To which major air law treaties is your state a party?
Russia is a party to the following:
- the Chicago Convention on International Civil Aviation of 1944 (the Chicago Convention);
- the Cape Town Convention on International Interests in Mobile Equipment of 2011 and the associated Protocol on Matters Specific to Aircraft Equipment (the Cape Town Convention); and
- the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.
All the above are currently effective in Russia.
Russia is not a party to the Geneva Convention on the International Recognition of Rights in Aircraft of 1948 or the Rome Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft of 1933.
What is the principal domestic legislation applicable to aviation finance and leasing?
The principal Russian legislation in this sphere includes the Civil Code of the Russian Federation (the Civil Code), the Federal Law on Finance Leasing and the Air Code of the Russian Federation (the Air Code), expanded in various specific laws and by-laws.
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?
The main principle stated in the Civil Code is that proprietary rights (including ownership and mortgage interests) in an aircraft are governed by the law of the jurisdiction where the aircraft is registered. Thus, to create valid ownership title to, or mortgage interest in, an aircraft, relevant contracts must be valid and effective under the law of the jurisdiction where the aircraft is registered.
Under Russian law, parties to a contract may agree on a foreign governing law if there is a sufficient foreign element in the transaction (eg, a foreign entity or, potentially, a foreign asset is involved). Russian courts should recognise the choice of law unless such choice of law contradicts Russian public policy or mandatory norms of direct application of Russian law (such as application of Russian governing law to agreements in relation to immovable property located in Russia (see question 6)).
For aircraft owned by non-Russian lessors, it would be standard to have an Irish aircraft lessor or owner leasing the aircraft directly to a Russian airline (the Standard Structure). The aircraft in the Standard Structure usually registered on the Bermuda Aircraft Register (see question 6 below for further details). Under the new Bermuda registration rules it is possible for any aircraft owner or lessor registered in any Commonwealth country (including Ireland) to register the aircraft directly in the Bermuda Aircraft Register. Previously, for Bermuda registration purposes it was necessary to have either a Bermuda aircraft owner or a lease with a Bermuda company in place.
In the Standard Structure, all finance, security and lease documents are normally governed by English or New York law.
Transfer of aircraft
How is title in an aircraft transferred?
If an aircraft is registered on the Russian Aircraft Register (all terms in this paragraph are defined in question 6), the title to such aircraft must be transferred by a sale and purchase agreement governed by Russian law. The transfer of title will be effective from the moment of its registration on the Register of Rights.
If an aircraft is registered in a foreign register, the ownership title to the aircraft normally vests in a bankruptcy-remote special purpose vehicle (SPV) outside Russia, and transfer of title happens between non-Russian entities and outside Russia (see questions 20 and 26). Current market practice is for relevant transfer agreements to be governed by English law, subject to the provisions of the applicable foreign law.
Transfer document requirements
What are the formalities for creating an enforceable transfer document for an aircraft?
There are no specific Russian law requirements in respect of a foreign law governed transfer agreement. However, generally if a Russian entity is a party to the transfer agreement, it must be in written form, with no other specific requirements. For registration requirements, see questions 4, 6 and 7.
To be presented as evidence in a Russian court or to any Russian authority, the transfer agreement must be in Russian or have a notarised translation into Russian.
Registration of aircraft ownership and lease interests
Identify and describe the aircraft registry.
Russia has the following two types of aircraft registers:
- for national registration, the State Register of Civil Aircraft of the Russian Federation (the Russian Aircraft Register); and
- for title registration, the Unified Register of Rights to Aircraft and Transactions Therewith (the Register of Rights).
Both registers are maintained by the Federal Aviation Agency of the Ministry of Transport of the Russian Federation (Rosaviation) and are publicly available. The Russian Aircraft Register is an owner-based register. With respect to the Register of Rights, any person having or acquiring a right in an aircraft subject to registration may apply for such registration, which will serve as public evidence of such rights.
