAs.
Most of those deregistrations arose in uncontested repossession cases. Court orders were not required. The RAB respected the five-business-day period stipulated in its regulations, including a few cases where the repossession was contested by the operator.
In late 2018, the Brazilian airline known as Avianca Brasil filed for bankruptcy restructuring. One of the rulings that has emerged from that case held that during a bankruptcy stay period the RAB cannot deregister aircraft based on IDERA applications. In fact the RAB itself recognised this limitation when the Avianca Brasil case commenced. Subsequently, the Bankruptcy Court extended the stay period beyond 30 days pursuant to a contested ruling and the RAB sought to deregister aircraft based on filed IDERA applications. The RAB was enjoined from processing those IDERAs by the Brazilian judiciary. The case relating to this exercise is pending decision at the time of this publication. As of this moment it appears that the RAB will remain prohibited from processing IDERAs during stay periods. What is uncertain is the duration of stay periods in future bankruptcy proceedings.
SecuritySecurity document (mortgage) form and content
What is the typical form of a security document over the aircraft and what must it contain?
Most Brazilian security agreements take the form of a mortgage. There are some other types of Brazilian security agreements, in particular a form of document called a fiduciary sale agreement, that occasionally attract the attention of financiers; however, most lenders are more comfortable with mortgages coupled with security assignments.
As mentioned in question 3, mortgages have traditionally been governed by Brazilian law and using a non-Brazilian law mortgage based on the Cape Town Convention is as yet untested. Most practitioners consider such mortgages to be valid ‘security agreements’ under the Cape Town Convention, thus creating international interests. Increasingly large asset-based securitisation and warehouse facilities do not require Brazilian-law mortgages.
Aircraft mortgages (regardless of governing law) may be executed in English and most of them are. The requirement of sworn translations, described in question 16, applies to mortgages.
According to the Brazilian Aeronautical Code an aircraft mortgage must contain certain information such as the amount secured and the interest rate of the underlying loan. This requirement frequently made financiers uncomfortable, considering that registered mortgages are in the public domain. In addition the inclusion of such information was difficult in large multi-aircraft financing transactions. Based on the Cape Town Convention the RAB no longer requires inclusion of the financial details of the underlying financing. Other requirements of the Brazilian Aeronautical Code such as identification of the insurance policies covering the mortgaged aircraft is still required, however, such information is relatively innocuous.
Under Brazilian law a mortgagee is not entitled to take possession of the mortgaged asset. The traditional remedy of a mortgagee is to prompt a court to take possession of the asset, auction it and then use the proceeds to satisfy the secured debt. This remedy is unattractive because of the relatively long period of time it would take to organise an auction and also to several other unknown factors in the process, such as whether the court would conduct the auction in US dollars or Brazilian currency, and the means to remit the sale proceeds from Brazil after the auction.
Brazil has a considerable number of aircraft lease repossession cases that have had fairly favourable results for lessors, including precedents in 2015, 2016 and 2018. Thus it is common to include security assignments enabling a mortgagee to ‘step into the shoes’ of a lessor and repossess an aircraft as the lessor’s assignee. Security assignments typically contain notices of assignment given to the Brazilian operator and acknowledgements or consent given by the Brazilian operator to a security trustee or the ultimate creditor. The Brazilian operator will usually agree to redirect payments to a security trustee and to recognise the exercise of lease remedies by the security trustee as assignee of the lessor.
There is a possibility that with the Cape Town Convention mortgagees will be allowed to repossess aircraft in their capacity as mortgagees, and not necessarily as assignees of lessors. Since most security packages include security assignments, there may be a need to test this issue in the future.Security documentary requirements and costs
What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?
