november 2010 william ho – partner jackson chow – senior foreign registered lawyer william kk ho...

November 2010

William Ho – PartnerJackson Chow – Senior Foreign Registered Lawyer William KK Ho & CoThe statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute and shall not be construed as any tax or legal advice by William KK Ho & Co, the author or presenter and should not be used or relied upon for any purpose other than for general information.

Getting the Deals Done!! – Understanding and overcoming legal challenges in the PRC

William KK Ho & Co

Outline

Introduction - Aims

Cape Town and recordation of IDERAs in the PRC

Tax Bonded Areas and PRC Project Companies

1

2

3

PRC Regulatory Authorities – Approvals and Registrations

Conclusion

4

5

William KK Ho & Co

Introduction

Aims

Focus on the PRC

Understanding PRC Regulatory Requirements

Checklist when managing PRC aircraft financing transactions

Highlight recent developments relating to Aircraft Financing practices in the PRC

William KK Ho & Co

PRC Regulatory Authorities

Inter-relationships…

NDRC Approval SAFE Approvals CAAC Registrations

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National Development and Reform Commission (NDRC)

Responsible for macroeconomic management of the PRC

Formulates policies for economic and social development, guides the economic system of the PRC

NDRC Approvals

Applications sought by the relevant entity wishing to import, purchase or lease aircraft into the PRC – applications to specify:

number and type of aircraft; and

structure of lease or financing (detail the amount of financing).

time restrictions to obtaining SAFE approval.

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State Administration of Foreign Exchange (SAFE)

People’s Bank of China (PBOC)

China’s central bank.

Formulates and implements monetary policy.

provides financial services to promote economic growth and financial stability.

Responsible for planning and administrative control of foreign exchange.

Formulates policies and regulations and manages the exchange rate and foreign exchange reserves.

SAFE delegated authority by PBOC to regulate compliance with FX regulations.

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State Administration of Foreign Exchange (SAFE)

SAFE – responsible for regulating compliance, approving and registering foreign exchange transactions

Monies to be remitted outside of the PRC will require SAFE approval –

Loans, Leases, Guarantees, Fee Letters, etc will require registration with SAFE and its approval

Applications for SAFE Approval

Failure to obtain approval prohibits purchase of foreign currency to satisfy payment obligations offshore

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Civil Aviation Administration of China (CAAC)

Civil Aviation Law of the People’s Republic of China (“Aviation Law”)

Responsible for “Civil Aircraft” affairs

“Civil Aircraft” means aircraft other than those used for military, customs and police services (Article 5)

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CAAC Registration Rights in the PRC

Article 11of Aviation Law – Rights of a civil aircraft to be registered with CAAC:

(1) the ownership rights of a “civil aircraft”;

(2) the rights for the acquisition and possession of a “civil aircraft” through an act of purchase;

(3) the right to possess the “civil aircraft” under a Lease where the term is more than six months; and

(4) the mortgage rights of a civil aircraft

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PRC Regulatory Authorities - CAAC

Any:

- acquisition

- transfer

- extinction

of ownership of a civil aircraft must be registered with CAAC

(Article 14 – CA Law)

Ownership Rights

The mortgage shall be “established“ by registering the mortgage with CAAC by both the mortgagor and the mortgagee


Once the mortgage has been registered, ownership of the aircraft shall not be transferred without the consent of the Mortgagee


Mortgage Rights

An aircraft lease (including a financing lease) which has a term longer than 6 months shall require the lessee to register its right of possession over the civil aircraft with CAAC

Any unregistered possession right shall not act against any third party claim


Possession Rights

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CAAC Registration Rights in the PRC

CAAC registrations aim to give public notice of an interested party’s rights with respect to the Aircraft – failure to register shall not act against any third party claim.

Registered rights of civil aircraft may be made available to the public for inquiry, reproduction or extraction (Article 12)

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Cape Town Convention and Protocol in China

Cape Town Convention & Protocol

Convention and Protocol signed on 16 November 2001

China ratified the Cape Town Convention and Protocol on 3 February 2009

Cape Town came into force in China on 1 June 2009

Creates international standards for registration, ownership, leasing and enforcement of security and legal remedies for default

International Standards assist domestic importers of aircraft to access international financing

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Priority system (based on first to file) in respect of international interests in Aircraft Objects

Remedies available to enforce international interests:

take possession

sell or grant a lease; and

receive income or profits from management of the aircraft

CAAC registration rights to co-exist with Cape Town IR system?

Mortgage rights registration necessary? Possessory rights registration necessary?