In accordance with provisions of the Air Code, an aircraft operated by a Russian airline should be registered either on the Russian Aircraft Register or on a register of a country that has an agreement with Russia on the maintenance of continuing airworthiness, under article 83-bis of the Chicago Convention (the Foreign Register) and such aircraft shall be added to the schedule of such agreement. Such aircraft would acquire Russian nationality for the purposes of clause 7 of the Convention of International Civil Aviation and article 33 of the Air Code. Currently, the most widely used Foreign Register in Russia is the Bermuda Aircraft Register.
An aircraft registered on the Russian Aircraft Register acquires Russian nationality and becomes an immovable property under Russian law. This leads to various consequences, including:
- agreements relating to such aircraft must be governed by Russian law;
- Russian arbitrazh courts (the system of Russian state commercial courts) have exclusive jurisdiction over claims with respect to the rights relating to such aircraft; and
- legal interests in such aircraft, such as ownership title and mortgage interest, shall be registered in the Register of Rights.
There is currently no separate register for engines or rights in engines in Russia.
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?
The Russian regulations on registration of rights to aircraft and transactions connected with them (the Registration Regulations) require that the occurrence, transfer, termination of property rights (including ownership title and security interest) and encumbrances over such rights with respect to civil aircraft subject to state registration shall be registered on the Register of Rights (no other registers are available for this purpose). Registration of any interest in an aircraft on the Register of Rights may be initiated by a person holding or intending to acquire the relevant interest. There are no limitations on jurisdiction of the holder of interest in the aircraft for the purpose of such registration.
Bearing in mind aircraft registration provisions of the Air Code (see question 6), there is a theoretical risk that, on the basis of literal application of the Registration Regulations and the Air Code, rights in an aircraft operated by Russian airlines and registered on the Foreign Register may be subject to the Registration Regulations.
In relation to aircraft lease agreements, there are some contradictory interpretations on whether they are subject to state registration in the Register of Rights. This is because of a contradiction between registration requirements applicable to immovable property and transportation vehicles. The position that aircraft operating leasing falls under the exception available for transportation vehicles was confirmed by the Supreme Arbitrazh Court of Russia, and therefore are not subject to the registration.
Our current understanding is that the Registration Regulations should be applicable only to aircraft registered on the Russian Aircraft Register and Russian law agreements. The Registration Regulations should not be applicable to aircraft registered on a foreign register.
Registration of ownership interests
Summarise the process to register an ownership interest.
Registration of any interest in respect of an aircraft on the Register of Rights is possible only after the registration of the underlying aircraft on the Russian Aircraft Register. There is no limitation on how far the registration authorities should investigate the existing ownership title, and there is a risk that they may request documents with respect to the whole chain of transfers of title up to a purchase from a manufacturer.
The Registration Regulations provide for the maximum period of one month for registration of rights and encumbrances on the Register of Rights after filing of all necessary documents.
Together with the application for registration of title, the applying party should file documents (in Russian or containing notarised translation into Russian):
- confirming its rights to file the application, including rights of the signatory to sign such application;
- creating the relevant interest (eg, sale and purchase agreement);
- identifying the aircraft; and
- confirming payment of state duty for registration.
A more precise list of the documents necessary for registration of ownership interest in the aircraft should be considered on a case-by-case basis, depending on the background of a particular transaction. Documents filed for registration must contain all information required for such registration.
State duty for registration of title in an aircraft varies depending on the type (weight) of the aircraft, but does not exceed 5,000 roubles.
Russian law does not provide for registration of any interest in engines. The description of an aircraft for the purpose of registration of some interest in it must contain serial numbers of engines installed on the aircraft.
Registration of ownership interest in the host aircraft should not automatically vest the title to the engines installed in such aircraft in the aircraft owner.
Title and third parties
What is the effect of registration of an ownership interest as to proof of title and third parties?