The following are general rules that apply to all documents being registered with the RAB and not merely security documents:
- documents that are not written in Portuguese must be registered with a sworn translation. A sworn translation refers to a translation prepared by a licensed Brazilian translator;
- documents that are signed outside Brazil must be apostilled or consularised by the Brazilian consulate responsible for the jurisdiction where the signature has taken place. If the jurisdiction is a signatory to the Hague Convention then an apostille is sufficient. If the jurisdiction is not a signatory to the Hague Convention then the document must be consularised. In most cases the consulates require local notarisation as a prerequisite to consularisation. In some cases the apostille of a government officer is required for consularisation. The rules of the various Brazilian consulates vary. There are a few traditional exceptions to the consularisation rule. The main exception applicable to aviation contracts is France. Based on a bilateral treaty between Brazil and France, documents executed in France require notarisation but do not require an apostille or consularisation;
- documents signed in Brazil by attorneys-in-fact pursuant to notarised and apostilled or consularised powers of attorney do not require a further apostille or consularisation;
- the RAB usually requires the signature of two witnesses on all documents being submitted for registration;
- all signatures must be notarised. There is a notarisation method that allows for signatures to be notarised after execution, without the notary actually witnessing the signature. This allows for the submission of undated documents in custody pending a closing. This simplified notarisation procedure does not apply to bills of sale; and
- documents signed outside Brazil or in languages other than Portuguese that are not registered with the RAB would, for the purposes of admissibility, need to be registered with RTDs (see question 7).
Costs to comply with these documentary requirements vary. The cost to obtain a sworn translation averages US$30 per page; however, the actual cost is based on the number of characters in the Portuguese translation of the document. RAB registration costs are approximately US$7 per page. RTD filing costs vary the most depending on the contents of the document and the jurisdiction of the RTD. The usual basis for RTD registration costs is based on the ‘value of the document’. The RTD fees used to be subject to ceilings, and aircraft leases usually exceed the ceilings. However, even the ceilings can vary, sometimes being as little as US$2,500 or as much as US$8,500. Since 2016, the RTDs in the State of Rio de Janeiro and the RTDs of a few other jurisdictions eliminated ceilings and in those locations the RTD costs have risen sharply. This is what caused parties to question the need to make RTD filings in some cases. As mentioned in question 7 there is support for the position that RTD registration is unnecessary for documents registered with the RAB. This has become the norm in most aircraft finance transactions.Security registration requirements
Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.
Similar to ownership interest and lease documents, security documents creating liens over Brazilian-registered aircraft must be filed with the RAB and should be filed with RTDs to ensure admissibility. The procedures described in questions 8, 10 and 16 apply to security documents. International interests arising from mortgages and other security agreements must be registered with the International Registry.Registration of security
How is registration of a security interest certified?
As stated in question 11, a certificate of registration will mention that an aircraft is subject to a mortgage but will not include any details such as the name of the mortgagee. A registry extract certificate confirms the full details of all mortgages and registered liens over aircraft (see questions 9 and 11 regarding registry extract certificates). For the International Registry priority search certificates are procured.Effect of registration of a security interest
What is the effect of registration as to third parties?
Registration with the RAB confers priority over security interests registered subsequently unless an express agreement such as a subordination agreement is executed and establishes different priorities.
A third party interested in ascertaining the terms of a security interest may rely on a registry extract certificate (see questions 9 and 11). In addition, all the documents registered with the RAB are in the public domain, and third parties can obtain copies when necessary.Security structure and alteration
How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?
Security interests over aircraft are usually structured as mortgages. The concept of trusts is not recognised in Brazil, and there are no ‘Brazilian trusts’. But trusts from other jurisdictions are recognised as entities in Brazil and are frequently used to hold title or mortgage interests over aircraft registered in Brazil. Thus, many aircraft are registered in the names of owner trustees and many mortgages are registered in the names of security trustees.
In the case of owner trustees, there is no need to register changes in beneficiaries; however, since November 2013 the RAB has required the submission of trust agreements (which must be notarised, apostilled or consularised and translated as described in question 16). Although the RAB regulation does not expressly mention amendments to trust agreements, parties should consider submitting trust agreement amendments to the RAB. Trust agreements are not registered with the RAB per se. They are submitted for and retained in the RAB’s internal records.
A security trustee may hold a mortgage interest for a large group of lenders or for a changing group of beneficiaries such as new lenders without affecting the security. Loan transfers would not affect the security. The only party with registered rights as a lienholder in Brazil would be the security trustee. The lenders’ recourse against the security trustee would not be a Brazilian issue and would be adjudicated outside Brazil.Security over spare engines
What form does security over spare engines typically take and how does it operate?
