This country-specific Q&A provides an overview of Aviation Finance & Leasing laws and regulations applicable in Philippines.
What international aviation conventions has your jurisdiction signed and/or ratified?
The Philippines is a signatory to, and has ratified,
the 1921 Warsaw Convention on Unification of Certain Rules for International Carriage by Air,
the 1944 Chicago Convention on International Civil Aviation,
the 1948 Geneva Convention on International Recognition of Rights in Aircraft,
the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards,
the 1963 Tokyo Convention on Offences and Certain Other Acts Committed on Board Aircraft,
the 1970 Hague Convention on the Suppression of Unlawful Seizure of Aircraft The Hague,
the 1971 Montreal Convention on the Suppression of Unlawful Acts against the Safety of Civil Aviation, and
the 1999 Montreal Convention on Unification of Certain Rules for International Carriage by Air.
If your jurisdiction has signed and ratified the Cape Town Convention: a. Which qualifying declarations (opt-in and opt-out) has your jurisdiction made under the Cape Town Convention? b. Does the Cape Town Convention take priority over conflicting national law?
a. Which qualifying declarations (opt-in and opt-out) has your jurisdiction made under the Cape Town Convention?
The Philippines is not a member of the Cape Town Convention. Thus, items 2a and 2b are not applicable.
b. Does the Cape Town Convention take priority over conflicting national law?
Please refer to our response to item 2a.
Will a court uphold the choice of a foreign governing law in respect of the following contracts and if so, please also state any conditions or formality requirements to this recognition a. Lease and b. Security document (for example, mortgage)?
Yes. Philippine law generally recognizes the freedom of the contracting parties to select the governing law applicable to their contract when it is a bona fide and genuine choice that is not against law, morals, good customs, public order or public policy and not designed to evade some provisions of the law of another jurisdiction having a closer connection with the transactions contemplated therein. The law chosen to govern the contract must have a substantial relationship to the transaction. Thus, Philippine courts will generally recognize and enforce a foreign law-governed contract, unless a party raises and proves that another law, e.g., Philippine law, has a closer nexus with the transaction.
As Philippine courts will not take judicial notice of the foreign law, foreign law must be pleaded and proven in an action before Philippine courts. In accordance with the doctrine of processual presumption, in the event of failure to prove foreign law, Philippine courts will presume that the foreign law is the same as the laws of the Philippines on the matter.
While the choice of foreign law as the governing law of the contract will be recognized by the courts of the Philippines, such courts may, in disregard of any provision of foreign law, apply the laws of the Philippines
with respect to matters bearing upon the capacity of the party who is a Philippine national to enter into and perform its obligations under the contract, and
in determining compliance with all the requirements of governmental authorizations (if any) under the laws of the Philippines.
b. Security document (for example, mortgage)?
Please refer to our response to question 3a.
Please confirm whether it is (i) customary and (ii) necessary to also take a local law mortgage and if so, why?
It is not necessary to also take a local law security interest if there is an existing foreign law mortgage. However, parties would usually opt to enter into a local law mortgage for different reasons such as avoiding the nuances of having a foreign law governed contract, e.g., pleading and proving foreign law before Philippine courts and issue of which jurisdiction would have a closer nexus to the transaction. Thus, it may be advisable to also have a local law security interest over the aircraft.
Are foreign judgments recognized and enforceable by courts of your jurisdiction and if so, please also state any conditions or formality requirements to this recognition (for example, do you require a local court order confirming such recognition)?
Yes, the judgment of a foreign court may be recognized and enforced by Philippine courts, subject to the procedure for recognition of foreign judgments under the Rules of Court of the Philippines. To be enforceable, the foreign judgment must first be recognized by Philippine courts. Any action for the enforcement or recognition of foreign judgments must be filed with the courts in accordance with the Rules of Court of the Philippines, specifically Section 48 of Rule 39 of the Rules of Court.