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China has nominated CAAC as an authorised entry point – similar to FAA

Authorisation codes and IR register

CAAC provides for standard form applications for authorisation codes for:

registration;

amendment; and

discharge,

of an international interest

Supporting documents to be provided CAAC for registration of international interest

- Certificate of Nationality Registration for the Aircraft - Extract of relevant transaction documentation

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Upon ratification, China also pronounced the certain declarations

Declaration under Article 39(1)(a) – certain non-consensual rights or interest in China shall rank ahead of registered international interests (without any formality of registration)

Bankruptcy expenses

Liens of an employee for unpaid wages

Taxes payable by the debtor

Remuneration for salvaging and aircraft; and

Fees for custody and maintenance

Declaration under Article 50(1) - Convention shall not apply to “internal domestic transactions” in the PRC

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IDERAs

Irrevocable De-Registration and Export RequestAuthorization (IDERA)

Allows for the deregistration, export and physical transfer of the Aircraft out of the State of Registration

IDERA to be registered with CAAC

Recent developments in the recordation of IDERAs

CAAC Guidelines/Procedures for the De-registration of Civil Aircraft According to an IDERA (Ref. No.: AP-45-AA-2009) (June 2009)

Airworthiness management program held in Beijing provide training and information seminar on the recordation of IDERA’s in PRC (Sept 2010)

William KK Ho & Co

IDERAs

CAAC Guidelines/Procedures

Recordation of IDERAs (Part 2 of Guidelines)

Agreed form IDERA (in duplicate) to be submitted to CAAC

Signed by an authorized person and affixed with company chop (if individual, signed by such applicant)

Submitted with supporting documentation (evidence authorization) and other evidence as required by CAAC

CAAC to review application. Determination within 20 working days.

CAAC if satisfied, shall record and retain one copy of the IDERA and return the other copy to the Applicant

Bottleneck of recordations. Process still being formalised.

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IDERAs

Revocation, amendment and deregistration - IDERA

Authorization given under IDERA shall not be revoked or amended without the consent of the Authorized Party in writing (Article 1.6.2)

Removal of an authorization at the request of the Authorized Party (Article 1.6.2)

Nominal fee will be charged on de-registration determined by CAAC (Article 1.6.4)

Authorized Party to complete agreed form for deregistration (Form AAC-104(06/2008)) and signed by authorized person with company chop to be affixed (Article 3.1)

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IDERAs

Procedures for deregistration - IDERA

Authorized Party to file de-registration application together with supporting documentation:

evidence of Authorised Party’s legal identity

authorisation issued by a PRC court consenting to the de-registration and export the aircraft out of China; and

such other documents required by the CAAC

If application satisfied, CAAC to issue a Letter for Civil Aircraft (Form AAC-194(06/2008)) within 5 working days after its receipt of the de-registration application

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Inter-relationships…

NDRC Approval Precondition to import,

purchase or leasing of aircraft

Conditions tied to application

SAFE Approvals Leases, Loans, Fee

Letters, Guarantees, etc will need SAFE approval

Failure prohibits purchase of foreign currency to satisfy obligations

CAAC Registrations Notice to public of

interested party’s rights in aircraft

Inherent protections afforded under PRC law

Harmony - IR & CAAC ??

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China Banking Regulatory Commission (CBRC) notice on “Financial Leasing Companies in the Territory of Bonded Areas”

FLCs established under CBRC be permitted to establish “project companies” within particular "bonded zones/areas" in China

“Bonded Areas”

PC lease to a domestic airline be regarded as “cross-border leasing transaction” end user Airline to take benefit of competitive tax rates

Permits FLC’s to be more competitive in global aircraft leasing market

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Background:

SPCs traditionally established in tax neutral jurisdictions

SPCs enjoy competitive tax benefits, bankruptcy remoteness and integrally involved in limited recourse financings

PRC domestic FLCs subject to heavier tax burdens

Foreign lessors using offshore SPCs (appropriately structured) enjoy favorable withholding tax rates, lower local tax liabilities

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PRC Project Companies now participating in PRC Leasing transactions

PC’s, not equivalent to offshore SPCs but have characteristics of SPCs:

PC can enter into one leasing transaction, and would own one asset (or assets that are subject to a common leasing transaction)

PC enjoys certain favorable tax treatments

FLCs to better manage risks of leasing transactions

Flexibility for FLCs to dispose of the asset

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Establishing an Onshore PC

PC’s akin to being granted a “business licence”

FLC to satisfy threshold conditions (Article 6)

FLC - capital adequacy ratio of not less than 8%

net assets of not less than RMB 1 billion (allowing for loss reserves)

Sound corporate governance, internal control and risk management systems

FLC applicants to make submission to CBRC for approval (Article 7)

Ongoing reporting obligations to CBRC (Article 15)

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Traditional SPCs FLC Project Companies

Jurisdiction: Cayman Islands, Ireland

Limited recourse:

Bankruptcy remote:

No other business Covenants:

Grant of Share Charge:

Favorable PRC Tax Treatment:

Jurisdiction: PRC Tax Bonded Areas

Limited recourse characteristics:

Bankruptcy remote characteristics:

Single asset business:

Strict set up qualifications:

Favorable PRC Tax Treatment:

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Conclusion

Revert to our Aims Understanding PRC Regulatory Requirements

NDRC approvals

SAFE approvals

CAAC Rights registrations

Cape Town IR registrations

IDERA registrations

Checklist when managing PRC aircraft financing transactions

Recent developments relating to Aircraft Financing practices in the PRC – IDERA and Cape Town registrations, Tax Bonded Areas & Project Co’s

William KK Ho & Co

Questions?

William KK Ho & Co

Getting deals done !! Understanding and overcoming legal challenges in the PRC

november 2010 william ho – partner jackson chow – senior foreign registered lawyer william kk ho...

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