Overview

Conventions

To which major air law treaties is your state a party?

South Korea signed up to the Chicago Convention (1944) on 11 December 1952 and the New York Convention (1958) on 9 May 1973. The country is not a party to the Rome Convention (1933), the Geneva Convention (1948) or the Cape Town Convention (2001).

Domestic legislation

What is the principal domestic legislation applicable to aviation finance and leasing?

The principal domestic legislation includes:

  • the Aviation Safety Act;
  • the Aviation Business Act;
  • the Act on Mortgage on Vehicles and Other Specific Movables; and
  • the Decree on Aircraft Registration.
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?

Parties may agree on the governing law (Article 25 of the Act on Private International Law); however, real rights in aircraft must be governed by the law of the country in which the subject matter is registered (Article 20 of the Act on Private International Law). Therefore, contracts regarding the transfer of interests in or creation of security over aircrafts registered in South Korea must be governed by South Korean law.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

A transfer of title in an aircraft will become effective only on registration thereof (Article 9(1) of the Aviation Safety Act); physical transfer will not be sufficient. In addition, a mortgage over an aircraft must be registered to be properly established (Article 5(1)(6) of the Act on Mortgage on Vehicles and Other Specific Movables) and rights to lease an aircraft must be registered to be effective against third parties.

Transfer document requirements

What are the formalities for creating an enforceable transfer document for an aircraft?

Any person intending to transfer or take ownership of an aircraft or the right to lease a registered aircraft must file an application with the Ministry of Land, Infrastructure and Transport (MOLIT). This must state the names and addresses of the transferor and transferee, and must be accompanied by documents evidencing the following:

  • The transferee is not a restricted person under Article 10(1) of the Aviation Safety Act.
  • The transferor has title or a leasehold interest in the aircraft.

A public office that has disposed of an aircraft by public sale must, on the request of an obligee of registration, attach to the request for registration documents evidencing the reason for the registration of transfer and commission the MOLIT to register such transfer, without delay.

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

The basic laws relevant to the aircraft registration system in South Korea are:

  • the Aviation Safety Act;
  • the Decree on Aircraft Registration; and
  • the Aircraft Registration Regulations.

Any party that owns or leases – and thereby has a right to use – an aircraft must register the aircraft with the Ministry of Land, Infrastructure and Transport (MOLIT) (Article 7 of the Aviation Safety Act).

In accordance with Article 18 of the Chicago Convention, South Korea prohibits dual nationality of aircraft and Article 10(2) of the Aviation Safety Act prohibits the registration of aircraft that are already registered overseas.

For each registered aircraft, the MOLIT maintains a separate register (Article 5(1) of the Decree on Aircraft Registration) with a section for recording matters relating to:

  • aircraft markings;
  • ownership and title; and
  • lease rights and mortgages (Article 5(2) of the Decree on Aircraft Registration).

Civilian aircraft and aircraft owned by the government or local authorities for the purposes of disaster relief are subject to registration. However, the following need not be registered:

  • aircraft used by the military, Customs or the police service;
  • aircraft to be leased to foreign jurisdictions (thereby acquiring foreign nationality);
  • aircraft manufactured domestically but without a determined owner; and
  • aircraft with foreign nationality but being leased and operated domestically (Article 4 of the Aviation Safety Act Enforcement Decree).

In connection with the 83bis arrangement, the MOLIT has issued the Handbook on the Transfer of Rights in International Leasing (Regulation 230 of the MOLIT). The purpose of the handbook is to provide guidance on matters relating to the mutual transfer of responsibility and authority in respect of aircraft airworthiness when leasing between South Korea and other contracting states, and applies where responsibilities and authorities relating to airworthiness of an aircraft being leased between South Korea and a contracting state are being transferred (Articles 1 and 2 of the handbook).

There is no separate registration system for aircraft engines in South Korea and title to an engine automatically vests in the aircraft owner.