A judgment rendered against a party by a foreign court may be enforced before a Philippine court without a rehearing on the merits, but such judgment may be repelled by evidence that
such foreign court did not have jurisdiction in accordance with the jurisdictional rules of such court,
the party against whom the judgment was rendered had no notice of the proceedings, or
the judgment of such foreign court was obtained through collusion or fraud or was based on clear mistake of law or fact,
the foreign judgment was not valid under the laws of the court that rendered it,
the foreign judgment is not yet final and executory,
the state where the foreign judgment was obtained does not allow recognition or enforcement of Philippine judgments,
the foreign judgment is contrary to the public policy or the good public morals of the Philippines.
Is your aircraft registry an owner-register (registering ownership interests) or an operator-register (registering interests as operator)? Please also state any conditions, procedural steps or formality requirements for such registration and explain how this is evidenced (for example, the issuance of a Certificate of Registration)
There is an Aircraft Registry in the Philippines, which is maintained by the Civil Aviation Authority of the Philippines (the “CAAP”). The CAAP was created by Republic Act No. 9497 (the “CAAP Law”) in 2008 and has a broad range of powers and functions, including a duty to operate as the sole and exclusive registry for aircraft, aircraft engines, and liens and security interests on aircraft and aircraft engines. In particular, the Aircraft Registry is handled by the Airworthiness Department of the Flight Standard Inspectorate Service Division of the CAAP (the “Airworthiness Department”).
The CAAP is an owner and operator registry. Under the CAAP Law, no aircraft is eligible for registration in the Philippines unless it is owned by or leased to a citizen of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum (60%) of whose capital is owned by Filipino citizens. Thus, the nationality of the owner or the operator is the principal factor in determining the qualification of an applicant for (and to be the recipient of) an aircraft Certificate of Registration.
For original registration in the CAAP, a certificate or notice of de-registration has to be issued by the former registry, if any. The de-registration certificate must be received by the CAAP directly from the former registry.
A proper application should be made in writing and signed and sworn to by the eligible owner or the lessee (i.e., notarized, and consularized or apostilled, as applicable), if executed abroad). The application shall state the date and place of filing, specification, construction, and technical description of the aircraft and such other information that may be required.
The application for registration is filed with multiple departments in the CAAP –
the Engineering and Registration Division,
the Airworthiness Department, and
the Flight Standards Inspectorate Service.
The supporting documents that must be attached to the initial Certificate of Registration application form are the following:
Documentary evidence of ownership (or for leased aircraft, notarized duplicate signed copy of the aircraft lease agreement). If the aircraft lease agreement is signed outside the Philippines, it must be notarized, and consularized or apostilled (as applicable). The lease agreement must be approved by CAAP. If the aircraft for registration was not purchased from the last registered owner, the applicant must submit a comprehensive history of ownership, starting from the first registered owner to the last registered owner.
Special power of attorney or equivalent document such as a board resolution authorizing the applicant to sign on behalf of the applicant corporation and specifying the particular document/s to be signed;
Customs Clearance and/or tax exemption, if applicable, and/or a Customs Release/Payment;
Certificate of Non-Registration, if the aircraft is factory-new or a deregistration fax and email, if the aircraft is previously registered in another jurisdiction;
Official receipt, payment of registration fee (which depends on the gross weight of the aircraft in kilograms);
Official receipt, payment of recordation fee of PhP400.00 (about USD8.00) and a 12% Value Added Tax (VAT) if the applicant is not VAT-exempt
CAAP Accounting Clearance;
Assignment of registration number/RP-C number. The applicant must reserve a registration number which must be used within 90 days, otherwise the reserved registry number is deemed automatically cancelled if not used within that specified period;
Articles of Incorporation and By-laws of the owner or lessee;
Names of the directors of the company owning or leasing the aircraft and their specimen signatures giving authority to register and/or operate the aircraft in the Philippines. This document must also designate the person(s) who has the authority to transact on their behalf on matters relating to the aircraft registration and/or operation;
Proof of identity, such as a copy of a government issued identity card, passport if owned by an individual, or any other identification card approved by the CAAP; and
Certified true copy of aircraft Certificate of Insurance.
