Legal Aspects of Aircraft Leasing in Kazakhstan
Introduction: Types of Leases
Airlines and other aircraft operators lease aircrafts to operate aircrafts without the financial burden of buying them as well as to provide a temporary increase in capacity. The two main types of available leases are wet leasing , which is normally used for short-term leasing, and dry leasing , which is used for longer-term leases. In practice these types of leasing are generally used by air carriers, but in Kazakhstan the legislation does not provide and distinguish these two leases.
Introduction: Types of Leases
Airlines and other aircraft operators lease aircrafts to operate aircrafts without the financial burden of buying them as well as to provide a temporary increase in capacity. The two main types of available leases are wet leasing (1) , which is normally used for short-term leasing, and dry leasing (2) , which is used for longer-term leases. In practice these types of leasing are generally used by air carriers, but in Kazakhstan the legislation does not provide and distinguish these two leases.
In our article we would like to draw your attention on some legal aspects of international leasing, in particular, issues related to tax, customs and administrative regime.
The laws of Kazakhstan precisely provide only a financial lease. The financial lease should meet the following conditions:
- transfer of a lease’s subject to the lessee ownership and (or) provide the lessee’s right to acquire a lease’s subject at the fixed price provided in a lease agreement;
- the term of the lease is over 75% of the use term of the lease’s subject;
- the current (discounting) cost of lease payments are more than 90% of the transferring lease’s subject. (3)
Apart from financial leasing, the operating leasing is widely used in practice. An operating lease is generally a lease term that is short compared to the economic life of the aircraft being leased. An operating lease is commonly used to acquire aircraft for a term of 2-7 years (4). The differences between the taxation of operating lease and financial lease of aircrafts are described below.
Applicable Taxes and Custom Duties
The taxation regime for the financial lease of an aircraft is different from that of operating leasing. In an international financial leasing, income gained by the lessor will not be subject to withholding taxes. Since the aircraft will be delivered as the property of the lessor, the customs regime of temporary importation may apply with respect to delivery. The Tax Code (5) states that financial lease objects included in a list of a Resolution (6) are fully exempted from the payment of custom duties and taxes. According to this Resolution, “civil helicopters and planes, manufactured in CIS countries, and operating within 15 years of their date of issue, or manufactured in non-CIS countries and operating within 10 years of their date of issue” are included in the list of subjects of leasing under the customs regime of temporary importation of goods and means of transport. This means that upon delivery aircraft received from the lessor under a regime of temporary importation will not be levied for custom duties and taxes. Thus the term of temporary importation will be established according to the terms set in the financial lease contract.
According to the Tax Code, operating leases, unlike financial leases, are subject to a withholding tax and a 12% VAT. The tax rate for withholding tax is 20% or 15% depending on the structure of the lease agreement. If lease payments are considered as interest, then a 15% tax rate will be applied.
In order to enter into a lease agreement, the lessee must comply with certain state requirements. A lessee should obtain a permit from the Civil Aviation Committee for the purchase of a lease of an aircraft and should register the aircraft, the right to the aircraft and the leasing agreement itself. Otherwise, the lease agreement may be invalidated due to the failure to fulfill the main conditions of a leasing agreement.
In order to obtain a permit the lessee should submit an appropriate statement as well as the list of required documents (7) to the Civil Aviation Committee. The Civil Aviation Committee has 30 calendar days to examine the documents.
In order to register an aircraft, the right to the aircraft, and the lease agreement, the lessee should also submit to the Civil Aviation Committee an appropriate statement with the list of the required documents.
It is worth to mention that the Republic of Kazakhstan in March 2008 acceded to Cape Town Convention On International Interests in Mobile Equipment, which came into force as from May 1,2009. The Republic of Kazakhstan, however, has not yet acceded to the Protocol thereof.
Safety Standards: The Applicability of Eurocontrol Requirements in Kazakhstan
In 2009 the European Commission included almost all of Kazakhstan airlines in a list of air carriers forbidden from flying over European Union territory. In response, the Government of Kazakhstan is implementing a number of measures to harmonize the technical aviation requirements of Kazakhstan with those of European Union. Despite discrepancies between the requirements of Eurocontrol and those of the Civil Aviation Committee of Kazakhstan, fulfilling the requirements for compliance with Eurocontrol is generally recommended. It is worth mentioning that the requirements of Eurocontrol are stricter and that Kazakhstan is trying to comply with them: according to a recent Presidential Decree (8) , uniform European aviation requirements should be implemented by 2015.
There is still a demand in aircraft leasing in the region despite the number of issues, including administrative, tax and customs law. To minimize the risks associated with leasing the lessor as well as the lessee should consult qualified lawyers with experience in the field.
1) Wet lease is a leasing arrangement whereby one airline (lessor) provides an aircraft, complete crew, maintenance, and insurance to another airline (lessee), which pays by the number of hours operated. The lessee provides fuel and covers airport fees, as well as any other duties, taxes, etc.
2) A dry Lease is the lease of the basic aircraft without insurances, crew, maintenance, etc. Usually a dry lease is utilized by leasing companies and banks. A dry lease requires the lessee to provide aircraft registration. A typical dry lease starts from two years onwards and bears certain conditions as far as depreciation, maintenance, insurances, etc. are concerned.
3) The Law of the Republic of Kazakhstan On Financial Leasing dated July 5, 2000.
5) The Tax Code of the Republic of Kazakhstan dated 10.12.2008 №99-IV
6) Resolution of Government of the Republic of Kazakhstan On the Approval of the List of Leased Assets to which Apply the Customs Regime of Temporary Import of Goods and Vehicles, dated 21.08.2001 №1092.
7) Required documents are listed in the Resolution of the Government of the Republic of Kazakhstan On Approval of Rules On Permit Issuance for Ownership, Leasing, Trust Management or any Other Use Right of Aviation, Technique, Airdromes and Airports , dated 19.10.2002 № 1133 and include copies of institutional documents of the applicant, a financial report for the last fiscal year, etc.
8) The Decree of the President of Republic of Kazakhstan On the State Program for Accelerated Industrial Development of the Republic of Kazakhstan for 2010-2014 and Invalidation Force of Some Decrees of the President of the Republic of Kazakhstan, dated 19.03.2010 № 958.
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