Aircraft Financing in Venezuela

1. Applicable Legislation.

Civil aviation in Venezuela is regulated by the Civil Aeronautics Law of July 2005, as amended in March 2009 (referred to as the VCAL), which revoked the 2001 VCAL. The VCAL regulates commercial and private aircraft used for the transportation of passengers, mail, luggage and cargo. The VCAL also contains general rules on the types of security interest that can be created in aircraft and engines, the liability of owners and operators, the infrastructure of the Venezuelan Air Authorities, routes, services and other civil aviation activities.

Venezuelan civil aviation is also governed by the Air Transportation Integral and Social Policy Act of October 2009 and the National Civil Aeronautics Institute Act of December 2005. The former includes provisions for the development of social policies for air transportation, whilst the latter covers the Venezuelan aeronautics authority and its powers. The VCAL Partial Regulations of July 2004 and the Venezuelan Aeronautics Regulations issued by the National Civil Aeronautics Institute, last published in Official Gazette number 40.393 dated April 14, 2014, are also of interest.

International conventions ratified by Venezuela include the International Civil Aviation Convention. Venezuela has not ratified the Geneva Convention of 1948 on the Recognition of Rights in Aircraft.

2. Aircraft Financing in Venezuela.

The two methods commonly used in Venezuela to finance the purchase of an aircraft are:

(a) a financial lease in which the buyer gets an option to purchase; and

(b) a straight sale with a security interest in the aircraft.

Leases normally take the form of a medium-term lease (3 to 5 years) with an option to purchase at the end of the term. Under a lease, the lessor has the right to repossess the aircraft in case of default. Leases can present some problems under Venezuelan law (see infra Aircraft Leasing).

An alternative to the lease is a straight sale, in which the seller keeps a security interest in the aircraft, or a sale in which an international bank grants a loan to the buyer, this in turn, being secured by a mortgage on the aircraft.

3. Aircraft Leasing.

Both financial and operating leases require that the aircraft as well as the lease be registered in Venezuela at the Aeronautical Registry. Leases, whether financial or operating, on aircraft are considered for the purposes of the registration to be the same type of transaction. Title to the aircraft should be registered at the Aeronautical Registry by the owner of the aircraft or by a person or a company that is legally authorized to operate the aircraft.

Leases registered at the Aeronautical Registry normally correspond in their terms and conditions to standard international leases (aircraft properly identified, maintenance provisions, etc.).

4. Option to Purchase under Financial Leases.

International leasing companies should be careful with provisions in Venezuelan law covering financial leases. Financial leases that include an option to purchase present some problems because the Venezuelan Civil Code provides that a lease giving the lessee a right to purchase is equivalent to a sale (it effectively alters the character of the lease) (Venezuelan Civil Code, Article 1579). If the lease is considered a sale, then the title will be passed to the lessee with the option. To circumvent the problem outlined above, the option may in Venezuela be given to a third party related to the lessee.

5. Sale with a Security Interest – the Chattel Mortgage.

The sale of an aircraft to a Venezuelan corporation in which the seller keeps a security interest is relatively straightforward. The seller and the buyer enter into a sales agreement and then the aircraft is registered in Venezuela. Once registered, aircraft as well as engines can be mortgaged in favor of the seller or the lender.

A chattel mortgage is the only type of security interest that can be created in an aircraft under Venezuelan law. The chattel mortgage must first be registered at the corresponding Subalternate Registry Office and then at the Aeronautical Registry. It is the registration of the mortgage at the Subalternate Registry Office that actually creates the security interest. When the mortgage is registered at the Subalternate Office, some minor registration fees have to be paid.

Mortgages in a foreign currency in Venezuela are sometimes registered at the Subalternate Registry. However, there has been a fair amount of litigation in Venezuela regarding the validity of mortgages denominated in a foreign currency. The conservative approach is to establish a mortgage in local currency (Bolivars) with an escalation clause, whereby the debtor creating the security interest agrees to increase the amount of the mortgage should the Bolivar be devalued as against the foreign currency in which the loan is denominated.

A special authorization is required to set up a chattel mortgage. If the lender (mortgage holder) is a foreign bank or a financial institution (including national export agencies such as Hermes, Sace or Coface), application for approval must be made to the Superintendency of Banks. This procedure is at times cumbersome, and the lender should allow itself at least one month to complete this step. For other types of lenders, the application must be filed at the Ministry of Infrastructure, currently Ministry of Transportation. In every case certification by the Aeronautical Registry that the aircraft is free of any lien is required for registering the mortgage at the Subalternate Registry.

