How to set up an aviation leasing platform in Ireland

Since the 1970s, Ireland emerged as the pre-eminent destination for international aircraft lessors. The exact number of Irish-incorporated leasing entities remains vague. But an investigation by the Central Bank of Ireland found evidence of 1,132 entities based on data from 2014.

The attractiveness of Ireland is well known (See Ishka Insight: Will they stay? Irish lessors, Brexit and tax).  But how do investors go about setting up leasing platform in Ireland? There are three common leasing platform options used according to Karl McDonagh, a tax consultant with PwC in Dublin: a trading platform, a non-trading platform, and what’s known as the Section 110 structure, a type of special purpose vehicle (SPV). 

“The appropriate structure will depend on what the company is hoping to achieve. There are advantages and disadvantages to each, but all are well tested within the industry. But importantly, it only takes three to five days to set one up. “You can come here Monday, and by Friday a newly incorporated company can exist.”

 

Quite straightforward  

 

For investors and existing lessors wishing to incorporate in Ireland there a few regulatory hurdles to pass.  “It’s very straight forward,” says Tom Woods, a partner at KPMG Ireland and head of aviation finance and leasing.  “Unlike other leasing regimes there aren’t any bilateral negotiations or discussions where you need to get authorisation or meet certain conditions.  All you need to do is establish a company, appoint directors with relevant leasing experience, and build out a leasing platform from there.” 

The usual leasing model is to have one company per aircraft. That allows them to have one parent company which has all the substance in Ireland to qualify for tax purposes.  In Ireland, it takes five days maximum to set up a holding company as a legal entity.  After that, “the whole thing takes one to two weeks to be operational,” adds Woods.

The speed of incorporating subsidiary companies in Ireland means an investor can do so only when a deal pipeline emerges and less time and money is spent devoted to legal structures. When a lessor’s aircraft is due for delivery, it can instruct its lawyers to set up a new entity. So, a client doesn’t need to pay director’s fess or produce financial statements for a company this isn’t in use.

 

Trading or non-trading?

 

Establishing a trading platform has no minimum equity capitalisation requirement.  So, a new investor can establish a company with only €1 of share capital. Ireland has two corporation tax rates.  The lower rate of 12.5% is the trading corporation tax rate and 25% is the higher corporation tax rate for passive income. Naturally prospective lessors want the lower rate, but to do so they must show some kind of tax substance or sufficient activity in Ireland to justify a lower rate.

It is known in the business as the standard twelve and a half percent trading platform. And, though it is difficult to obtain, it comes with a host of other benefits, including an eight-year depreciation write off period and a tax reduction on interest expenditure.

There is no hard and fast rule for proving substance.  However, a concession from Irish Revenue allows a company to be trading as an aircraft lessor if it acquires an aircraft which is on lease already or If it engages services from a local management company which has substantial and active leasing experience. This is where corporate service providers add value.

“We can assist with substance on the ground here,” says Nigel Woods, executive director of Ocorian.  “We can lend employees and provide a working solution.” Normally with newer lessors they don’t want to put people on the ground and start haemorrhaging money by setting up a full office when they are unsure how many deals they are going to do.  “So, if it doesn’t work out or if they chose some other jurisdiction, then the exit strategy is fairly simple for them and they don’t have to worry about redundancies etc.

The non-trading platform is really the default platform for many lessors and the one assigned if trading status is not assigned.  It doesn’t confer the benefits of the lower corporation tax rate and there are no deductions for interest expenditure. Though capital allowances may be granted under a technical structure which is known as a Case 4, non-trading lessor – one for the lawyers.

 

Section 110

 

Section 110 is a part of the Irish tax code that deals with securitisation, and S110 entities have become increasingly popular since it was introduced as a part of the 2011 Finance Act.  It is particularly useful for international lessors without a full operational leasing platform in Ireland who are looking to access Ireland’s tax treaty network. 

It is used when the funding comes from a parent company – usually a trading platform in its own right — or a related entity, and is an effective way of extracting profit to the parent or a different jurisdiction.  It often entails setting up a number of companies, and it is not uncommon to have a separate platform for each aircraft or asset.

“One company with people and aircraft in it is the best from a tax perspective” says Woods.  “However, as aircraft are subject to different financings, the aircraft tend to be held in SPCs to allow for different security pools.”  A lessor purchasing new aircraft would likely have multiple lines of credit from different banks, each of which will want to have the security of bankruptcy remoteness offered by an SPV.

To establish a Section 110 entity, no tradeable presence, including employees is required and it is taxed at the higher rate of 25%, but this only applies to a nominal amount. Section 110 entities can issue profit participating notes on which the interest expense is deductible for tax purposes.

However, S110s must meet certain technical requirements.  “Amongst the technical requirements, the company must hold ‘Qualifying Assets,’ which is defined to include several different types of assets. For these purposes, leased aircraft would be regarded as qualifying assets,” says McDonagh, “The Section 110 company must hold qualifying asset of €10million or greater, in value, on the day on which the qualifying assets or aircraft are first acquired. And, as with all structures, the Section 110 must be tax resident in Ireland. According to McDonagh, there are two tests of tax residence in Ireland namely a primary incorporation test and a central management and control test. It will be important that the Irish companies are centrally managed and controlled in Ireland so no other jurisdiction can claim it is tax resident elsewhere.  In this regard, amongst other factors, it will be important that key strategic decisions regarding these entities are taken by its directors at board meetings physically held in Ireland on a regular basis.

 

Ishka View

 

Establishing a leasing platform in Irelands is remarkably easy with a variety of structures on offer and a developed ecosystem of legal and corporate service providers to aid new investors and established lessors alike.  Ireland has a favourable tax regime, an extensive double tax treaty network and a developed knowledge base.  It is likely to continue as a premier destination for aviation bound capital for some time.

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