The Aircraft Titleholder Structure in Japan: What You Need to Know
Hisao Hirose of Squire Patton Boggs provides an overview of the most common aircraft titleholder structure used in Japan, and discusses the tax implications of this structure.
Registration of Aircraft
In Japan, aircraft are registered in the name of the owner with the Civil Aviation Bureau (JCAB) of the Ministry of Land, Infrastructure, Transportation and Tourism. However, aircraft cannot be registered in the name of the owner if they are:
- a non-Japanese national;
- a non-Japanese governmental entity or corporation incorporated under a law other than Japanese law;
- a Japanese corporation where the person authorised to represent such corporation is a non-Japanese national and/or a non-Japanese governmental entity or corporation incorporated under a law other than Japanese law; or
- a Japanese corporation where 2/3 or more of the officers of such corporation are non-Japanese nationals or 1/3 or more of the voting rights of such corporation is held by non-Japanese nationals and/or non-Japanese governmental entities or corporations incorporated under a law other than Japanese law.
For registration purposes, the aircraft “owner” is defined as an individual or a legal entity holding the legal title to the aircraft. An individual or legal entity holding a beneficial interest in the aircraft but not the legal title is not regarded as the “owner”.
Where an aircraft is leased by a non-Japanese lessor to a Japanese airline, the aircraft cannot be registered in Japan in the name of the lessor. Instead, a person eligible for registration is appointed as the titleholder. For registration purposes, the following titleholder structure is commonly used in Japan.
Common Titleholder Structure
The lessor sells the aircraft to the titleholder at a certain purchase price and simultaneously the titleholder sells the aircraft back to the lessor under a conditional sale agreement where the purchase price less a nominal amount (such as USD1) is paid at the closing, and this nominal amount is payable at the end of the lease. During this period, the aircraft’s title is held by the titleholder, a Japanese company whose sole business function is acting as the titleholder in this structure. The titleholder is supported by its parent company, which is a Japanese airline group company, a Japanese leasing company or a Japanese trading house. The titleholder creates a mortgage in favour of the lessor to secure the title transfer. This mortgage is registered with the JCAB.
Registration of Mortgage on Aircraft
In Japan, the “provisional registration” of an aircraft mortgage is a common practice to avoid expensive registration tax. A mortgage on aircraft registered in Japan can be registered with the JCAB. The perfection of the security interest can be achieved by such mortgage registration. The amount of registration tax payable for mortgage registration is 3/1000 of the secured amount, which is significantly high and explains the prevalent use of “provisional registration”.
The provisional registration of a mortgage to secure the claim for transfer of title to an aircraft costs JPY15,000. Such provisional registration may not be enforceable until it becomes “full” registration, but it does preserve priority over other creditors in respect of the aircraft.
If a financing party is providing financing to the lessor, this party shall be granted a first-priority provisionally registered mortgage, while the lessor shall be granted a second-priority provisionally registered mortgage, in each case by the titleholder.
Sale of Aircraft Registered in Japan
If an aircraft is sold and the sale results in the aircraft changing its nationality from Japanese to another country, the aircraft will be deregistered from the JCAB registry. However, it is important to note that all registered mortgages, including provisional registrations, must be either deregistered or the secured parties must consent to the deregistration of the aircraft before the deregistration can be completed.
If the aircraft remains registered with JCAB, including if the lease is novated from the lessor to a new lessor, the titleholder will transfer all of its participation in the transaction to the new titleholder, including transferring the title to the new titleholder. If the parties agree, the same titleholder may remain the titleholder. In this case, the lessor’s rights and obligations under the conditional sale agreement will be transferred to the new lessor with the consent of the titleholder. This is typically the case when the titleholder is arranged by the lessee/Japanese airline and the lease is novated to a new lessor.
Titleholder and Property Tax
Japanese property tax is imposed on the titleholder in respect of the aircraft. The titleholder is usually indemnified by the lessee for the Japanese property tax.
Titleholder and Consumption Tax
The sale of aircraft by a non-Japanese lessor to a titleholder is not subject to Japanese consumption tax, as the aircraft is not registered or owned by a Japanese tax resident. However, the conditional sale by the titleholder to the lessor is subject to a 10% Japanese consumption tax. The titleholder is not expected to incur any costs in the transaction, as another party will provide the funds for the payment of consumption tax. Although the amount paid to the tax authority is refundable, there may be a delay between the tax payment and the refund.
Squire Patton Boggs