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 or lease interest in aircraft must be registered on the aircraft register; no other register exists for aircraft (Article 7 of the Aviation Safety Act). The acquisition, loss or alteration of ownership of an aircraft is effective only on registration (Article 9(1) of the Aviation Safety Act). Where an aircraft is owned or leased by a foreign party, it cannot be registered in South Korea. However, if South Korean citizens or corporations have the right to lease or use such an aircraft, then it may be registered (Article 10(1) of the Aviation Safety Act). Even so, an aircraft with foreign nationality cannot be registered in South Korea (Article 10(2) of the Aviation Safety Act).

Registration of ownership interests

Summarise the process to register an ownership interest.

The applicant must be the person anticipated to be the registered title holder, although an application may be made through an agent (Articles 10(2)(1) and (3) of the Decree on Aircraft Registration).

An application to register an aircraft must be submitted to the MOLIT in person in the form prescribed by the Decree on Aircraft Registration (Annex 5 of the Aircraft Registration Regulations) and certain documents (Articles 11 and 12 of the Decree on Aircraft Registration). The following information must be provided on the application form and signed by the applicant or its agent:

  • the type of aircraft;
  • the aircraft manufacturer;
  • the manufacturing number and date;
  • the aircraft registration mark (if applicable);
  • the place in which the aircraft is parked;
  • the applicant’s name and address;
  • the agent’s name and address (if applicable);
  • the purpose of registration;
  • the date of application; and
  • such other information as the MOLIT may request.

Under Article 20(1) of the Aircraft Registration Regulations, the application form must be accompanied by:

  • documentation evidencing:
    • a copy of the agent’s authority to submit on behalf of the applicant (if applicable);
    • that the title holder is not a restricted person under Article 10 of the Aviation Safety Act;
    • the title holder’s ownership of the aircraft;
    • the applicant’s certificate of seal (a non-resident alien in South Korea or a foreign corporation without an operating office in South Korea may submit copies of its certificate or confirmation of incorporation but must thereafter submit originals within seven days of submitting the application) (Article 16 of the Aircraft Registration Regulations);
    • the aircraft acquisition price; and
    • payment of acquisition tax and registration tax (including all receipts and notices);
  • aircraft specifications and performance details (in the form prescribed under Annex 12 of the Aircraft Registration Regulations); and
  • two photographs (in hard and soft copies) of the left and right sides of the aircraft. (For aircraft being imported from abroad, the photographs may be submitted within seven days of the application.)

If the application form comprises two or more pages, each page must be indent-stamped (Article 13 of the Aircraft Registration Regulations).

The application process is as follows:

  • submission of application;
  • review of application;
  • internal report;
  • approval;
  • recordal in aircraft register; and
  • preparation and issuance of certificate of registration.

Where two or more applications are submitted simultaneously and the same documents are attached to the applications, the second application will be deemed to have attached the requisite documents, provided that the applicant attaches all requisite documents to the first application and notes in the second that the relevant documents are attached to the first (Article 15(2) of the Aircraft Registration Regulations). The application reference numbers will be granted in the order in which the applications are submitted. A prescribed form of the aircraft register can be found at Annex 1 of the Aircraft Registration Regulations and is completed and maintained by the MOLIT in accordance with Articles 5 to 8 of the Decree on Aircraft Registration and Articles 2 to 8 of the Aircraft Registration Regulations.

Title and third parties

What is the effect of registration of an ownership interest as to proof of title and third parties?

The acquisition, loss or alteration of title in an aircraft must be registered to be effective (Article 9(1) of the Aviation Safety Act). The party named on the aircraft register is assumed to be the owner of the aircraft. However, there is a risk of loss of ownership if the registration is invalid or terminated as the register does not have public authority.

Registration of lease interests

Summarise the process to register a lease interest.

In principle, the lessor or owner and the lessee should apply together, although an application may be made through an agent (Article 10(1)(3) of the Decree on Aircraft Registration). The method of submitting the application is the same as for registering title.