For the purposes of encumbrances, spare engines tend to be treated in the same way as aircraft. Spare engine mortgages should be registered with the RAB and RTDs for the reasons given above in respect of aircraft mortgages.
A security interest over a financed aircraft creates a security interest over the aircraft’s engines unless the security agreement expressly includes stipulations to the contrary. Engines should be described by model and serial number in aircraft mortgages. Whether an engine is installed on the aircraft at the time of creation is irrelevant to the creation of the lien (though location may have tax consequences).
It is generally understood that the installation of an engine on an airframe does not transfer title to that engine to the owner of the airframe. Equally, the removal of an engine from an airframe does not cause any title transfer. This principle has not been tested frequently; however, there have been a few challenges to this principle in recent years. In the major bankruptcy case of Varig airlines in 2005 and 2006, this principle was upheld and disputes over engine ownership did not arise (disputes over other parts did arise in that case). With the introduction of engine registrations under the Cape Town Convention, the tendency is that this principle will be fortified in Brazil. To date this issue has not arisen in the ongoing Avianca Brasil bankruptcy.
An engine that has been encumbered though registration of a mortgage or security agreement with the RAB will cease to be encumbered when a release is filed with the RAB.
Helicopter engines require special attention because of the frequency with which they are swapped from their airframes with the intention of title swaps. The general rules applicable to fixed-wing aircraft engines apply to helicopter engines as well; however, these rules do not always coincide with the commercial agreements relating to helicopter engine maintenance.
For engines (spare or otherwise) leased or acquired after 15 May 2013, international interest and sale registrations should also be made on the International Registry to obtain rights under the Cape Town Convention.
Enforcement measuresRepossession following lease termination
Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?
Self-help remedies for repossession are not available in Brazil, even with the advent of the Cape Town Convention. If a lessee is in default under an aircraft lease, the lessor may seek an immediate repossession order from a Brazilian judge. Based on a High Court decision, it is usually advisable for the lessor to give the lessee written notice of the default, even in the absence of a contractual obligation to provide such notice. In prior aircraft repossession cases filed against operators and airlines that were not undergoing bankruptcy reorganisation procedures, the Brazilian courts have been fairly efficient in granting preliminary injunctions placing leased aircraft in the possession of the lessor. This proved true in late 2018 when four aircraft were repossessed from Avianca Brasil prior to that airline seeking bankruptcy restructuring protection. These orders are not the equivalent to a summary judgment since they do not always allow the lessor to export and deregister the aircraft until after the lessee has had an opportunity to present a defence. In the repossession cases filed in late 2018, however, courts did allow for immediate export and deregistration. After a lessee presents a defence the court may grant the lessor definitive possession of the aircraft. At that point such a ruling would be roughly equivalent to a summary judgment.
In short, a lessor can obtain preliminary possession in a matter of a few days. A summary judgment could be obtained in a matter of a few weeks or months, though much would depend on the lessee’s defences.
The Brazilian Code of Civil Procedure that was in force and effect until the second half of March 2016 provided many opportunities for parties to file interlocutory appeals so lessees could try to slow proceedings by appealing decisions, including decisions on non-substantive issues. A new Code of Civil Procedure, which became effective in March 2016, is supposed to reduce the number of opportunities for filing interlocutory appeals. Based on the Avianca Brasil case to date this expectation seems to have been borne out for pre-bankruptcy cases. Once an operator commences a bankruptcy procedure, however, the number of interlocutory appeals seems to be as high as with the prior Code of Civil Procedure.
The reply to this question summarises a complex area of practice, and the advice of local counsel should always be sought whenever a lessor contemplates repossession.Enforcement of security
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
For the reasons explained in question 15, enforcement of security interests over aircraft in Brazil is rare. It will almost always be advantageous for the mortgagee to repossess an aircraft as assignee of a lessor and then to foreclose on a mortgage in an effort to force a court-supervised sale of the aircraft. Self-help remedies to repossess are illegal, and the basic remedy a mortgagee has under a Brazilian law mortgage is to cause a court to seize and auction the mortgaged asset. Arguably any holder of an international interest, including a mortgagee, should have Cape Town Convention remedies, such as taking possession, available. This has not yet been tested in Brazil, though mortgagees taking possession as assignees of lessors has been tested in the past.Priority liens and rights
Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
According to the Brazilian Aeronautical Code, an aircraft mortgage will prevail over the ownership rights of the aircraft of the mortgagor and of any other third party, other than the following:
- court costs;
- employee credits;
- airport fees;
- amounts relating to emergency services to the aircraft;
- amounts paid directly by a pilot while discharging his or her duties when the same are indispensable for continuation of the flight; and
- amounts spent on maintenance.
