Geoff Thomas looks at the question of offshore registry and how it affects the business aviation industry.
Our MEBA show in November showed one growing sector of exhibitors attracting the attention on many owners and operators – and that was the representatives of the offshore registries.
There are many reasons why aircraft owners and even airlines and commercial aircraft operators choose a country other than their own in which to register their aircraft. While most of them involve saving time and/or money in one way, shape or form – there are plenty of other perfectly valid reasons why the obvious ‘home’ country doesn’t necessarily become the registration authority of choice.
The maritime industry has worked with ‘flags of convenience’ for generations and although there have been many instances where a lack of regulatory control has caused problems, international cooperation in tightening up the system has eliminated many of the earlier difficulties. But is this the same for aviation?
The offshore registries on behalf of their governments are anxious to refute that the aviation industry operates anything approximating to a ‘flag of convenience’ scenario. And owners across the region testify to the benefits of registering with reputable departments in states such as Bermuda, the Bahamas, the Cayman Islands, Aruba, Malta and even the tiny Isle of Man which sits proudly in the Irish Sea between Great Britain and Ireland.
The largest aircraft register in the world is, not surprisingly, in the USA and while the following regulatory framework refers primarily to airliners registered there – similar regulations apply in many of the world’s larger and more developed countries.
There are more corporate jets registered in the USA than any other state – but there are a great many reasons why operators are increasingly looking at registration in other less regimented countries. For instance, island states in the Caribbean and western Atlantic regions are close to Florida and their aviation authorities frequently come under the aegis of the British civil aviation authority, the CAA.
The aviation authorities of these comparatively small countries are frequently knowledgeable, friendly and fluent in aviation’s language of English. And even though the official language of one of them - Aruba (an ex-colony of the Netherlands) - is Dutch, most people speak English and the Aruba Aviation Act is freely available in both languages.
Tiny Aruba is an autonomous country within the Kingdom of the Netherlands and it’s also officially an overseas territory of the European Union – while situated in the south-western Caribbean. Since the initiation of its offshore programme some 16 years ago, its registry has logged more than 400 aircraft, flown by more than 50 different operators in countries from Armenia to Kazakhstan and from Australia to the Philippines. The registry has also validated around 40 MROs worldwide.
In the case of shipping, cheaper registration fees, lower taxes, enhanced freedom from labour and conservation laws – and sometimes even diluted safety standards - are reasons for many maritime flags of convenience. Fortunately, the international regulatory bodies for aviation are far more strict and it’s unlikely that so-called ‘rogue states’ will emerge as popular places to register either airliners or business jets.
So what are the advantages for the world of aviation? Well according to owners the state of registration has far more to do with lease conditions and tax implications, along with a less complex legal framework.
Sometimes, too, aircraft appear on a particular register because the relevant leasing company is based in the country of registration rather than at individual operator’s home base in another country. Due to its lower corporation tax, Ireland has always attracted a number of multi-national aircraft leasing companies and the Republic’s Shannon airport has become something of a magnet for MRO operations.
Offshore registration allows a company to form a corporation in the registering country to own and operate aircraft without any such restrictions. And as an additional bonus for some private business jet owners and operators, offshore registration is confidential and not on the public record.
A number of Middle Eastern private jet owners have discovered the advantages of operating their aircraft under the register of a tiny island in the Irish Sea between Great Britain and Ireland.
The island is the Isle of Man, which may be tiny – indeed it is 10 per cent smaller than Bahrain – but, like its Gulf cousin, it is a giant in banking circles and in the registry of private aircraft.
The Isle of Man Aircraft Register was established on May 1 2007 and has grown in popularity with aircraft owners because of its commitment to customer service. It is now attracting increased business from Middle East-based clients.
“The Register is aimed at professionally flown private or corporate jets and twin-turbine helicopters,” explained Chris Broadhead, UK director, Charterhouse Lombard Aviation Services who were with the islands civil aviation authority at the MEBA show to help introduce business aviation operators to the registry.