The application form is prescribed under Annex 9 of the Aircraft Registration Regulations. If the application form comprises two or more pages, each page must be indent-stamped (Article 13 of the Aircraft Registration Regulations). Under Article 20(2) of the Aircraft Registration Regulations, the application form must be accompanied by documentation evidencing:

  • a copy of the agent’s authority to submit on behalf of the applicants (if applicable);
  • that the lessee or lessor is not a restricted person under Article 10 of the Aviation Safety Act;
  • the lessee’s right to lease the aircraft;
  • the applicant’s certificate of seal (a non-resident alien in South Korea or a foreign corporation without an operating office in South Korea may submit copies of its certificate or confirmation of incorporation but must thereafter submit originals within seven days of submitting the application) (Article 16 of the Aircraft Registration Regulations); and
  • payment of registration tax (including all receipts and notices).

The process of application is the same as for registering title.

Whereas ownership of an aircraft becomes effective only on registration thereof, rights to lease an aircraft must be registered in order to be effective against third parties.  

Certificate of registration

What is the regime for certification of registered aviation interests in your jurisdiction?

The form of certificate can be found under Annex 10 of the Aircraft Registration Regulations. The certificate is issued by the MOLIT and contains:

  • the registration certificate number;
  • the aircraft nationality and registration mark;
  • the aircraft manufacturer and type of aircraft;
  • the aircraft manufacture serial number; and
  • the name and address of the owner or lessee (as applicable) (Article 15 of the Decree on Aircraft Registration).
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?

The consent of any interested party stipulated in the aircraft register (eg, owner, lessee or mortgagee) is required in order to deregister and export an aircraft. For example, an owner or mortgagee intending to deregister an aircraft must also obtain the consent of the aircraft operator (the lessee). If the relevant consent is not forthcoming, the party wishing to deregister must obtain a court judgment in lieu of such consent and attach the original judgment or a copy of it to the application to deregister.

Powers of attorney

What are the principal characteristics of deregistration and export powers of attorney?

The deregistration and export power of attorney is grantable to multiple attorneys and must:

  • accurately indicate:
    • the aircraft markings;
    • the right to register;
    • the grantor of power;
    • the purpose of the power of attorney; and
    • the date of the power of attorney; and
  • include the signature of the grantor (Article 12(2) of the Decree on Aircraft Registration).

Where the granter is a foreign corporation, it must also submit to the MOLIT documents that are equivalent to the corporate register and the certificate of seal and its power of attorney must be notarised and legalised.

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.

N/A.

Security

Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

Security rights in an aircraft are created by way of a mortgage agreement. The agreement may be prepared in English or South Korean, but registration must be in South Korean. There is no specified form of agreement; parties may be as inclusive as they want in terms of detail. However, the agreement must include at a minimum:

  • the amount of underlying debt;
  • the name and address of the debtor;
  • the repayment period;
  • any interest;
  • the interest accrual date and payment period; and
  • the maximum secured amount.

Annex 1 of the Act on Mortgage on Vehicles and Other Specific Movables Enforcement Decree is the prescribed form of application. In order to register the mortgage over the aircraft, the mortgagor and mortgagee or their agent(s) must submit the application form in person to the Ministry of Land, Infrastructure and Transport (MOLIT) (Article 2(1) of the enforcement decree).

Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

An aircraft security becomes effective when:

  • the parties execute the mortgage agreement and submit an application to register the mortgage to the MOLIT; and
  • such registration is recorded on the aircraft register.

The registration fee is W8,200 regardless of the value of security. Payment may be made by attaching a revenue stamp to the application.

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.

An aircraft mortgage must be registered with the MOLIT and recorded on the aircraft register in order to be effective against third parties. The creation of security over an aircraft and deregistration, modification or transfer of the same can be effected through:

  • executing the relevant security agreement;
  • registering the creation, modification, transfer or termination of the security right with the MOLIT (including the relevant agreement and certificates of seal); and
  • updating the aircraft register accordingly.
Registration of security

How is registration of a security interest certified?