Registration of ownership interest on the Register of Rights is the only evidence of such interest. It does not remedy a defective title, but registered interest in an aircraft may only be challenged in court.
Registration of lease interests
Summarise the process to register a lease interest.
The process of registration of a lease interest is substantially similar to the process of registration of the ownership interest (see question 8). See our considerations on the necessity of registration of lease interest in question 7. Lease interest in an aircraft may be registered only if the ownership interest in such aircraft is registered on the Register of Rights. Therefore, for aircraft registered on a foreign register it is not possible to perform any registrations of rights in Russia.
State duty for registration of a lease interest varies, depending on the type (weight) of the aircraft, but does not exceed 5,000 roubles.
Certificate of registration
What is the regime for certification of registered aviation interests in your jurisdiction?
Registration of ownership of an aircraft on the Register of Rights is confirmed by a certificate issued by Rosaviation. The content of such certificate is stipulated by the Registration Regulations. The certificate contains information about the owner and the aircraft itself. State registration of an agreement subject to registration on the Register of Rights is confirmed by a registration stamp on the agreement.
Information about rights relating to an aircraft may be requested from Rosaviation in the form of an extract from the Registry of Rights.
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 Russian Aircraft Register is the owner-based register. No consent is required from the lessee for the purpose of deregistration, and there are no notification requirements in this respect.
There is no legal way for an operator to block such deregistration.
Export of the aircraft from Russia requires flight permission from Rosaviation and customs clearance of the aircraft. Normally, it is the lessee who is responsible for compliance with these formalities.
Russian customs regulation is based on the assumption that the customs procedure will be finalised by the same person who initially imported the aircraft into Russia (in most cases this is the lessee). Although export of a repossessed aircraft by its owner is theoretically possible, it is not directly regulated and may be cumbersome, especially if the lessee failed to pay customs duties during the term of lease or did not comply with a particular customs procedure.
There is a court case with respect to leased vehicles imported into Russia under the same temporary import procedure normally used for import of aircraft. This case confirms the right of a foreign lessor or owner to export the leased asset and conduct export customs clearance in the name of the owner or lessor in case of termination of the lease agreement. In addition, starting from January 2018 Russian customs legislation is amended to make it possible for a foreign holder of an irrevocable deregistration and export request authorisation (IDERA) to declare goods under re-export or export procedures, thus finalising temporary import procedure without the involvement of the lessee. However, in the absence of any practice, it remains to be seen how this right to use IDERAs will work in Russia.
Powers of attorney
What are the principal characteristics of deregistration and export powers of attorney?
No power of attorney is currently required for deregistration of an aircraft from the Russian Aircraft Register, since it is an owner-based register.
However, since to repossess an aircraft registered in a Foreign Register, it is necessary to customs clear such aircraft, and therefore the deregistration and export power of attorney (DPOA) which contains specific customs related authorities is a standard instrument in aircraft leasing in Russia, even though it has not been widely tested in Russia. The DPOA may be useful for deregistration of the aircraft from the Foreign Register and export of the aircraft from Russia.
Russian law provides for the possibility to issue an irrevocable power of attorney for any time period which however shall be indicated in such power of attorney. Such irrevocable power of attorney may be issued for the purpose of performance or security of performance of any obligation of the person issuing such power of attorney in relations with the attorney or any third parties, if such obligation is connected to entrepreneur activity. Such irrevocable power of attorney must be notarised by a notary and may be revoked after performance of the obligation that it relates to, if the attorney abuses his or her powers or there are certain circumstances certifying that abuse might occur. Information on revocation of powers of attorneys is publicly available.
Under Russian law, a power of attorney automatically terminates in case of the liquidation of a company that issued such power of attorney.
DPOAs do not require any registration or filing in Russia, except for their notarisation as set out above.
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.
Russia has made the declaration on IDERA to the Cape Town Convention, but as an IDERA is a new instrument for Russia, there is no established practice of its use.