Additionally, for aircraft for hire to the general public, the following must also be submitted:
Civil Aeronautics Board (the “CAB”) Permit/Approval of the Lease; and
Air Operator Certificate.
The CAAP may also require the submission of other supporting documents. If the CAAP Director General finds that the aircraft is eligible for registration, such aircraft shall be registered and an aircraft Certificate of Registration will be issued.
Documents executed abroad that are required to be submitted with the CAAP must be either
apostilled under the Apostille Convention, for those documents executed in countries that are parties to the Apostille Convention, or
authenticated following the usual authentication process, i.e., consularization, for those documents executed in countries that are not parties to the Apostille Convention.
Is there a security document register in your jurisdiction where a mortgagee’s interests will be recorded? If so, please also state any conditions, procedural steps or formality requirements for such registration and explain how this is evidenced (for example, the issuance of a certificate or official stamp on the security document)
Yes, the CAAP maintains a Registry where all liens, mortgages, or other interests in aircrafts are to be registered.
In the case of any conveyance affecting title or interest in an aircraft of Philippine registry, such conveyance is also required to be recorded in the books of the CAAP in order to be valid against third parties having no actual notice thereof. The CAAP law requires that the formalities for land registration should be followed in order to register a document with the CAAP, which are: (i) there document must be signed in the presence of at least two witnesses who shall likewise sign thereon, and (ii) each and every page (except the signature page) must be margin by the person or persons executing the instrument and their witnesses, and all the pages sealed with the notarial seal, and this fact as well as the number of pages shall be stated in the notarial acknowledgment.
The security document to be submitted to the CAAP must be original, notarized and consularized or apostilled (as applicable).
In addition, the CAAP requires the presentation of proof of authority of the signatories to the security documents (e.g., board resolutions), which must also be notarized and, if executed abroad, consularized by the Philippine consulate where the document was signed, or apostilled.
What is the effect of registration of: a. Ownership interest (for example, proof of title to third parties of ownership) b. Lease (for example, perfects the status of the Lessor under the Lease) c. Security document (for example, secures priority over later registered security). If there are any interests that could rank prior to the security document please state these
a. Ownership interest (for example, proof of title to third parties of ownership)
Registration of an ownership interest in an aircraft constitutes binding notice in rem as to the existence of such ownership. It is considered as proof of title that is binding on third parties. Third parties may rely on the accuracy of such registration. Inasmuch as these appear in public documents, they are vested with a prima facie presumption of validity and due execution. The accuracy of the entries recorded therein is also assumed.
b. Lease (for example, perfects the status of the Lessor under the Lease)
The registration of the interest of the lessor with the CAAP constitutes public notice to third parties of the rights of the lessor over the aircraft and such lease shall be binding against all such persons from the date of its recordation in the books of the CAAP. Inasmuch as these appear in public documents, they are vested with a prima facie presumption of validity and due execution. The accuracy of the entries recorded therein is also assumed.
c. Security document (for example, secures priority over later registered security)
Registration constitutes binding notice in rem as to the existence of such lien or security interest. Inasmuch as these appear in public documents, they are vested with a prima facie presumption of validity and due execution. The accuracy of the entries recorded therein is also assumed.
Generally, prior registration coupled with good faith, confers a better right over the aircraft in favor of the registered interest holder.
However, in a bankruptcy situation for the Owner/Lessee, the concurrence and preference of credits as enumerated in the Civil Code and other relevant laws will be observed, unless a preferred creditor voluntarily waives his preferred right. (Section 133, Financial Rehabilitation and Insolvency Act of 2010 [“FRIA”]).
Liens on specific movable or immovable property of the Owner/Lessee have preference on those assets and exclude all other to the extent of the value of the property to which the preference refers. If there are two or more credits with respect to the same movable or immovable property, they are to be satisfied pro rata after the payment of duties, taxes and fees due to the State (Sections 2246, 2247, 2248 and 2249, Civil Code). Those credits, which do not enjoy preference with respect to specific property of the Lessee and those, which enjoy preference as to the amount not paid are satisfied according to the order of preference established in Article 2244 of the Civil Code.