An aircraft mortgage becomes effective from the moment that it is recorded in the aircraft register. Any interested party will be able to access the records to verify the status of charges.

Effect of registration of a security interest

What is the effect of registration as to third parties?

Security interest that is properly registered will be effective against third parties. Once registered, the ranking of the security (mortgage) becomes fixed. Priority is established in accordance with the order of registration. The value of the mortgage, the creditor and the ranking will be set out in the aircraft register, and the mortgagee can make its claims based on this information.

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?

When a loan is secured by security over the aircraft, the aircraft mortgage must be registered on the aircraft register to establish a security right in the aircraft. Once registered, aircraft mortgages are effective not just between the parties to the mortgage agreement, but also against third parties. As a real right, a registered mortgage will be effective against an assignee of the aircraft ownership rights, successor mortgagees and other third parties seeking to make claims on the aircraft.

Security over aircraft and leases cannot be structured as trusts if the trust structure is such that the lender retains the right of claim but a trustee or agent holds the mortgage right in its name. This is because an aircraft mortgage becomes effective only on registration, meaning that the lender must also be registered as the mortgagee in order for its security rights to be recognised. A trust structure in South Korea has the effect of separating the holder of the claim right (the lender) from the holder of the security interest (the trustee or agent), meaning that the trustee or agent holds the security interest without actually holding the claim right to which the security interest relates. 

If the lender’s right of claim is assigned, the relevant mortgage must also be transferred and registered in accordance with Article 5 of the Act on Mortgage on Vehicles and Other Specific Movables Enforcement Decree in order to preserve the priority ranking afforded to the original lender.

Security over spare engines

What form does security over spare engines typically take and how does it operate?

Spare engines are treated as movable assets independent from the aircraft. Therefore, security rights over spare engines must be created by way of a movable assets yangdo dambo (security by means of transfer) agreement and enforced as movables. The establishment of security interest in spare engines is typically notified by attaching a public notice (eg, a nameplate) on the collateral itself.

As South Korea is not a signatory to the Cape Town Convention, there is no method for registering spare engines that have been installed on aircraft. Engines that are installed on rotorcrafts are not considered to be objects independent of the aircraft and engines installed on fixed-wing aircraft are considered to be accessories to the main aircraft. Therefore, engines that are installed cannot be treated as independent objects. As such, where necessary, movable assets yangdo dambo agreements should include provisions prohibiting the installment of spare engines or subjecting such installment to consent and other protective measures.

Enforcement measures

Repossession 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?

The following steps must be taken in order to take repossession of an aircraft:

  • The lease agreement must be formally terminated by a termination agreement executed by the lessor and lessee.
  • The right of lease registered with the Ministry of Land, Infrastructure and Transport (MOLIT) must then be deregistered or cancelled.
  • Finally, the aircraft must be deregistered and registered with the relevant aviation authority in the jurisdiction of return before the aircraft can be physically ferried out of South Korea.

Applications to deregister the right of lease and the aircraft may be made simultaneously. In order to deregister the right of lease and the aircraft, the lessor and lessee must submit to the MOLIT an application to deregister the right of lease or aircraft (as relevant), signed by or affixing the company seal of the lessee. Applicants must also attach a certified copy of the lease termination agreement and:

  • where a party affixes its company seal to execute a document or an agreement, a certificate of seal (with a validation or issue date of less than three months); or
  • where a party executes a document or an agreement by signature of its authorised signatory, the original documents authorising such signatory.