“It is the only dedicated corporate aircraft register in Europe and also the only European off-shore register,” Broadhouse said.
Charterhouse already has a portfolio of clients in the MENA region and the company now operates a dedicated office in Dubai under managing director Richard Smith. “We can assist clients in registering their aircraft with the Isle of Man Registry, as well as providing a structure to hold the aircraft as an asset if this is also required,” Smith said.
The island’s government is very proud of its new role in aviation and says the rapid growth of the Register since its launch is evidence that an appetite existed for a quickly-reactive, well regulated private register in a European-friendly time.
Three Cessna Citation Jets were registered within two days of the launch. One year ago the Register had some 176 aircraft, including an Airbus 340 and an Embraer Phantom 100 – indeed it was the first plane of its type to be registered in Europe. By last month, the registered aircraft passed the 300 mark.
“To maintain our high service levels we have expanded our administration resources in the Isle of Man and increased our authorised surveyors. We currently have 15 airworthiness surveyors, including surveyors resident in Switzerland, USA, Ireland, UK and the Isle of Man, which enables us to provide an efficient and cost-effective service,” Brian Johnson, the Isle of Man director of civil aviation, who was at MEBA, said.
The Isle of Man has an international reputation as a tax-efficient but responsible and co-operative jurisdiction and appears on the OECD ‘white list’ of countries complying with the global standard for tax co-operation and exchange of information.
Johnson outlined some other benefits of registering an aircraft in the Isle of Man while at the MEBA event. These include:
• High regulatory standards;
• High service levels and quality international reputation;
• Neutral nationality registration prefix;
• Secure mortgage register;
• No insurance premium tax (five per cent in UK);
• European time zone;
• Professional infrastructure with experience in aviation finance;
• A Standard & Poor’s and Moody’s AAA-rated jurisdiction;
• Clear and simple taxation regime;
• Stable legal and political environment.
Operators and owners of the smaller aircraft, however, will not be able to take advantage of the offer. “We are not able to register fixed-wing aircraft below 5,700kgs other than for residents of the Isle of Man,” Johnson said.
Owners and operators do need to ensure that the ‘flag’ they are registering under is reputable such as Isle of Man, Aruba, Caymen Malta etc.
The directors general of ICAO’s Civil Aviation Conference on a Global Strategy for Aviation Safety (DGCA/06) recommended that “States should eliminate flags of convenience and prevent illegal operations as well as the possible export of such activities from one State or group of States to another and exchange safety information to this end” and that “the Council should study the issue of flags of convenience taking into account the experience gained by other international organisations”.
And so it is that aviation, often held up as a role model for shipping, has been taking lessons from the maritime world.
The exchange of information and ideas between the two industries may have been predominantly one way as shipping has looked at how aviation manages safety (voyage data recorders and bridge resource management are two examples of borrowed ideas). But the airline industry has also turned to the maritime sector to learn how it deals with open registers.
While aviation is highly regulated in terms of safety, the liberalisation of the sector has resulted in airlines registering both themselves and their aircraft in different countries where standards of safety checks and balances may be deemed inadequate by internationally-agreed standards.
As part of its approach to the problem, ICAO has looked at how its counterpart in shipping, the International Maritime Organisation (IMO), had approached the problem and whether it could adapt any of the maritime world’s responses. Similarities in the regulatory framework of the two industries were noted, with the flag state in shipping, for example, corresponding to the ‘state of registry’ in aviation. In shipping, however, ICAO noted that there was no equivalent to aviation’s ‘state of the operator’. Curiously, however, it adds: “A genuine link must exist between the state and the ship”. This genuine link principle may exist on paper but it has never been defined.
While acknowledging primary responsibility for ensuring that ships comply with international laws rests with the flag state, ICAO noted that enforcement of the principle is in practice carried out by port-state control. It also noted the harmonisation of inspections between the various regional port state control regimes and the publishing of detention and inspection data on the public-access Equasis website. “Effective port state control has placed a higher degree of pressure on flag states, as they could fall into disrepute if ships under their registry are detained and that state’s registry could be, in effect, blacklisted,” ICAO noted.