The unsecured claim of a Lessor (which is the credit assigned by the Lessor to the Security Trustee) would be an ordinary credit and will be satisfied out of the free property of the insolvent Lessee. It may interest you to know that credits that appear in a public document or in a final judgment have preference among themselves in the order of priority of the dates of instruments and of the judgment, respectively, with respect to residual assets of the insolvent (Section 2244, Civil Code).
What types of lease are recognized in your jurisdiction (for example, translation, notarization, apostille, legalization etc.)?
The Philippines recognizes leases whether they are notarized or not. Apostilled or consularized leases are likewise recognized in the Philippines.
However, in order to be binding to third persons who have no actual notice thereof, leases must be registered with the CAAP. In this connection, in order to register a document to with the CAAP, the document must be notarized, and apostilled or consularized (as applicable).
In terms of leases over aircrafts, Philippine law recognizes leases over aircraft whether they be finance leases or operating leases. The CAAP further classifies operating lease agreements into “dry” leases, “wet” leases, “damp” leases, charter, and interchange agreement.
What formalities are required to perfect Lessor’s rights under a lease in your jurisdiction?
The formalities of an enforceable lease document for an aircraft should be observed. This means that in addition to the lease being written, it must also be signed on each page and notarized. If executed outside the Philippines, the lease should also be consularized or apostilled (as applicable). The CAAP also requires documentation showing the authority of the persons who executed the document (e.g., special power of attorney) which should also be notarized and consularized or apostilled, as applicable.
The lease need not be translated to Filipino if the same is in the English language. If the lease is in a foreign language other than English, an accompanying English translation, with a certification by the translator that the translation is correct and accurate, would be required. For purposes of registration with the CAAP, such English translation must be notarized and apostilled or consularized (as applicable), where executed abroad.
Based on our informal queries with the CAAP, the English translation must also be signed by the signatories on the signature page thereof.
The CAAP Law provides that all conveyances made or executed, which affect title to, or interest in, an aircraft of Philippine registry, or any portion thereof (including leases), is required to be recorded with the CAAP to be valid against third parties who have no actual notice thereof.
In addition, the lease of the aircraft requires approval of the CAB. When the application for CAB Approval is filed, the CAB transmits a copy of the lease agreement to the CAAP for authorization. Only when the CAAP issues its authorization will the CAB issue an approval. The CAB approval is valid for the term of the Lease and need not be renewed.
No consent of any other official body is required to record the interest of the Lessor in the aircraft, which will be annotated on the Certificate of Registration of the aircraft as a detail of the Lease.
Are the ownership rights relating to engines recognized as separate and distinct from the ownership of the rest of the aircraft in your jurisdiction? Please highlight any separate registration, filing or additional formalities that are required to be completed to perfect Lessor’s interest in the engines
The CAAP keeps a separate registry for spare engines while engines attached to the aircraft are registered together with the airframe.
Please see our response in item 12 below on perfection of security interest.
What form does security over aircraft generally take in your jurisdiction?
Previously, a security document over an aircraft would take the form of a chattel mortgage. However, The Philippines recently enacted Republic Act No. 11057, or the Personal Property Security Act (the “PPSA”) which repeals, modifies, and amends the Chattel Mortgage Law.
The PPSA states that it applies to all transactions of any form that secure an obligation with movable collateral, except interests in aircraft, which is subject to the CAAP Law. The CAAP Law merely provides for the registration of aircraft interests with the CAAP registry, and the PPSA and its Implementing Rules and Regulations (the “PPSA IRR”) do not clarify if only the creation and perfection of security interest over aircraft are excluded from the coverage of the PPSA. There is a position that the creation and enforcement of security interest over aircraft should be governed by the PPSA and the PPSA IRR, while its registration requirements should continue to be governed by the CAAP Law. An alternative view is that the Chattel Mortgage Law still applies to security over aircraft. Given that the PPSA and the PPSA IRR are new laws, such positions are not free from doubt.