IDERA is not required for the deregistration of an aircraft from the Russian Aircraft Register. However, export authority contained in IDERA may be useful for the export of aircraft registered in the Foreign Register from Russia.
The form of IDERA effective in Russia contains standard deregistration and export authorities, and it must be countersigned and recorded by Rosaviation in accordance with the Cape Town Convention.
No specific regulations have been adopted in Russia in relation to IDERAs and any recording thereof. Therefore, while Rosaviation may still be able to record IDERAs relating to aircraft registered on the Russian Aircraft Register, recording of IDERAs in relation to aircraft registered on the Foreign Register is not possible in Russia. The effectiveness of an IDERA without such record is questionable.
A DPOA and an IDERA have different spheres of application, and therefore it is advisable to obtain both a DPOA and an IDERA in transactions with Russian airlines.
Security document (mortgage) form and content
What is the typical form of a security document over the aircraft and what must it contain?
As a general rule, the validity and effectiveness of mortgage interest is assessed under the law of the jurisdiction where the aircraft is registered. In the Standard Structure, an aircraft mortgage agreement is governed by foreign law and should be enforced outside Russia.
The main contractual security applicable to aircraft under Russian law is a mortgage. The mortgage can be both possessory or non-possessory, it but does not give the mortgagee a title to the mortgaged property, which remains in the ownership of the mortgagor. The mortgage provides the mortgagee with a priority right to discharge its claims under the secured documents from the value of the mortgaged aircraft or proceeds received from its disposal.
A mortgage over an aircraft registered on the Russian Aircraft Register must be governed by Russian law and registered in the Register of Rights. Without registration on the Register of Rights a mortgage is invalid.
There are no specific requirements for the language of security documents that are not subject to state registration in Russia. If the aircraft mortgage is to be notarised by a Russian notary or registered on the Register of Rights, it must be in Russian or bilingual with the Russian prevailing. Any document to be filed as evidence in Russian courts must be in Russian or accompanied by a notarised translation into Russian.
A Russian mortgage must contain a detailed description of the secured obligations, including their nature, amounts and schedule of payments under the secured document, detailed description of the mortgaged property and its value. In the absence of these terms, the mortgage agreement is invalid.
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 mortgage must be concluded in written form and is generally not subject to a notarisation requirement (other than the aircraft mortgage securing an underlying document that itself is notarised). The parties may also specifically agree on a notarised form of the agreement. The failure to meet statutory or contractual requirements to the form of the agreement entails invalidity of such agreement.
The notarial fee may vary depending on the grounds for notarisation and value of the aircraft, and should be confirmed on a case-by-case basis.
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.
The Russian registration requirement for an aircraft mortgage is similar to registration requirements applicable to the ownership title, discussed in question 7.
An aircraft mortgage is effective upon its registration on the Register of Rights. The process and costs of registration of mortgage interest are similar to the registration of ownership and lease interest (see question 8).
In the Standard Structure, an aircraft mortgage is governed by foreign law and is not registered on the Register of Rights. However, since this practice has not been tested in Russian courts, the risk that enforcement of such aircraft mortgage may meet certain resistance in a Russian court remains. We would advise for an alternative security to be arranged (see question 20).
Registration of security
How is registration of a security interest certified?
Upon registration of an aircraft mortgage, the relevant record is created in the Register of Rights and a registration stamp is placed on a mortgage agreement.
Effect of registration of a security interest
What is the effect of registration as to third parties?
An aircraft mortgage subject to registration in Russia is effective upon its registration on the Register of Rights.
If there are several mortgages over the same aircraft, the order of priority between them will be established in accordance with the time of registration.
Registration of an aircraft mortgage on the Register of Rights is the only evidence of such mortgage interest. Registered mortgage interest may only be challenged in court.
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?
For the Standard Structure, see question 3.