Once the right of lease and the aircraft have been deregistered, the lessor must register the aircraft with the relevant aviation authority to which it will be returned and provide evidence of such registration to the Seoul Registration Aviation Administration (SRAA) before the aircraft can be physically ferried out of South Korea. Once evidence of registration of the aircraft in the jurisdiction of return is received, the SRAA will carry out final checks on the aircraft to ensure that it is fit for ferrying and notify the lessor of the aircraft’s airworthiness. At this point, the aircraft may be ferried out of the country. As a rule, an export certificate of airworthiness is not required to ferry an aircraft out of South Korea but if the jurisdiction to which the aircraft will be returned requires one, the lessor may apply for one to be issued. The regulations do not specify whether any other documents must be submitted with the application, but the SRAA may specify this separately at the time of application.

The law does not allow for a party to unilaterally apply to deregister or cancel the right of lease and the aircraft. Therefore, if the lessee proves to be uncooperative, the lessor will need to obtain a decision from the relevant court or arbitral tribunal (as applicable) confirming that the lease agreement has terminated before proceeding to unilaterally apply to deregister the right of lease and the aircraft. Either a decision of the tribunal or a court judgment will be sufficient for the lessor to unilaterally proceed with deregistering or cancelling the right of lease and deregistering the aircraft.

Enforcement of security

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

A secured party cannot enforce a security interest privately, but rather must partake in a voluntary auction or disposition by public sale in accordance with the Civil Execution Act. Enforcement of security interests in registered aircraft tends to be similar to the compulsory execution procedures for ships (Article 187 of the Civil Execution Act and Article 106 of the Civil Execution Regulation). In contrast, enforcement of security over unregistered aircraft, unregistered lightweight aircraft, ultralight aircraft and foreign aircraft occurs through a corporeal movables execution procedure.

Where a foreign aircraft is in South Korean airspace or is stationed at a domestic airport, airport zone or airfield, the enforcement procedures of South Korea apply as lex fori. As there is no foreign aircraft register in South Korea, registration of provisional attachment or transfer of ownership due to sale is not possible. As such, the provisions relating to the procedure for entering in the register do not apply to the compulsory execution against foreign aircraft (Articles 186 and 187 of the Civil Execution Act).

If, following establishment of security, the debtor becomes subject to a rehabilitation procedure, the secured party becomes a creditor under the Debtor Rehabilitation and Bankruptcy Act. A rehabilitation secured interest refers to a security interest that exists when the rehabilitation procedure is commenced and which was created as a result of a cause arising before the rehabilitation procedure was commenced. Rehabilitation secured creditors cannot exercise their rights individually but must partake in a rehabilitation procedure and benefit from indemnity or change of rights in accordance with a rehabilitation plan.

If the debtor becomes bankrupt, the secured party has the right to foreclose outside bankruptcy with respect to the property that is the object of the security and this right may be exercised without resorting to bankruptcy procedures (Articles 411 and 412 of the Debtor Rehabilitation and Bankruptcy Act).

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?

The priority of distributions on an enforcement of aircraft security interest is the same as for enforcement of a security interest in real estate. For example, in relation to a security interest established before the statutory deadline of a tax receivable in a sale asset, distributions will be made in the following order:

  • costs of enforcement;
  • any improvement costs or preservation costs incurred by a third-party purchaser of a mortgaged property (Article 367 of the Civil Act);
  • wages for the last three months and retirement benefits, among others, for the final three years of service (Article 38(2) of the Labour Standards Act and Article 12(2) of the Guarantee of Employees’ Retirement Benefits Act);
  • national and local taxes and surcharges imposed in relation to the aircraft that is the subject of enforcement (Article 35(1)(3) of the Framework Act on National Taxes and Article 99(1)(3) on the Framework Act on Local Taxes);
  • a security interest established over a sales asset before a statutory deadline of a national or local tax claim;
  • wages other than the wages under Article 38 of the Labour Standards Act and Article 12 of the Guarantee of Employees’ Retirement Benefits Act and other claims arising in connection with labour relations;
  • national taxes, local taxes and any collection charges for arrears;
  • employment insurance, industrial accident compensation premium, national health insurance premium and national pension premium; and
  • other general claims.
Enforcement of foreign judgments and arbitral awards