Under the PPSA, the security document is a security agreement. A security agreement is a written contract signed by the parties that establishes their intent to create a security interest. Under the PPSA, a “security interest” is a “property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation; including the right of a buyer of accounts receivable and a lessor under an operating lease for not less than one year.” A security agreement may also provide for the creation of a security interest in future property; however, it will only be created when the grantor acquires rights over such property or the power to encumber it.
Are there any particular terms or characteristics that such a security document must take (for instance, a cap on the secured liabilities)?
Under the PPSA, the security agreement must be in writing and contain a general description of the collateral. The description of the collateral will be deemed sufficient when it reasonably identifies the collateral. Under the same law, a description such as “all personal property”, “all equipment”, “all inventory”, or “all personal property within a generic category” of the grantor shall be sufficient.
Are there any perfection requirements for such security document? If so, please state any conditions, procedural steps, formality requirements or documentation (for example, corporates, list of directors etc.) required to effect this
Under the PPSA, it is upon perfection that a security interest becomes effective against third parties. This can be done either through registration of the notice of the security agreement or possession of the asset. However, given the position that the registration requirements should still be governed by the CAAP Law, it is submitted that the security agreement should always be registered with CAAP. Under the CAAP Law, any conveyance affecting title or interest in any Philippine-registered aircraft or any portion thereof must be recorded with the CAAP in order to be valid and effective against third persons.
For registration, the security agreement must be in writing, signed on each page, and notarized. If executed abroad, it should also be consularized or apostilled. The CAAP also requires documentation showing the authority of the persons who executed the document (e.g., special power of attorney) which should also be notarized, consularized, or apostilled, as applicable.
Summarize any captive insurance regime in your jurisdiction as applicable to aviation.
A Philippine entity is not allowed to procure or accept policies or contracts of insurance from any insurance company not authorized to transact business in the Philippines covering risks situated in the Philippines. The restriction for obtaining insurance coverage locally does not apply to reinsurance. However, no insurance company may cede all or part of any risk situated in the Philippines by way of reinsurance directly to any foreign insurer not authorized to do business in the Philippines unless such foreign insurer or, if the services of a non-resident broker is utilized, such non-resident reinsurer or broker is represented by a resident agent duly registered with the Philippine Insurance Commission.
Are cut-through clauses under the insurance and reinsurance documentation legally effective in your jurisdiction?
Cut-through clauses are generally valid under Philippines Law.
Are there minimum requirements for the amount of third-party liability cover that must be in place in your jurisdiction?
While no specific amount is prescribed, as a minimum, any person operating an aircraft must have valid insurance guarantee covering aircraft hull, each person, freight, and mail on board the aircraft, and third-party liability.
Can a mortgagee (or equivalent security interest holder) or lessor following an event of default under a mortgage (or equivalent security document) or lease, respectively, take possession of the aircraft without judicial intervention in your jurisdiction? Please also state any conditions, procedural steps, formality requirements or documentation (for example, original, legalized, translated Lease/Mortgage, corporates etc.) required to effect this
Public policy prohibits a mortgagee from simply taking and appropriating the personal property turned over to it as security for the payment of a principal obligation. This is known as pactum commissorium under Article 2088 of the Civil Code.
Under the PPSA, a secured creditor may enforce its security interest whether through a judicial process or through an extra-judicial process, including the sale of the secured assets through either a public or private disposition. The secured creditor may take possession of the property without need of judicial process and proceed to dispose the collateral in a public or private sale upon notice to the debtor. Further, a secured creditor may propose to take all or part of the collateral in total or partial satisfaction of the secured obligation. The secured creditor may send a proposal to the debtor, any other secured creditor or lien-holder who perfected its security interest or lien by registration at least five days before the proposal is sent, and any other person with an interest in the collateral who has notified the creditor. The creditor may retain the collateral for full satisfaction of the secured obligation if the creditor does not receive an objection in writing from any person entitled to receive such proposal within 20 days after the proposal is sent to such person. The creditor may retain the collateral in partial satisfaction of the secured obligation, only if the creditor receives the affirmative consent of each addressee of the proposal within 20 days after the proposal is sent to such person.
