FAA Policy Clarification for U.S. Non-Citizen Trusts
After more than two years of review, several public meetings and written public comments, the Federal Aviation Administration (“FAA”) is issuing a policy clarification in relation to situations where non-citizens are placing aircraft in trust for purposes of U.S. registration. This policy clarification becomes effective on September 16, 2013.
In order to register an aircraft on the United States of America Aircraft Registry, the registrant needs to meet the definition of “U.S. citizen.” In summary, to qualify as a U.S. citizen the registrant needs to be: (1) An individual who is a citizen of the United States or one of its possessions; (2) A partnership of which each member is such an individual; (3) A corporation or association created or organized under the laws of the United States or any State, Territory or possession of the United States of which the president and two thirds or more of the board of directors and other managing officers thereof are such individuals and in which at least 75 percent of the voting interest is owned or controlled by persons who are citizens of the United States or of one of its possessions. (See 14 CFR Part 47.2) Please note that the above definition of U.S. citizen for purposes of aircraft registration is a complicated subject and there are several other factors, definitions and regulations that clarify the issue and should be reviewed carefully to gain a thorough understanding of this subject.
Given that there are quite a number of potential aircraft registrants that may not meet the definition of U.S. citizen, such as certain aircraft manufacturers, publically traded companies, private companies with foreign investors and individuals and entities that do not meet the definition criteria, the FAA has for over 40 years allowed (as one alternative for these parties to still register their aircraft in the United States) the use of non-citizen trusts. These trusts are specifically authorized under the Federal Aviation Regulations. (See 14 CFR Part 47.7). In a non-citizen trust arrangement, the foreign party (whether a corporation, company, other legal entity or individual) contributes title to the aircraft to an owner trustee (usually a bank or trust company) that meets the U.S. citizen definition, this trustee then owns the aircraft for the benefit of the trustor and leases the aircraft back to the beneficiary of the trust or to an affiliate of the beneficiary.
In early 2011, the FAA announced that it was reviewing the policies and practices associated with the use of non-citizen trusts. In particular, the FAA noted concerns relative to the FAA’s ability to obtain important operational and maintenance information about the aircraft from the registered owners (i.e., the owner trustees). The FAA noted its obligations in relation to oversight of U.S. registered aircraft when being operated outside the United States and its ability to provide foreign civil aviation authorities information on these aircraft when requested. Accordingly, the FAA undertook a process lasting more than two years to review owner trust arrangements and the FAA solicited feedback from various parties in the aviation industry, including, without limitation, aircraft manufacturers, companies serving as owner trustees, fractional aircraft companies, industry attorneys and title firms in Oklahoma City, among others. The results are set forth in the FAA’s Notice of Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations Involving Non-U.S. Citizen Trustors and Beneficiaries issued June 18, 2013.
For the most part, the FAA’s new clarification will require “suggested” revisions to the trust agreements and operating agreements that govern these arrangements and will require the beneficiary of the trust to provide the owner trustee certain maintenance and operations information upon request from the owner trustee in order for the owner trustee to comply with information requests from the FAA. It appears the FAA will also require that the operating agreements or other lease arrangements be submitted to the FAA for review prior to the FAA issuing an opinion from the FAA Aeronautical Center Counsel as to the trust being in proper form for valid FAA registration of the subject aircraft (even though the submission of the trust agreement to the FAA for approval has for many years been a “best practices” point in the industry).
However, this clarification seems to still leave several interesting questions unresolved. One, what are the penalties (if any) if an owner trustee is not able to, or in extreme cases, refuses to respond to the FAA’s request for information? The most likely scenario here is that the owner trustee tries to obtain the information in the time periods prescribed under the clarification, but the beneficiary of the trust does not timely respond. Second, because the FAA has clarified that all owners of aircraft (including owner trustees) are responsible for having access to and providing upon request by the FAA certain maintenance and operational information about the aircraft, where does this leave aircraft financiers who enter into lease arrangements in order to facilitate the financing of an aircraft for their customers? It would appear that banks, leasing companies and other financiers should review their internal policies and possibly their lease documentation to ensure they can comply with a similar request for information from the FAA. Lastly, it appears that foreign aircraft registries of convenience are very excited by this clarification, as it may push many potential aircraft registrants to rethink their aircraft registration and instead opt to register their aircraft in one of the off-shore registries of convenience.
Only time will tell how this clarification will affect the aircraft industry. Until then, good luck and happy flying.
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