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

Foreign judgments or arbitral awards may be enforced by South Korean courts. As of May 1973, South Korea is a signatory of the 1958 New York Convention. In order to enforce a foreign ruling or arbitral award in South Korea the following requirements set out in Article 217 of the Civil Procedure Act must be satisfied:

  • The judgment has been finally and conclusively given by a court having valid jurisdiction in accordance with the international jurisdiction principles under South Korean law and the applicable treaties.
  • The defendant has been duly served with a service of process (other than by publication or similar means) in sufficient time to enable it to prepare its defence in conformity with the applicable laws or respond to the action without being served with process.
  • Recognition of the judgment is not contrary to the public policy of South Korea in light of the substance of the judgment and the procedures of litigation.
  • Either judgments of South Korean courts are accorded reciprocal treatment in the jurisdiction of the court which issued the judgment or the requirements for the recognition of a foreign judgment in the jurisdiction of the court which issued the judgment are not considerably prejudicial and substantially different in material aspects from those in South Korea.
  • South Korean courts have issued a judgment of execution in accordance with Article 26 of the Civil Execution Act.

Taxes and payment restrictions

Taxes

What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?

On assignment of the aircraft, where the assignor is a domestic company and the assignee is a foreign company, the gains from the assignment are included in the calculation of the domestic company’s income for that fiscal year and therefore attract corporate tax. In this case, the assignee will not be subject to withholding obligations. Where the assignor is a foreign company and the assignee is a domestic company, income generated from the assignment of industrial, commercial or scientific machinery, facilities, equipment, delivery equipment, tools, appliances or equipment is treated as income derived from the business of the foreign company and therefore domestically sourced income (Article 5 of the Corporate Tax Act and Article 132(2)(11) of the Corporate Tax Act Enforcement Decree). Therefore, if a foreign company transfers an aircraft that was registered and leased in South Korea, any gains accruing from the transfer are likely to be treated as domestically sourced income. In this case, if the foreign company has a fixed place of business in South Korea and such income vests in that place of business, the foreign company will be taxed in the same way as a domestic company. Meanwhile, if the foreign company has no permanent establishment in South Korea or if it does but the relevant income does not vest in such establishment, withholding tax equal to 2.2% of the amount paid in South Korea is levied on the business income. However, if a tax treaty exists between the assignee’s jurisdiction and South Korea, no tax may apply. Most tax treaties signed by South Korea stipulate that business income will not be taxed in the country unless the foreign company has a permanent establishment there.

Where a foreign company obtains a loan from foreign financial institutions to purchase an aircraft and then leases the aircraft to a domestic lessee, the taxation of rent and the taxation of interest must be considered. A foreign company that leases an aircraft to a domestic company and receives rental income therefrom will be deemed to have accrued domestically sourced income (Article 93(4) of the Corporate Tax Act). In such case, if the foreign company has a permanent establishment in South Korea and the rental income vests in that permanent establishment, the foreign company will be taxed (for corporate tax and VAT) in the same way as a domestic company for such rental income. However, if the foreign company has no permanent establishment in South Korea or if it does but the rental income does not vest in such establishment, withholding tax equal to 2.2% of the amount paid in South Korea will be levied on the rental income. However, the taxation of aircraft rental income may vary depending on the type of lease and the existence and details of a tax treaty between South Korea and the jurisdiction of the lessor. Therefore, each case must be reviewed for its own details.

Where the borrower is a foreign company and the lenders are foreign financial institutions, withholding tax should not be an issue as no interest is paid in South Korea. However, where a domestic company guarantees the repayment by its foreign subsidiary of a loan from foreign financial institutions, the Korean Taxation Office has found such repayment of the principal and interest to be domestically sourced income under Article 93(1) of the Corporate Tax Act. There is no clear case regarding security, but if interest is paid domestically upon the exercise of a security right, such payment may be deemed to be domestically sourced income.