The taking of possession by the secured creditor in this instance, however, assumes that it can be done without breach of the peace. Under the PPSA, breach of peace shall include entering the private residence of the grantor without permission, resorting to physical violence or intimidating, or being accompanies by a law enforcement officer when taking possession or confronting the grantor
How can a mortgagee (or equivalent security interest holder), lessor under a lease or designee/beneficiary of an IDERA deregister the aircraft? Please also state any conditions, procedural steps, formality requirements or documentation (for example, original, legalized, translated Lease/Mortgage/IDERA etc.) required to effect this
As a general rule, only the person in whose favor the Certificate of Registration has been issued may apply for deregistration. However, if a Deregistration Power of Attorney is granted deregistration may be requested by the owner, lessor or the security trustee, or any other person so specified by the lessee.
Deregistration of an aircraft typically requires the submission of the notarized CAAP deregistration form and the surrender of the originals of the documents obtained during the registration of the aircraft. In particular:
Letter of Intent/Request for deregistration;
Notarized (and consularized/apostilled (as applicable)) Deed/Bill of Sale (if applicable);
Original Certificate of Registration and Original Certificate of Airworthiness;
Indication of country to where the aircraft will be exported;
Name of new owner/lessee;
CAAP accounting clearance of the current owner/lessee; and
Cancellation of Mortgage or Contract of Lease (if any).
Deregistration will not be permitted without the consent of any recorded mortgagee, if any. If the aircraft is registered in the Philippines by reason of a lease, the application for de-registration may be based on the termination of the lease. However, in cases other than due to the default of the lessee, consent of lessee must always be obtained.
A deregistration fee of PhP750.00 (USD15.00) (for foreign) or PhP300.00 (about USD6.00) (for domestic) is payable, subject to 12% VAT, unless there is a law providing that the applicant for deregistration is exempt from the payment of taxes.
Deregistration may be sought within a reasonable period of time, counted from the time that the ground for the same arises. Save in cases where prescription or laches may set in, there is no time limit for making such an application.
Can the government or the lessee lawfully prevent the repossession or deregistration and if so, in what circumstances
Under the 1987 Philippine Constitution, in times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. Under the CAAP Law, aircraft operation is impressed with public interest.
If judicial intervention is required, please describe the process? Please also state any procedural steps, length of time to complete and advise as to documentation required
Section 47(c) of the PPSA provides that if, upon default, the secured creditor cannot take possession of collateral without breach of the peace, the secured creditor will be entitled to an expedited hearing upon application for an order granting the secured creditor possession of the collateral. Such application must include a statement by the secured creditor, under oath, verifying the existence of the security agreement attached to the application and identifying at least one event of default by the debtor under the security agreement. The secured creditor is entitled to an order granting possession of the collateral upon the court finding that a default has occurred under the security agreement and that the secured creditor has a right to take possession of the collateral. The court may direct the grantor to take such action as the court deems necessary and appropriate so that the secured creditor may take possession of the collateral.
How is legal title transferred under the laws of your jurisdiction? Please also state any conditions, procedural steps, formality requirements or documentation (for example, corporates etc.) required to effect this
No particular form of transfer is required for validity and legal recognition of a title transfer as between the parties. But for the same to be binding against third persons and effective in rem, the same must be registered with the CAAP.
A recordation fee of PhP400.00 (about USD8.00) is currently collected for every recordation or annotation filed with the CAAP. An additional fee of PhP400.00 (about USD8.00) is collected for every re-issuance of the Certificate of Registration with annotations. This fee is subject to 12% VAT, unless there is a law providing that the applicant for deregistration is exempt from the payment of taxes.
For the transfer to be recorded, it should comply with requirements similar to the requirements for registration of documents affecting land, i.e., it must be notarized, among others. If executed abroad, it should also be apostilled or consularized (as applicable) in the place of execution.