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
Any valid judgment for a definite sum given by a competent court outside Brazil would be recognised and accepted by the Brazilian courts without retrial or examination of the merits of the case after ratification by the Brazilian Superior Court of Justice. To be ratified by the Brazilian Superior Court of Justice, a foreign judgment must meet the following requirements:
- it must comply with formalities necessary for its enforcement under the laws of the place where it was rendered;
- it must have been given by a competent court after proper service of process on the parties or after sufficient evidence of the parties’ absence has been given, as established pursuant to applicable law;
- it may not be subject to appeal;
- it may not be contrary to Brazilian sovereignty, public policy or morality;
- it must be duly apostilled pursuant to the Apostille Convention or authenticated by the competent Brazilian Consulate and be accompanied by a sworn translation into the Portuguese language; and
- it may not be a decision on any matter over which the Brazilian judiciary has exclusive jurisdiction.
Any urgent interlocutory decision given by a competent court outside Brazil would be recognised and accepted by the Brazilian courts without retrial or examination of the merits after ratification by a Federal Court with proper jurisdiction. The same requirements enumerated above, with the exception that a judgment may not be subject to appeal, would apply to the enforcement of any such urgent interlocutory decision.
Brazil is a party to the 1958 New York Convention.
Generally, in practice, when dealing with aircraft physically located in Brazil, the time and cost required to enforce foreign judgements in Brazil makes use of foreign courts impractical in aircraft finance transactions. If repossession is required it will rarely be in the interest of the lessor or owner to follow the procedures of obtaining a foreign judgment and enforcing it in Brazil. Proceeding through the Brazilian judiciary will almost always be substantially faster. The position might differ in respect of aircraft that are used on international routes and located outside Brazil from time to time or when a creditor is seeking a monetary award.
Taxes and payment restrictionsTaxes
What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?
Operating lease payments
Rent payments made to lessors incorporated in jurisdictions that are not considered tax havens under Brazilian law are exempt from withholding taxes. Actually, there is no ‘withholding tax’ per se. The relevant tax is Brazilian income tax that is withheld at source. There is a possibility that a lessee would have to withhold income tax on lease payments that do not relate to rent (eg, default interest). Maintenance reserves have not been subjected to any withholding tax.
Tax havens are defined as jurisdictions with annual corporate income tax rates under 20 per cent. The Brazilian Federal Revenue Service also publishes a list of countries that are deemed tax havens for taxation purposes. The list includes most offshore jurisdictions (eg, the Bahamas, Bermuda, the Cayman Islands, the Channel Islands and Singapore). In September 2016 Ireland was added to the list of tax havens. Neither the United States nor any state of the United States is on the tax haven list. Until October 2016 it was generally assumed that operating lease payments made to lessors incorporated in jurisdictions that are considered tax havens under Brazilian law would be subject to Brazilian income tax withheld at source (ie, in Brazil), at the rate of 25 per cent of the amount of the payment, however, following an uproar that arose in September 2016 when Ireland was added to the tax haven list, the Brazilian tax authority issued a clarification that operating lease rentals are not subject to the withholding tax even if the lessor is located in a jurisdiction that is considered a ‘tax haven’. This applies to leases signed prior to the end of 2019 and to payments due prior to the end of 2022.
Finance lease payments
The interest portion of all payments would be subject to withholding tax of 15 per cent (or 25 per cent in the case of payments to tax havens); however, there is an exemption from this withholding tax that will remain in effect until the end of December 2022. The exemption applies to commercial airlines only.
There are virtually no direct loan transactions for aircraft finance in Brazil. Payments would be subject to a 15 per cent withholding tax on the interest portion of each payment (25 per cent in the case of payments to tax havens).