The VCAL contains certain legal liens (priorities of payment) on the aircraft, its price or any insurance payment (Article 24 of the VCAL). These legal liens rank above any other security interests in the aircraft, including chattel mortgages. Priorities under the VCAL include: (i) fees for services related to air navigation and airports, penalties and taxes; (ii) any expenses stemming from the foreclosure of the mortgage and other security interests; (iii) expenses for the preservation of the aircraft; (iv) debts incurred in the search, assistance and rescue of the aircraft; (v) salary of the crew for the last 3 months; and (vi) certain legal liens related to the cargo.

6. Aeronautical Registry.

The Aeronautical Registry is an office of the National Civil Aeronautics Institute that acts as the sole Registry for all documents related to air transport. Titles for the purchase, transfer and modification of rights on aircraft and engines must be registered at the Aeronautical Registry. Any security interest created in as well as any permanent rights over the aircraft or the engines must also be registered here. The Aeronautical Registry also holds a record of the permits that exist for the operation of aircraft. In accordance with the VCAL, only Venezuelan companies or persons may obtain licenses from the Aeronautical Registry for aircraft used for commercial aviation.

7. Registration Formalities.

All documents related to aircraft must be registered at the Aeronautical Registry. These documents should be in Spanish or, if in a language other than Spanish, they must be duly translated into Spanish by a Venezuelan public interpreter.

Signatures on leases, proxies, assignment of leases, commercial bills and other signatures on documents for registration executed outside of Venezuela must be properly notarized and legalized before the competent authorities in the place where they are signed. In the case of countries like Venezuela that have subscribed to the Hague Convention on the Use of Apostille, the Apostille may substitute legalization before the Venezuelan Consulate.

8. Value Added Tax (VAT).

Under the Venezuelan Value Added Tax Act (Ley de Impuesto al Valor Agregado), the value added tax is applied as a percentage of the sales price of goods and services, including lease payments. Article 64 (1) of the Value Added Tax Act grants a temporary exemption from VAT for importation and sale of aircraft used for public transportation until an exoneration decree is issued by the Government (this decree has not yet been issued).

The VCAL also contains a provision (unclear) that creates a general exemption from tax and customs duties on the public air transportation of passengers, which may include a VAT exemption for the sale and the rent of aircraft leases.

Note that when VAT is paid on a sale where the seller is not domiciled in Venezuela or for services rendered by a party not domiciled in Venezuela, including payment of rent under international leases, the tax must be paid directly to the Venezuelan Tax Authorities (SENIAT) by the buyer or lessee responsible under Article 9 of the Value Added Tax Act.

9. Income tax on leases.

The gross income generated by lease payments on international leases (whether financial or operating leases) is subject to income tax in Venezuela (net of depreciation). Venezuela has, however, entered into double-taxation treaties with several countries, including the United States, the United Kingdom, France and Germany (see our Newsletter on Double-Taxation Treaties). Most of the double-taxation treaties that Venezuela has signed contain special provisions regarding income from leases. Most of the income on aircraft lease payments where the countries have double-taxation treaties with Venezuela is not subject to Venezuelan income tax.

10. Liability to Third Parties on the Ground.

Article 108 of the VCAL provides that the operator of the aircraft is the only company liable for damages caused by Venezuelan aircraft to third parties. This provision eliminates the joint liability between the owner and the operator provided for under the previous VCAL.

11. Customs Duty.

Pursuant to the Fifth Final Provision of the VCAL, all Venezuelan registered aircraft used in public transportation are exempt from all customs duties and other taxes established under the Venezuelan Customs Law until the relevant decree providing for exoneration is issued by the Venezuelan Government.

12. Insurance against Acts of War and Hijacking.

Pursuant to Decree 1471 issued by the President of Venezuela on October 1st 2001, as amended on May 2002 by Decree 1773, the Venezuelan Government guarantees payment of indemnity for damage caused by war or the hijacking of a Venezuelan aircraft up to the coverage amount of the insurance policies against acts of war and hijacking that were in effect on September 10th, 2001. In order to qualify under this guarantee, Venezuelan airlines must have complied with certain requirements established in Decree 1471.

January 31, 2018