In the Standard Structure, an aircraft mortgage is governed by foreign law and is not registered in Russia (remaining under the risk of falling under Russian registration requirements to it; see question 17). At the same time, there is usually alternative security, such as a share charge over an SPV and common law governed security assignments over rights under lease agreements.
Since, in the Standard Structure, finance documents and most of the security (unless specifically required otherwise by the jurisdiction where the aircraft is registered) are governed by common law, the common law concept of security agent or trustee is widely used. There is no concept of trust in Russian law, but it should be interpreted and applied in accordance with the governing law of finance documents. Since there is no Russian security involved it does not need to be adjusted to Russian law requirements.
Under Russian law, an aircraft mortgage is a proprietary right (see question 15). Any change of beneficiaries may be made by way of transfer of beneficiaries’ rights under the mortgage agreement, together with their secured rights.
Security over spare engines
What form does security over spare engines typically take and how does it operate?
It is possible to take security over an engine either as part of the aircraft in which it is installed or separately from the aircraft as separate equipment. If any of the parties to the security agreement over the spare engines is a foreign entity, the parties will be able to choose foreign law as the governing law of the relevant security document. Under Russian law such security would take the form of a pledge, with the pledgee acquiring a priority right to discharge its claims under secured documents from the value of the pledged engine or proceeds received from its disposal.
Under Russian law, the moment of creation of security over an engine, and its termination, do not depend on whether it has been installed in or removed from the aircraft.
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?
It is questionable to what extent repossession of an aircraft without recourse to a court or arbitration will work if the lessor does not secure at least some level of the lessee’s cooperation. Although it is not directly prohibited by Russian law, there are many practical matters where the owner’s or lessor’s actions without the cooperation of lessee or third parties (eg, maintenance facilities, airports) may not be practically possible. Most likely that in the absence of the lessee’s cooperation, repossession of the aircraft on the basis of a court decision or arbitral award will be the only way to repossess an aircraft.
Russia has made the declaration on out-of-court enforcement of the provisions of the Cape Town Convention. However, it has not yet been tested in practice.
For the purpose of repossession, the owner or lessor must comply with the provisions of the lease agreement and its governing law. Under Russian law, before terminating a lease the lessor is obliged to send a default notice requesting that the lessee comply with its respective obligations under the lease agreement.
The only lawful way for the lessee to impede the owner’s right to exercise default remedies in court is to file various counterclaims or requests to postpone or reschedule hearings on various grounds. There are no standard grounds that may be considered outside of the particular enforcement scenario.
Enforcement of security
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
Foreign security should be enforced in accordance with its governing law.
Under Russian law, the Russian law pledge or mortgage gives the pledgee or mortgagee rights of claim in case of the pledgor’s or mortgagor’s default, which shall be satisfied from the value of the pledged or mortgaged property.
The enforcement may be performed through courts or by means of an out-of-court procedure to which the parties should specifically agree.
Out-of-court enforcement of a Russian law pledge or mortgage requires notary endorsement to be made at the beginning of enforcement. Since such endorsement can be made only on the notarised agreement, the relevant pledge or mortgage agreement must be executed in the presence of a notary if an out-of-court enforcement option is required.
For certain ex parte claims that may impede a mortgage or pledge enforcement, see question 24.
If bankruptcy proceedings have commenced with respect to the lessee, and the lease agreement has not been terminated, then the rights of the lessee under the lease agreement will fall into the lessee’s bankruptcy estate. The leased aircraft itself, not being the lessee’s property, will not be included in the lessee’s bankruptcy estate.
Russia has made a declaration to the Cape Town Convention providing for the obligation of the insolvency administrator or the debtor upon the occurrence of an insolvency-related event, to give possession of the aircraft to the creditor no later than at the end of a 60-day waiting period.
At the liquidation stage (where all creditor claims are subject to satisfaction), the satisfaction of unsecured payment claims (ie, not secured by Russian law pledge or mortgage from a Russian lessee) against the insolvent company is generally subject to statutory order of priorities, with the contractual claims being satisfied last.
