So, You Want to Buy an Aircraft? A Guideline to Purchasing an Aircraft in the UAE
Transport & Logistics Focus
"Private Aircraft Ownership on the Rise: Global fleet of private jets set to double in two decades. UAE regulations on aircraft ownership outlined."
Law Update: Issue 360 - Africa and Transport & Logistics
Yazan SaoudiPartner,Transport & Insurance
Bushra Abu TayehSenior Counsel,Transport & Insurance
Wael ElgouhariSenior Associate,Transport & Insurance
Ameen KimParalegal,Transport & Insurance
With air travel becoming ever more increasingly accessible with passenger airlines dominating the modern mode of transport, individuals are now racing to have an aircraft for themselves. According to one report, the purchase of private aircrafts is likely to reach its peak levels this year with the global fleet of private jet doubling in the past two decades[1]. Buying an aircraft is an exciting and rewarding process that requires a talented team of professionals and experts that can aid you in this journey. This includes, among others, an aircraft broker, the certified inspection mechanics, aviation lawyers, and an aircraft operator.
In the UAE, if the buyer desires to purchase an aircraft that will be registered/based in the UAE, the aircraft needs to be either owned or operated by UAE national entity or a UAE national individual.
The types of companies permitted are as follows:
an onshore UAE company (minimum 51% of local ownership), or
a free zone UAE company (no requirement of local ownership).
The aircraft can also be owned by a foreign entity, provided it is operated by a local UAE operator.
In general, it is advisable for potential aircraft buyers to set up a company, or Special Purpose Vehicles (SPVs), which are often created for the sole purpose of aircraft registration, ownership, as well as cross-border finance transactions. This is a common industry practice implemented by individuals and legal entities that desire to purchase an aircraft but also limit their exposure to any unnecessary liabilities in respect of the underlying asset. As title to aircraft is often transferred to the SPV rather than to the owner, any claims arising in connection with the ownership or the operation of the aircraft will be brought against the SPV as the legal owner of the aircraft.
The UAE is gaining increasing popularity as a preferred location for establishing aircraft holding structures in both domestic and international aviation transactions. This is primarily due to its favourable tax, cost, and efficiency advantages. In particular, the Abu Dhabi Global Market (ADGM) offers a highly competitive incorporation process with reasonable fees, efficient completion timelines, and the convenience of fully online procedures. Notably, the special purpose vehicles (SPVs) in the ADGM are not obligated to maintain a physical presence and the process of winding down operations is relatively straightforward, eliminating the need for a liquidator. Additionally, the Dubai International Financial Centre (DIFC) and the Dubai Airport Freezone (DAFZ), along with over 40 other free zones across the country, provide excellent options for incorporating SPVs for the purposes of aircraft ownership and financing.
The UAE is gaining increasing popularity as a preferred location for establishing aircraft holding structures in both domestic and international aviation transactions.
An aircraft broker often aids the potential buyer and seller through the preliminary negotiations of the aircraft specifications in the applicable price range. As per the UAE General Civil Aviation Authority’s (GCAA) stipulations, only FAA/EASA/TCCA approved types are accepted within the UAE. Once a buyer has carefully chosen the type of aircraft for its intended purpose of use through the broker, the broker will pair the buyer with a potential seller through distributing a Letter of Intent (LOI). The parties’ legal teams are then involved in the review and negotiation of the LOI. LOIs in the context of aircraft purchases may be unexpectedly comprehensive, with some key material terms pre-determined by way of easing into the final Purchase Agreement between the parties.
In the LOI, parties generally agree upon the purchase price, the deposit amount, the aircraft specifications, the pre-purchase visual inspection, and the physical conditions in which the aircraft will be delivered (i.e. delivered on an as-is basis or on a conditional basis). The LOI will also often include the appointment of a joint escrow agent from aircraft escrow companies for the purposes of placing the deposit. An Escrow Agreement will arise between the parties and the agent once the agent has been appointed. Once the LOI has been reviewed and negotiated by the parties’ legal team, it is ready for execution and a timeline is launched.
As the purchase and sale of aircrafts is highly regulated and requires a complex and multifaceted approach, it necessarily invokes the input of qualified and experienced relevant experts.
