Mexico: Aviation: An Introduction
On 1st July, 2018 Mexico took to the polls in a historic election. Andrés Manuel López Obrador won the presidential seat by an unprecedented landslide. His newly created party MORENA also won control of both chambers of Congress as well as many governorships and municipal governments. The new federal government is set to take office on 1st December, 2018 with a six year mandate until 2024. With the promise of swift changes aimed at ending the endemic corruption that has eroded public life and the prevailing violence that commenced with the Calderón administration's war against drug cartels, the new president has pledged to undertake the fourth most profound transformation the country has experienced since its independence.
The new election came at a challenging time in which Mexico had to cope with internal and international political and economic paradigm shifts. The new administration has promised to overhaul public service and reshape its institutions, to rethink economic policy and to conduct a deep transformation of the country’s public life for the public good. In the words of the president elect, neo-liberalism and technocracy are out the door for the foreseeable future.
In spite of the fear and scepticism that the private sector and the political opponents of Mr. López Obrador have fuelled for many years, the market’s reaction to the political message and policies announced by the incoming administration has been better than expected. No exodus of capital or reduction of foreign investment has occurred as the new president has pledged to respect the private sector, encourage private national and foreign investment, maintain the independence of the central bank and preserve healthy and prudent economic policies. The stock market and the exchange rate have remained stable, and the country continues to prepare with optimism for a new era of public and economic life and policy in Mexico.
Despite the many changes proposed, we should be hopeful that the new government will respect and take advantage of the legal framework established by a number of important structural legal reforms that were approved by the Mexican Congress between 2012 and 2015, which are now in full force and effect. These reforms address substantial structural changes in education, energy, telecommunications, taxation and the financial sector. The reformed labour law, the new Amparo law, and the law for prevention of money laundering have also been approved. These reforms encourage foreign investment in Mexico and are having an increasingly positive effect on the Mexican economy and the rule of law. In spite of its electoral defeat, the achievements of the outgoing administration should not be undermined; Mexico enjoys the highest level of foreign investment in recorded history and more than 3.2 million jobs were created during the past six years. The positive effect of these changes will undoubtedly benefit the country in years to come.
Among the numerous changes proposed, the new administration has promised to review and possibly reshape the construction process of Mexico City’s new multibillion dollar airport. Under the new government style, working groups are being set up and a public survey will be conducted to determine if the project will remain as it is currently being developed, if it will be concessioned in full to the private sector or if it will be shelved and replaced by a completely new plan because it is considered unviable in its current guise by many technical and operational analyses.
Of particular note to the aviation sector is the amendment being discussed to adopt the Qualifying Declarations of the Cape Town Convention and Protocol in line with the 2011 Aircraft Sector Understanding of the OECD. This would need to be analysed and hopefully adopted soon. Adopting these declarations would increase competitiveness and certainty among financiers and lessors of aircraft, and also generate substantial growth in the Mexican aviation industry.
The implementation of the new bilateral air service agreement with the United States has eliminated some of the previous agreement restrictions, now permitting the fifth and seventh freedom of the air for cargo and eliminating pre-established numbered frequencies on passenger routes. The bilateral air service agreement will increase the number of operations and generate more competition and substantial growth in the Mexican market.
The aviation industry in Mexico has diversified from the collocation of aircraft assets in the jurisdiction through elaborate financial schemes to the development of aviation related education centres focused on all levels, such as technical services, manufacturer training, infrastructure and equipment technology as well as engineering programs and master programs. The thriving manufacturing sector dedicated to aircraft and high-technology parts and components has substantially developed and is now thriving, with a growth rate of over 20% in the last 6 years, bringing development to central states and creating numerous jobs for highly qualified technicians.
The concurso mercantil and the bankruptcy of Mexicana Airlines in 2010 reshaped the Mexican aviation industry. Stronger and better financed airlines currently service Mexican air space. Numerous aircraft have been acquired since 2011 through different leasing and financing schemes. More sophisticated structures are becoming available and numerous lessors and financiers are active and willing to participate in the Mexican market.
To highlight certain features of Mexican law that are relevant to aircraft operators and financiers, it is useful to note that the use and exploitation of the Mexican airspace is under federal jurisdiction and as such any controversies related to the operation of aircraft must be resolved by federal courts. As for aircraft registration, in accordance to the regulations of the Mexican Aeronautic Registry, aircraft to be operated in Mexico must bear Mexican registration marks. The registry could authorise the lease of foreign registered aircraft by eligible Mexican air carriers. Over the past years, the Mexican registry has controlled the registration of aircraft with a foreign registry, limiting this to no more than 50% of an air carrier's fleet.
The freedom of the parties to choose the governing law of their contractual relationships is fully recognised in Mexico. As for security interests, interests subject to foreign law and jurisdiction would be recognised and enforceable in Mexico. It must be noted that under Mexican law a foreign judgment would not be enforceable when it is dictated as a consequence of the exercise of an in rem action. In order to register a security interest in Mexico in respect to an aircraft, even if it is constituted under foreign law, it must be constituted in respect of aircraft bearing Mexican registration. An interest registered at the International Registry of Mobile Assets would be enforceable in Mexico.
In regard to repossession of aircraft, there are no self-help remedies available in Mexico. To recover possession of an aircraft it is necessary to obtain a favourable order from a competent court. Court proceedings in Mexico generally involve two stages (first instance and appeal, with the additional possibility of amparo as a special procedure regarding constitutional matters), the duration of which would generally take between 12 and 18 months. Contractual relationships would be resolved through ordinary commercial proceedings: the enforcement of títulos de crédito (credit instruments) such as promissory notes, in rem securities and interests; and other public instruments can be enforced through executive commercial proceedings, which are more expeditious and permit the cautionary attachment or seizure of assets subject to final judgment.
In respect to taxes, the applicability thereof would depend on the place of residence of the parties to a transaction and of the legal act being considered conducted within Mexican territory, meaning the location of goods at the time of effective delivery. Mexico follows the principle of worldwide income for taxation purposes of Mexican tax residents. In the leasing of aircraft VAT would be applicable to rent payments when the transaction is considered to have occurred within Mexican territory. This would be the case when material delivery of the asset is conducted within Mexican territory. As for income tax, it must be considered whether the recipient of the revenue is a tax resident of Mexico, or whether such a transaction is considered to have taken place within Mexican territory. The transfer of title between two foreign residents is not taxable in Mexico regardless of the location of the aircraft. A withholding tax is applicable to rent payments paid to foreign residents at a rate of 5% in relation to aircraft that have been temporarily imported to Mexican territory for air carrier purposes, which is subject to a further deduction based on the proportional share of the average annual expenditure.