If title to a Brazilian-registered aircraft is transferred between two non-Brazilian parties, the only tax that might be applicable would be capital gains tax on the sale. Although this tax has been applicable since 2004, the Brazilian tax authorities have not sought to impose it on sales between non-Brazilian entities. There are questions concerning the jurisdiction of the Brazilian tax authorities over sales that do not involve any Brazilian taxpayer. If a Brazilian party is involved in such a sale, several taxes such as a state VAT and federal excise tax would be applicable.
Circulation of goods and services tax and industrial products tax
There are two taxes that might be assessed on aircraft imports. These taxes are the responsibility of the Brazilian airlines. The airlines rarely pay these taxes as there are a number of legal methods available to avoid their assessment. One such tax is the circulation of goods and services tax. It is a state VAT-type tax. At least two Brazilian states do not apply it to commercial aircraft imports, and in other states there are arguments that allow airlines to obtain injunctions to avoid paying the tax. A Brazilian Supreme Court ruling supports the position that ICMS is not due on lease payments other than the final payment in a finance lease.
The industrial products tax is a federal excise tax. It has a zero rate for most commercial aircraft, so Brazil’s airlines are rarely concerned with it. For helicopter operators there is no exemption and importers usually pay it, though occasionally air taxi companies are able to obtain injunctions to avoid such payment. The rate is 5 per cent for air taxi companies and 10 per cent for other importers.
Gross-up provision of aircraft leases and other aviation finance agreements are usually valid.
Contribution for social security financing tax
COFINS is an additional tax on imports, and this was not applicable to aircraft imports in past years. Based on a change in law that occurred in 2013 the Brazilian tax authorities began to assess the COFINS tax on aircraft imports beginning in the last quarter of 2014. Airlines have been challenging the assessment of the COFINS tax on imports of commercial aircraft under lease agreements. To date, most airlines have been able to avoid paying COFINS tax; however, this has been based on interim judicial rulings and not on final decisions on the merits of the applicability of the COFINS tax. If and when applicable, the COFINS tax would be 1 per cent of the value of an aircraft at the time of import. The COFINS tax is due from the Brazilian importer of an aircraft.
Brazilian tax is complex and the foregoing explanation is a brief summary that should be verified with local counsel.Exchange control
Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?
Brazil has strict foreign exchange controls. A Brazilian aircraft lessee must register the financial terms of a lease with the Central Bank of Brazil through a computerised system called SISBACEN. The Central Bank registration in SISBACEN is commonly referred to as the ROF (financial transaction registration). The only common exception to such registration applies to leases with terms of less than 360 days. The registration usually takes one to two business days, though this period can vary. In normal ROF registration procedures, the operator does not need to submit the written lease to the Central Bank; however, the Central Bank has the right to require submission of a lease at any time.
Central Bank ROFs approve regularly scheduled payments due under a lease (eg, rent and maintenance reserves). Irregular payments such as default interest or losses and damages must be approved by the Central Bank on an ad hoc basis, before remittance. At present it is fairly easy for Brazilian lessees to obtain such approval.
The payment of insurance proceeds is also subject to Central Bank of Brazil approval, which is usually obtained without difficulty.Default interest
Are there any limitations on the amount of default interest that can be charged on lease or loan payments?
There are usury rates in Brazil; however, there are questions as to whether such rates would apply to cross-border leases or loans. At present the limits are in the region of 13 per cent per annum so the issue does not arise frequently. Several years ago the Central Bank of Brazil limited default rates to 225 or 250 basis points over the regular rate of interest in a lease; however, those limitations have not been applied in recent years.Customs, import and export
Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?
Generally, lessors do not incur significant costs to bring aircraft into Brazil or to export them. In amicable situations the industry standard is that the Brazilian lessee bears all import and export-related costs. In a repossession scenario, a lessor will incur costs that can be significant; however, those costs are not charges of government agencies. The main costs in a repossession and export are legal fees, customs broker fees, court filing fees (usually 1 per cent of the value of a claim) and storage and maintenance costs. For example, in a repossession action if a lessor obtains preliminary relief but has to wait for a final decision the storage and maintenance costs will be borne by the lessor. Such costs may be contractually chargeable to the lessee; however, in an adverse repossession case recovery of those amounts from a lessee may be difficult. Lessors or owners repossessing aircraft through the courts must also post bonds; however, such bonds are not costs per se since they are returned to the plaintiff at the end of the proceedings, assuming the plaintiff prevails. There is some variation in the bond. As a general rule, 10 to 20 per cent of the amount of overdue rent is typical. See question 33 regarding liability.