The only lawful way for the owner to impede the mortgagee’s right to exercise default remedies in court is to file various counterclaims or requests to postpone or reschedule hearings on various grounds. There are no standard grounds that may be considered outside the scenario of the particular enforcement. Under Russian law, a pledgor may request a court to postpone the sale of pledged property for a term not longer than one year.
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?
Lien within commercial relations
Under the general rule, a creditor has a right of retention in respect of specific property if the debtor fails to discharge in due time the obligation to effectuate payment for the property or fails to pay to the creditor the compensation owed to it for the expenses and other losses borne by the creditor in connection with the property. However, if the parties are acting as entrepreneurs, the creditor may use the right of retention as a self-defence in relation to claims not connected directly with the retained property. In fact, an airline will always be acting as an entrepreneur.
At the same time, Russian law does not expressly allow a creditor to detain an object (aircraft) leased by a third party to a debtor on account of a debtor’s outstanding obligations. Therefore, a prevailing view is that a creditor detaining an object owned by a third party shall not be entitled to satisfy its claims from the value of the detained object.
Notwithstanding the above, in our experience, certain Russian airports detained a number of aircraft owned by third-party lessors in the course of Transaero Airlines and VIM Airlines cessation of business operations.
An aircraft may be subject to requisition in emergency events. In this case the state is obliged to pay the entire value of the aircraft to its owner. The owner may dispute such amounts paid in court. The owner may also demand that the requisitioned property be returned after the relevant events have passed.
Criminal or administrative offence
The aircraft may be arrested or confiscated as an object of a criminal or administrative offence (eg, in the case of breach of the customs procedure or non-payment of customs duties).
We are not aware of any cases of Russian authorities exercising their rights to confiscate an aircraft.
Enforcement of foreign judgments and arbitral awards
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
We are not aware of any treaty or convention providing directly for the recognition and enforcement of judgments in civil and commercial matters between the United Kingdom or the United States of America and the Russian Federation. In the absence of such a treaty, a Russian court is not obliged to recognise or enforce a judgment of the English or New York court. However, we are aware of few instances in which the Russian court recognised and enforced an English court judgment in the Russian Federation on the basis of a combination of reciprocity and the existence of a number of bilateral and multilateral treaties to which both the United Kingdom and the Russian Federation are parties. However, in the absence of established court practice, it is difficult to predict whether a Russian court would be inclined on the same grounds to recognise and enforce an English or a New York court judgment in connection with a lease agreement.
Yes, Russia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.
Taxes and payment restrictions
What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?
Formally, the lessee would be required to withhold Russian corporate income tax in respect of rent payments under the lease agreement (10 or 20 per cent, depending on the way the aircraft is used). Twenty per cent withholding tax may also apply to damages, interest or other payments under the lease. At the same time, where a relevant double tax treaty provides for a tax relief and the lessee was provided with a tax residency confirmation of the lessor together with confirmation of its beneficial entitlement to income, no obligation to withhold should arise.
There is some uncertainty in Russian tax legislation with respect to whether rent payments payable by a Russian lessee to a foreign lessor are subject to Russian VAT. At the same time, there are official clarifications from the Russian tax authorities that provide some comfort by confirming that no VAT is applicable in such case. Current market practice is in line with such clarifications.
In theory, Russian VAT may apply to the transfer of title to the aircraft. Although Russian legislation provides for no mechanism of VAT assessments when both transferor and transferee have no presence in Russia, it may be worth transferring the title to the aircraft outside Russia (preferably in international airspace to prevent similar risks in other jurisdictions).
Tax gross-up provisions are standard for lease and finance documents. Historically, Russian tax law was based on a principle that everyone must discharge his or her tax liabilities personally, and there were doubts as to whether gross-up provisions were consistent with this principle. Recently, the Russian tax legislation has been amended to explicitly permit settlement of a taxpayer’s obligations by third parties. However, because of somewhat vague drafting of the amendments, there is still some residual risk that gross-up provisions may be unenforceable in Russia.