Withholding tax will be levied on interest paid to foreign companies by domestic companies at a rate of 22% unless a tax treaty exists between South Korea and the jurisdiction of the payee, in which case a limited rate of withholding tax may apply (depending on the terms of the relevant tax treaty).

Exchange control

Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?

A filing under the Foreign Exchange Transactions Act may be required where a foreign party and a domestic party enter into a capital transaction such as a loan transaction, a security transaction or a lease agreement. The filing may need to be made with the Bank of Korea or a designated foreign exchange bank depending on:

  • the nature of the parties;
  • the transaction structure; and
  • the terms and conditions thereof.

For example, should a non-resident foreign owner or lessor of an aircraft enter into an operating lease agreement with a South Korean lessee that has a lease term of at least one year, a filing will need to be made with the designated foreign exchange bank (Article 7-46(1)(2) of the Foreign Exchange Transaction Regulations). However, where the lease is a financial lease, such that the lessee is to obtain title to the aircraft upon its expiration, a filing will need to be made with the Bank of Korea (Article 7-46(2) of the Foreign Exchange Transaction Regulations).

Default interest

Are there any limitations on the amount of default interest that can be charged on lease or loan payments?

Default interest on loan payments cannot exceed an annual rate of 24% (Article 2(1) of the Interest Limitation Act). There are no particular limitations on default interest for lease payments.

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?

No custom duties apply to aircraft. For parts, custom duties may apply at a rate of 3% to 8%. In the case of SMEs, as items of tax disparity, parts and raw materials imported for use in the manufacture or repair of the aircraft and its parts are tax-exempt (Article 89(1)(1) of the Customs Act and Article 35(1)(1) of the Customs Act Enforcement Decree). Certain items imported by enterprises that are not small and medium-sized but which are subject to the World Trade Organisation Agreement on Trade in Civil Aircraft and are so determined by the Ministry of Economy and Finance will be 100% exempt until 31 December 2021 (Article 89(6)(1) of the Customs Act).

Aircraft are subject to import restrictions. In principle, the approval of the Korea Aerospace Industries Association is required. However, where the aircraft is imported on a lease following approval under the Foreign Exchange Transaction Act and subject to the Ministry of Land, Infrastructure and Transport’s recommendations, it is exempt from this approval. In sum, aircraft imported in connection with an operating lease do not require import approval, but aircraft imported in connection with finance leases do need approval.

Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

Air transport service providers, aircraft rental service providers, air charter operators, aircraft owners and aircraft operators must all have in place adequate aviation insurance as prescribed by the Ministry of Land, Infrastructure and Transport (MOLIT) (Articles 70(1) and (2) of the Aviation Business Act). ‘Aviation insurance’ constitutes:

  • passenger insurance;
  • airframe insurance;
  • cargo insurance;
  • war risk insurance;
  • third-party insurance;
  • aircrew insurance; and
  • other insurance prescribed by the MOLIT (Article 2(37) of the Aviation Business Act).

Where insurance is retained, the maximum limitation of liability is the limit prescribed by an international convention on air transportation of which South Korea is a signatory (ie, the Hague Convention or the Montreal Convention). Where it is unreasonable to apply these rules, the liability limit will be as prescribed by the MOLIT (Article 70(2) of the Aviation Business Act Enforcement Decree). Failure to have adequate insurance in place is punishable by imprisonment for a maximum of three years or a fine not exceeding W30 million (Articles 78(1)(5) and (6) of the Aviation Business Act).