An aviation port-state control system already exists, in that countries can and do take action against aircraft, airlines and states of registry with powers of detention and the ability to impose bans on use of their airspace. ICAO, however, believes the authority to detain non-airworthy foreign aircraft “is not as formalised as it is in the maritime world”, while guidance on “search and inspection rights” of states is lacking. “The absence of international standardisation is clearly an obstacle to a more efficient and uniform means of controlling flags of convenience,” the aviation agency noted. The liberalisation under open skies policies has brought with it greater demands for globally harmonised safety oversight.
Along with the Isle of Man, Malta is among European jurisdictions highlighting the issues and advantages inherent in registering an aircraft offshore. However paradoxical it may seem, it is not inaccurate to state that Malta can claim to be an onshore jurisdiction with offshore advantages.
It could be said that one of Malta's biggest advantages is that it is not an offshore jurisdiction but an EU country in the Eurozone region with quasi-offshore advantages. Also, Malta is not selling itself as a flag of convenience but a flag of excellence. Malta is banking on its experience in the shipping and yachting industry, where it is one of the most highly respected flags worldwide, and the jurisdiction's main aim is to emulate these successes in the aviation sector.
Tax efficiency is becoming an increasingly important driver in owner and operator decision making regarding where to register. The wider issues include the status and reputation of the jurisdiction; the expertise and contacts of its professionals; geographic convenience and the quality of its facilities and associated services.
There is also a need to ensure registry requirements enable the staff to meet the owner's individual needs and that it has the staff and expertise to provide a prompt and cost-effective registration service.
Because of its geographical location and history within the British jurisdiction, Malta is of particular relevance to both North Africa and the Middle East, and according to its aviation authority, its main advantages comprise: Good transparency of rights and interests in the aircraft; stimulus for the development of finance and operating leases of aircraft; clear rules on the tax treatment of the finance charge combined with tax deductions that are available to finance lessors complemented by capital allowances for lessees; and broader registration possibilities.
There is also an absence of a withholding tax on lease payments where the lessor is not a tax resident of Malta and competitive minimum depreciation periods for aircraft.
A Maltese spokesman says: "The private use of an aircraft by an individual who is not resident in Malta and is an employee or officer of an employer or company or partnership whose business activities include the ownership, leasing or operation of aircraft used for international transport does not constitute a taxable fringe benefit."
Malta, he adds, implements the provisions of the Cape Town convention on international interests in mobile equipment and also its aircraft protocol. "Effectively this grants secured lenders a higher degree of protection and more effective remedies while allowing lower borrowing costs,"
Over the past five years, Malta has slowly but surely been registering significant growth in all sectors of the aviation industry. It has attracted the likes of Dubai Aerospace subsidiary SR Technics, Germany’s Lufthansa Technics as well as Comlux and DC Aviation. The number of AOCs issued has risen to 14 and this is expected to increase.
Malta, he points out, is an EASA country held in the highest regard by the FAA and ICAO. It is a geographically convenient English-speaking jurisdiction set on making aviation, and particularly business aviation, feel at home.
Like Malta, the IoM says that high regulatory standards, service levels and a high-quality international reputation are keys to success. Also significant are the absence of insurance premium tax as opposed to 5% in the UK; an AAA-rated jurisdiction; and professional infrastructure with experience in aviation finance Status on the OECD 'white list' of countries complying with the global standard for tax co-operation and exchange of information; a clear and simple taxation regime; and stable legal and political environment.
Choosing a jurisdiction can be hard and companies such as Switzerland's AeroEx point out that it is crucial to register the aircraft with the most suitable ‘offshore’ authorities.
It warns: "With the new upcoming EASA regulation for commercial and non-commercial air transport operating into and within the EU coming into force in 2012, all registrations performed in different countries will be more difficult. This will decrease the tendency, for example, to register many aircraft in the United States, Cayman Islands, Bermuda and Isle of Man in order to act under less bureaucratic oversights."