In order for the conveyance to be recorded, it should also state:
the interest in the aircraft of the person by whom such conveyance is made or executed or, in the case of a contract of conditional sale, the interest of the seller; and
the interest transferred by the conveyance.
The recordation with the CAAP may be arranged through the airline which currently leases the aircraft, since such airline is required by law to surrender the original Certificate of Registration in order for an annotation to be made in the said certificate.
Are there any restrictions on the sale of an aircraft following enforcement (for example, the requirement to obtain a court order or conduct a public auction or other action in order to sell the aircraft upon enforcement)
The general rule is that judicial intervention is not required for a lessor to take possession of an aircraft. The lease usually provides that a lessor has the right to repossess an aircraft in the event of default of the lessee or upon expiry or termination of the lease. However, judicial intervention will be necessary to forcibly take possession of an aircraft if the lessee asserts that the retaking is wrongful or otherwise refuses to voluntarily surrender possession of the aircraft to the lessor. If the lessor elects to file an action in the Philippines, it may file an action for replevin for the recovery of the aircraft, with an application for the issuance of a writ of replevin, which is a provisional remedy that would allow the lessor to retain the aircraft during the pendency of the action.
Generally, the permission of any other party (including any official body) is not required for a lessor to take possession of an aircraft unless it
has been attached by order of a court in a proceeding instituted by a third party against the lessor or the lessee, or
inadvertently included among the assets of the lessee placed under suspension of payments, receivership or liquidation, or
distrained by tax authorities for non-payment of any Philippine tax payable by the lessor or seized by customs authorities for non-payment of customs duties, fees, charges, fines, or violation of the Tariff and Customs Code.
In such instances, the approval of the courts or the governmental offices concerned in the proper case will be necessary to release the aircraft to the lessor.
Would lease rentals be subject to tax (for example, withholding or income tax)? Please also state if there are any conditions for such tax to be imposed and any steps usually taken to mitigate this
Under Section 28 (B)(4) of the Tax Code, rentals derived by a non-resident Lessor of the Aircraft are subject to a final withholding tax of seven and one half percent (7 ½%) of the gross rentals.
The rental income of the non-resident Lessor may be exempt from Philippine taxes if the franchise of the Lessee so provides, under such terms provided by the franchise, e.g., assumption by the Lessee of such cost.
The income tax on the rentals earned by a non-resident Lessor of the Aircraft may also be exempt from Philippine taxation in accordance with the provisions of an applicable tax treaty between the Philippines and the country where the Lessor is domiciled. To avail of such tax treaty exemption, the non-resident Lessor will have to obtain confirmation from the BIR by filing a Tax Treaty Relief Application.
For other payments made to the lessor under the lease (other than rental income or indemnification of actual losses incurred by a lessor) derived from sources within the Philippines, a non-resident foreign corporation is generally subject to income tax at the rate of 30% of the gross income received, which is withheld at source.
Philippine taxation employs the final withholding tax system on income earned by non-resident foreign corporations not engaged in trade or business in the Philippines. Under the final withholding tax system, the amount of income tax due on the income is withheld by a withholding agent (i.e., the payor of income or the lessee). The tax withheld by lessee as such withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as a withholding agent. In case of its failure to withhold the tax or in case of under withholding, the payor/withholding agent is liable for the deficiency tax
Would a sale of an aircraft in your jurisdiction incur sales tax? Please also provide details of amount or calculation and any steps usually taken to mitigate this
Under Philippine tax laws, only a “person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods,” is liable for VAT. The term “in the course of trade or business” means “the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person.” Generally, a contract of sale perfected and consummated in the Philippines will give rise to a taxable event, which will subject the transaction or the parties thereto to the taxing authority of the Philippines. If the seller is not engaged in trade or business in the Philippines, a transfer of the Aircraft while outside of Philippine airspace will not give rise to transfer taxes, VAT, or withholding taxes. A sale and purchase of the Aircraft does not attract documentary stamp taxes or any other transfer fees.