Before the LOI expires, the buyer must conduct a pre-purchase visual inspection, generally at their own expense. Depending on the provisions of the LOI, the inspection may determine an alteration in the overall purchase price. The Aircraft Purchase Agreement (APA) will then follow, which must be drafted by a qualified aviation lawyer. The APA contains the material terms of the LOI, such as the purchase price, deposit, terms of payment, warranties, as well as a timeline for the pre-purchase inspection and any insurance coverage for the aircraft. Additionally, the APA may be coupled with an aircraft Management and Operations Agreement, if the buyer is a leasing company that also provides operational services.
In the APA, it is important that the delivery location is specified and that there is allowance for flexibility for other locations upon mutual agreement in writing between the parties involved. The delivery location for aircraft purchases holds significance in terms of tax implications as varying laws and regulations across jurisdictions impact applicable taxes and overall tax efficiency (value-added tax, import duties, registration fees, and operating/corporate taxes, etc). Therefore, consulting tax professionals in choosing the ideal delivery location for the transaction is crucial in tax planning to minimize costs and maximize tax benefits for aircraft buyers and sellers.
The purpose of the pre-purchase inspection is for the seller to ensure and the buyer to confirm that the condition of the aircraft is as described in the Purchase Agreement. The inspection takes place in a hangar/maintenance facility that is qualified for the inspection of the type of aircraft. The aircraft inspector conducts an inspection of the aircraft, the aircraft documents and logbooks, and prepares a report which would detail any discrepancies. The parties may seek to further negotiate the price or place the obligation on the seller to fund any repair costs.
Once the aircraft has been accepted by the buyer, any remaining technical inspections or remaining rectifications of discrepancies will commence. The appointed inspector will then execute and deliver the Technical Acceptance Certificate to the seller and the Buyer must deposit the remaining purchase prices to the escrow account. Once the bill of sale has been signed by the seller and informs the escrow agent that the sale has been completed, the buyer must instruct the escrow agent to disburse the funds. The buyer may then finally take physical possession of the aircraft after purchasing the necessary insurances.
Once a successful delivery has been completed, the buyer must immediately file the aircraft’s registration with the GCAA in accordance with the Cape Town Convention and Protocol of 2001, to which the UAE is a party. The Cape Town Convention is a treaty established to create the International Registry (IR), which is an online international registration platform that provides a standardized way to register interests of buyers, sellers, creditors in movable property, such as aircrafts.
Currently, the UAE has elected to implement AEP codes for any aircrafts to be registered in the state. An AEP code is a code provided by an Authorising Entry Point which must be entered at time of registration where the registration is to be made on an airframe for which the state is the state of registry or has taken regulatory steps to so become. Therefore, interest bearers of an aircraft registered in the UAE must retrieve a code from the GCAA as the designated AEP before making a registration with the International Registry.
The GCAA issues AEP codes for the following interests and rights:(a) International interests, prospective interests and registrable non-consensual rights and interests;(b) Assignments and prospective assignments of international interests;(c) Acquisitions of international interests by legal or contractual subrogations under the applicable law;(d) Notices of national interests;(e) Subordinations of interests referred to in any of the preceding sub-paragraph;(f) Amendments of any of the above mentioned registered interests and,(g) Discharge or release of any of the above mentioned registered interests (GCAA CAR V (Issue 7) Section 1.5.5.).
As of this date, it is not required to obtain an AEP code for aircraft engine IR filings as interest bearers may file such interests directly on the IR website. Furthermore, subsection (g) of the above-mentioned UAE Civil Aviation Regulation (CAR) has not yet been amended to reflect the current position of the International Registry, which is that an AEP code for the discharge of an IR interest is no longer needed. However, despite the delay in the amendment of the CAR, as the GCAA follows the IR, it is currently not necessary to file for an AEP code for the discharge of an IR interest .
Our Aviation Team at Al Tamimi & Co. has extensive experience in aircraft purchases on behalf of VIP clients and government entities for the past decade, advising on the various transactions from start to finish from the initial selection of the aircrafts till the filing of the UAE AEP codes on behalf of the new owners of the aircraft. As the purchase and sale of aircrafts is highly regulated and requires a complex and multifaceted approach, it necessarily invokes the input of qualified and experienced of relevant experts. For any inquiries regarding potential aircraft purchases, our Aviation team can readily and competently guide our clients through the entire transaction and through the selection of experts and brokers due to the firm’s established presence in the UAE aviation industry and abroad.
[1] High Flyers 2023, Institute for Policy Studies https://ips-dc.org/wp-content/uploads/2023/04/High-Flyers-2023-Report.pdf
For further information,please contact Bushra Abu Tayeh.
Published in August 2023