A loan is usually provided to the non-Russian SPV owner, so Russian taxes are not applicable to loan repayment. Registration of the aircraft on the Russian Aircraft Register may trigger some additional tax considerations.
Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?
A Russian lessee must submit to a Russian authorised bank an original or a certified copy of, or an extract from, the lease agreement (or other relevant agreement) to ensure that such agreement is taken by a Russian authorised bank for monitoring (ie, for the Russian authorised bank as an agent of currency control to assign a unique identification number to the lease agreement (or other relevant agreement) and to keep records of payments under such agreement in its report of banking control on the basis of information and documents provided by the lessee).
Russian law does not impose any other restrictions related to international payments.
Are there any limitations on the amount of default interest that can be charged on lease or loan payments?
There are no statutory limitations on the amount of default interest. However, a Russian court may reduce its amount on the grounds that it is clearly incommensurate with the consequences of the default.
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?
Importation of aircraft into Russia is generally subject to 20 per cent VAT and customs duties up to 14.6 per cent (this may vary depending on the aircraft type).
Certain aircraft could, however, benefit from full conditional exemption from customs duty and import VAT depending on the type, manufacturer, empty weight and seat capacity.
In addition to the above, deferral of customs duties and VAT is available under certain customs procedures, such as temporary import.
Generally no customs duties or taxes are payable upon export of assets, other than customs processing fees. Exportation costs would also include broker’s fees and possible overheads.
The aircraft owner or mortgagee should not be liable for any payment of customs duties (subject to risk of arrest or confiscation of the aircraft; see question 24).
Insurance and reinsurance
Summarise any captive insurance regime in your jurisdiction as applicable to aviation.
Insurance under Russian law is a licensed activity, and the interests and liabilities of Russian airlines must be insured by Russian insurance companies. There are multiple insurance companies specialising in aviation insurance.
At the same time, Russian law permits a two-level structure with initial insurance in the Russian market and reinsurance in an international market. Such structure is widely used in aircraft finance and leasing.
In July 2016, a new law was adopted in Russia establishing the National Reinsurance Company, which is 100 per cent owned by the Central Bank of the Russian Federation. The new law contains a requirement to obligatorily reinsure up to 10 per cent of the total reinsurance amount with the National Reinsurance Company.
Are cut-through clauses under the insurance and reinsurance documentation legally effective?
There are no cut-through clauses in Russian law governed insurances. Although reinsurance cut-through clauses are standard for common law lease agreements with Russian lessees, they might not be enforceable in Russia. There is a view that, owing to Russian currency control restrictions, the payment of reinsurance amounts by the reinsurer directly to the loss payee based on a cut-through clause will be in breach of Russian law.
Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?
Assignment of reinsurance placed outside Russia is typical, and Russian law is not applied to it. However, there might be issues with enforcement of such assignment in Russia.
Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?
By default, the owner of an aircraft is deemed to be liable for the damage caused by such aircraft and will need to prove that operational control was with the lessee to avoid such liability.
The owner, financier or lessor may be held liable for damages caused by an accident only if it is involved in the operation of an aircraft or its maintenance, or if the relevant damage was its fault. Russia is a party to the Rome Convention on Damage Caused by Foreign Aircraft to Third Parties on the Surface of 1952, setting out criteria for operational control over the aircraft.
Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?
No. See question 33.
Third-party liability insurance
Are there minimum requirements for the amount of third-party liability cover that must be in place?
For flights over the territory of Russia, a minimum amount of third-party liability cover is calculated as statutory minimum wage as of the date of the insurance contract multiplied by two and multiplied by maximum take-off weight of the aircraft in kilograms. For international flights, regulation of the relevant state must be taken into account for calculation of this minimum amount.