According to a research report published in November 2015, for international air carriers, the average insurance coverage per aircraft was:

  • W2 trillion in passenger insurance;
  • W65 billion in gas insurance;
  • W10 million in cargo insurance;
  • W7 billion in war insurance;
  • W600 million in third-party insurance; and
  • W1.3 billion in crew insurance.
Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

Article 724(2) of the Commercial Act provides that a third party may directly request an insurer to compensate for losses caused by an accident attributable to the insured and Article 726 provides that the provisions relating to liability insurance will also apply to reinsurance mutatis mutandis. However, certain schools of thought take the position that Article 724(2) does not apply to reinsurance, unless the reinsurance agreement exceptionally specifies the right of the beneficiary of the original insurance to make a direct claim under the reinsurance agreement. Therefore, the terms and conditions by which a beneficiary of insurance may make a direct claim are decided under the parties’ agreement and if such terms and conditions exist, the beneficiary of insurance can only make a direct claim in accordance with and subject to such terms.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

There is no legislation mandating reinsurance but aviation businesses typically cede to reinsurance or form reinsurance pools to diversify risks. At the time of the Asiana Airline’s airliner crash at the San Francisco International Airport in 2013, domestic insurers had ceded most of their insurances to overseas reinsurers, retaining only 2.5% domestically.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

In principle, the air carrier and the aircraft operator are liable for air transport and aircraft operation. However, the owner may be liable under Article 758(1) of the Civil Act if damages have been caused to another person by reason of any defect in the construction or maintenance of the aircraft. Further, under Articles 930(1) to (3) of the Commercial Act, an aircraft operator will be liable for damages to a third party on the ground (including underground, on the water’s surface or underwater) who has been killed or injured or whose property has been damaged by an aircraft during flight or by a person or object that fell from the aircraft. For the purposes of this article, ‘aircraft operator’ means a person using an aircraft at the time that the accident occurs and the ‘aircraft owner’ as stated on the aircraft register will be presumed to be an aircraft operator.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

Case law has found that the liability of aircraft owners (see “Liability”) to be a strict liability. According to the Product Liability Act, a party that manufactures, processes or imports aircraft or a party that, by using its name, trade name, trademark or other distinguishing symbol, appears to be or misrepresents itself to be a manufacturer, processor or importer will be liable for damages if a defect in the aircraft causes loss or damage to life, body or assets (loss or damage solely to the aircraft is excluded).

It will be assumed that the object was defective at the time that it was supplied by the manufacturer and that the loss or damage was a result of such defect if the following can be proved:

  • The injured party was using the object properly at the time that it suffered the loss.
  • The cause of the loss or damage was within the actual control of the manufacturer.
  • The loss or damage is not something that would normally arise but for the defect in the object.

However, this will not apply to cases where the manufacturer proves that the damage was a result of a different cause other than a defect in the product (Article 3(2)).

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

As South Korea is not a signatory to the Rome Convention or the Montreal Protocol, provisions therein relating to third-party liability do not apply. Instead, Article 932 of the Commercial Act deals with third-party liability and provides that the liability of an aircraft operator will be limited to the following amounts:

  • where the maximum weight of the aircraft is less than 2,000kg:
    • 300,000 units of account; and
  • where the maximum weight exceeds 2,000kg:
    • 300,000 units of account for the portion up to 2,000kg;
    • 175 units of account per kilogram for the portion between 2,000kg and 6,000kg;
    • 62.5 units of account per kilogram for the portion between 6,000kg and 30,000kg; and
    • 65 units of account per kilogram for the portion exceeding 30,000kg.

Where death or bodily injury occurs, the liability of the aircraft operator will be limited to the amount of 125,000 units of account per death or injured person within the amount prescribed above. Where an aggregate amount of damage sustained by several persons due to an accident in which an aircraft is involved exceeds the prescribed maximum amount, each instance of damage will be compensated in proportion to the prescribed maximum amount. Where death, bodily injury or property damage occurs due to an accident in which an aircraft is involved, any damage sustained due to death or bodily injury will first be compensated within the limit of the prescribed maximum amount and the property damage will then be compensated with any remaining amount thereof.

According to a research report published in December 2015, entitled “Study on Airline Insurance and Management Plan, Ministry of Land, Infrastructure and Transport”, the average insurance coverage per aircraft for international air carriers was W600 million for third-party insurance.

Update and trends

Recent developments

Are there any emerging trends or hot topics in aviation finance and leasing in your jurisdiction?

N/A.