Why the British Virgin Islands make sense for business jet ownership vehicles

Alasdair Whyte
By Alasdair Whyte April 17, 2012 10:46
Simon Lawrenson, a partner in the Hong Kong office of Mourant Ozannes, examines the use of British Virgin Islands as the corporate vehicle of choice for high-net-worth individuals, companies, arrangers and lenders in the acquisition, financing and leasing of corporate and private jet aircraft and helicopters.

British Virgin Islands StampThose of us who regularly leaf through the business pages of the South China Morning Post over a morning cup of coffee will have been struck by the increasing coverage provided to the development of the regional business-jet market. Only very recently the paper reported a 45.3% growth in private jet acquisitions in mainland China for 2011. The same article also reported on the announcement of a high profile joint venture between NetJets and a consortium of Chinese investors led by private equity firm Hony Capital and Fung Investments. Additionally, Embraer recently estimated a rise in demand for private jets to 8,600 – 11,200 aircraft by 2021, with the Asia Pacific region contributing between 16-19% of total demand.

This growth, mirrored previously in other markets (Eastern Europe, Russia and the Middle East in particular) has led to another, significantly less obvious market development: the utilisation of off-shore companies, and more particularly BVI companies, as the acquisition finance vehicle of choice. This article examines some of the reasons behind this trend and some of its benefits.

The business-jet market has seen remarkable growth over the past fifteen years, notwithstanding the significant challenges posed by the recent global financial crisis. The evolution of fractional ownership programs (the period 1995 to 2010 saw delivery of over 1,150 business jets to fractional operators), the growth of a new class of millionaires and billionaires in emerging markets such as Russia, the Middle East and more recently China and the increasing use of corporate jets by companies for high-speed business travel, have all contributed to the market’s increasing maturity. With aircraft order books beginning to bounce back and more liquidity available from private banks and institutional lessors, more and more purchasers and financiers will be looking to structure acquisitions using vehicles established in tax efficient, creditor friendly and cost-effective jurisdictions such as the British Virgin Islands (BVI).

Why BVI?

The BVI has become a leading jurisdiction for the establishment of vehicles in connection with the acquisition, financing, sale and leasing of private and business-jet aircraft. But why BVI?

Here a few suggestions:

i) Investor confidence: HNWIs, leading aircraft purchasers, lenders, arrangers and lessors have been utilising BVI companies as part of their acquisition finance structures for many years. The BVI is widely recognised as providing political, economic and legislative stability. As a result, market participants have developed a clear understanding and confidence in a tried and tested jurisdiction.

ii) Tax neutrality: Tax planning and management are important considerations in the establishment and operation of an aircraft holding company. Except for nominal fees for the optional filings discussed below, there are no taxes, fees or other charges (including stamp duty) that are payable (either by direct assessment or withholding) in respect of the execution and delivery of the aircraft acquisition and financing documents. BVI companies are also exempt from income and corporate tax, whilst the BVI Government does not levy capital gains tax on companies incorporated under BVI business companies legislation.

iii) Modern and flexible legislative framework: The jurisdiction offers commercial parties a legal regime based upon English corporate and common law principles that is modern and flexible whilst providing creditor friendly security enforcement procedures.

iv) Pricing: The cost of incorporation and on-going corporate administration of a BVI company, as well as BVI legal fees are extremely competitive when compared against other leading financial centres.

Lender Protection

It is not uncommon for business-jet purchasers to finance their acquisition by way of a secured lending arrangement. A typical secured financing would, for instance, contemplate the borrower’s (i.e. the BVI company) obligations being supported by an aircraft mortgage, the usual assignments of insurances, aircraft/engine maintenance support agreements etc. and potentially a guarantee by a HNWI or other third party. But what additional protections are offered under BVI law to lenders?

It is very common for lenders to take security over the shares in the BVI aircraft holding company – enabling the lender, its nominee or its receiver to assume legal and economic control of the aircraft holding company upon exercise of its enforcement powers. This security typically takes the form of an equitable mortgage which is governed by BVI law.

Whilst, generally speaking, there are no “perfection” requirements under BVI law (i.e. save for certain limited circumstances no steps have to be taken as a pre-requisite to the validity or enforceability of security created either by BVI aircraft holding companies, or in respect of that company’s shares), there are steps which can and, as a matter of course, are taken to ensure a lender’s security is protected and is provided with priority under BVI law against unsecured creditors and subsequent unsecured creditors:

i) Where a BVI aircraft holding company creates security over any of its assets – such as an aircraft mortgage or a security assignment of insurances – particulars of the security may be filed with the Registry of Corporate Affairs in the BVI. Particulars of the security will then be recorded on the official “Register of Registered Charges”, a publicly searchable register, putting third parties examining the register on notice of the existence of such security. The filing also acts as a priority determinant under BVI law vis-à-vis subsequent security in respect of the secured asset (whether or not particulars of the subsequent security are filed), as well as the claims of unsecured creditors.

ii) Where a lender has taken security over the shares of the BVI aircraft holding company (typically held by or on behalf of the HNWI or the corporate owner) then a notation can be entered on the company’s register of shareholders to evidence the existence of such security. Again, this acts to place third parties examining the register on notice of the existence of such security. It is also possible, where the parties agree, to file the annotated register with the Registry of Corporate Affairs, thereby placing on public record the existence of such security.

The security package, together with the filings and annotations, combine to create a clear and effective security package that will be recognisable and enforceable under BVI law – and which is attractive and acceptable to borrowers and lenders alike.

The future

As emerging markets in Asia Pacific, Africa and Latin America continue to grow and with them, the numbers of billionaires and multinationals increase, business-jets are likely to continue to be much sought after “productivity tools”. With confidence in, and knowledge of, the legal systems of such emerging markets still developing, purchasers and financiers will wish to structure acquisitions in a stable, creditor friendly, tax neutral jurisdiction. The BVI is well placed to meet this continued demand.

Alasdair Whyte
By Alasdair Whyte April 17, 2012 10:46

One Minute Week Newsletter