Insurance and reinsuranceCaptive insurance
Summarise any captive insurance regime in your jurisdiction as applicable to aviation.
Brazilian aircraft operators are required to place all primary insurance with Brazilian insurers, and Brazilian primary insurers were, until the end of 2016, required to offer 40 per cent of all reinsurance risk to reinsurers registered in Brazil on a right of first refusal basis. In the past, the Brazilian reinsurance market did not take up all of the 40 per cent risk offered to it, so the effective reinsurance percentages underwritten by reinsurers outside Brazil were usually higher than 60 per cent.Cut-through clauses
Are cut-through clauses under the insurance and reinsurance documentation legally effective?
Cut-through clauses are valid provided the primary insurer is insolvent. In the absence of such insolvency, cut-through clauses may be deemed unenforceable.Reinsurance
Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?
Assignments of reinsurance are legally effective and are typically included in aviation lease and finance transactions.Liability
Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?
Generally, operators are liable for the operation of aircraft provided the agreement assigning operational responsibility is registered with the RAB. Therefore, in the case of leased aircraft, lessees (or sub-lessees where applicable), and not owners, are liable. In the absence of registration of the lease or operational agreement (which is rare), an owner would be presumed to be liable. If an aircraft is leased pursuant to an unregistered lease then the owner and operator would be jointly and severally liable for the operation of the aircraft.Strict liability
Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?
As explained in question 33, parties with no operational interest are not liable for the operational consequences of aircraft. In litigious situations there is always a risk of a victim lodging a claim against an owner, lessor or financier; however, the Brazilian Aeronautical Code places operational responsibility on the operator.Third-party liability insurance
Are there minimum requirements for the amount of third-party liability cover that must be in place?
The Brazilian Aeronautical Code contains minimum third-party liability requirements commonly referred to as RETA. The RETA requirements are fairly low. The US dollar equivalent varies in accordance with currency fluctuations and other factors, but is in the region of US$30,000 per person. Virtually all lease or other aviation finance contracts contain insurance requirements in line with international practices in relation to insurances. RETA cover is rarely, if ever, relied on as adequate in an aircraft finance transaction.
Update and trendsRecent developments
Are there any emerging trends or hot topics in aviation finance and leasing in your jurisdiction?
As mentioned in a few of the foregoing replies, the Brazilian airline known as Avianca Brasil (whose formal name is Oceanair Linhas Aereas SA) has been in financial distress for several months. In November and December of 2018 lessors repossessed four of its leased aircraft. Those repossession cases, though Avianca Brasil contested them, proceeded without delay. The lessors of those aircraft, within a period of two weeks, were able to file for repossession, take physical possession (through a court order), export and deregister the four aircraft. IDERAs were used to deregister. The RAB issued clear regulations in 2014 that it has consistently applied to enable parties named as ‘authorised parties’ in IDERAs to deregister. There are some doubts about whether foreign lessors or owners are obligated to obtain export authorisations for repossessed aircraft. The Brazilian tax and customs authorities have not clarified how IDERAs might be used to export repossessed aircraft (or even if there is a need to obtain an export authorisation).
Avianca Brasil sought bankruptcy protection on 10 December 2018 and since then several questionable decisions have emanated from the Brazilian judiciary. The most controversial relates to the stay period applicable to an airline in bankruptcy protection (called ‘judicial recuperation’ in Brazil). According to the Brazilian Bankruptcy Law, lessors are not subject to any stay when an airline seeks judicial recuperation protection. According to Brazil’s Cape Town Convention Declarations, the ‘waiting period’ is 30 days. Thus the stay period applicable to Avianca Brasil should have been zero days or, at most, 30 days (the view of this author is that the correct period, according to the Cape Town Convention, would be zero days). But contrary to most expectations the Brazilian Bankruptcy Court extended the 30-day waiting period, initially for 15 extra days and then, on 1 February 2019, the Court extended the stay until time during the first half of April. As at the time that this chapter has been updated, those extensions are under appeal.