However, note that if transfer of the Aircraft is made while the Aircraft is in the Philippines or within Philippine airspace, the seller may be held liable for income taxes and other taxes or fees associated with a transfer of the Aircraft, even if the seller is not considered as engaged in trade or business in the Philippines. The BIR has ruled that:
Corollary, Section 159 of Regulations No. 2, otherwise known as the Income Tax Regulations, provides that income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word ‘sold’ includes ‘exchange’. The ‘country’ in which ‘sold’ ordinarily means the place where the property is marketed.
It is clear from the above-mentioned section that income derived from the sale of personal property except shares of stock shall be taxable in the country in which sold. This is true, considering that under the requisites or limitations on the power of taxation, person, property or interest taxed must be within the jurisdiction of the taxing authority.
Thus, parties to the sale and purchase of the aircraft may wish to ensure that the transfer of the Aircraft is perfected and completed offshore in order to minimize, if not altogether avoid, the application of Philippine income tax laws to the transaction.
Are there any restrictions on the import or export of aircraft in your jurisdiction and would such importation or exportation incur any liability as to customs or taxes? Please also state if any consents or approvals are required and the procedural steps taken to obtain these, and any procedural steps or formality requirements to mitigate any taxes
The Importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts for domestic or international transport operations are exempt from VAT.
According to Section 800 of the Customs Modernization and Tariff Act (“CMTA”), aircraft and such other goods or supplies imported by and for the use of scheduled airlines operating under congressional franchise which are necessary or incidental to the proper operation of the scheduled airline importing the same, are exempt from the payment of import duties upon compliance with the formalities prescribed in the regulations promulgated by the Customs Commissioner.
There are no duties payable for the export of an aircraft.
Are there any foreign exchange restrictions on transfers of funds
Yes, cross-border transfers of Philippine pesos and foreign currencies are regulated in the Philippines. However, Philippine foreign exchange regulations have been liberalized such that generally, authorized agent banks in the Philippines may sell foreign currency for non-trade purposes to a Philippine resident without the prior approval of the Bangko Sentral ng Pilipinas (the “BSP”, our central monetary authority). Thus, the Lessee may purchase foreign currency from the Philippine banking system to service rental payments, without need of prior approval from the BSP.
However, to purchase amounts in excess of USD1,000,000, the Application to Purchase Foreign Exchange must be accompanied by supporting documents. For charters and leases of vessels/aircraft, it must be supported by
the billing statement from the non-resident lessor/owner of the vessel/aircraft and
a photocopy of the contract/agreement.
How successful have foreign creditors and lessors been in enforcing their security and lessor rights over and successfully repossessing aircraft in a timely manner?
Based on our firm’s experience, owners and lessors have been able to successfully process the repossession, deregistration, and export of aircraft upon the termination or expiration of operation leases. However, the said processes require the cooperation of the aircraft operators as certain information and documents are with the said operators.
What government led reforms affecting creditor and lessor rights are currently underway in the aviation sector in your jurisdiction?
None as of now.
Please describe any interesting legal development in your jurisdiction (for instance, decided court cases or arbitral awards) which affect creditor and lessor rights?
Please discuss any relevant governmental regulations implemented in your country to help alleviate the financial and other difficulties faced by airlines in your jurisdiction caused by CoVid 19 and whether that will impact rights of lessors (who lease aircraft to the airlines) and lenders (who finance such aircraft which are mortgaged in favour of the lenders)? Are such governmental regulations expected to be in place until the difficulties faced by airlines caused by the CoVid 19 subside or are they more long term?
Yes. Due to the impact of the COVID-19 pandemic, the CAAP has extended the validity period of Certificates of Airworthiness of registered aircraft, with the latest issuance extending the validity of certificates expiring in January and February 2022 until March 21, 2022. In addition, under Republic Act No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II), regulatory agencies such as CAAP are authorized to waive or suspend regulatory fees. In this regard, CAAP has waived airport concession rental charges for 20221 due to the impact of the COVID-19 pandemic.
These measures are temporary in nature. Bayanihan II was in effect until December 19, 2020.
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