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March 2014 – The Russian Business Jet Aviation: an headache which needs to improve

                         

 

NEWSLETTER MARCH 2014 – NEWSLETTER FLO – AVIATON 

Arthur Flieger, Attorney at law Flieger Law Office bvba with the cooperation of Stijn Brusseleers, Attorney at law Flieger Law office bvba

THE RUSSIAN BUSINESS JET AVIATION – AN HEADACHE WHICH NEEDS TO IMPROVE

Russia is a developing aviation market. Western aircraft manufacturers are flooded with orders and such will be so for the forthcoming years. The number of business jet rotations at Moscow’s aviation hub exceeds the number of business jet rotations at London area airports. However Russian regulations and legislation treat business and commercial aviation identically, which implies there is a significant legal challenge for business aviation market participants. Despite the turmoil Russia shows continued growth in the aviation sector. There is indeed a growth, but a number of significant legal obstacles threaten the growth and profitability of the Russian business aviation market. Russia’s primary aviation legislation, the Aviation Code, which was adopted in 1997, does not distinguish between business aviation and commercial aviation. With other words the legal concept of business aviation is absent from Russian law. Due to the lack of the traditional separation between business and commercial aviation, Russian aircraft operators face serious legal obstacles. One should also refer to the issue of import regulations and safety standards.

Due to the lack of regulations many Russian business aircraft owners choose to register aircraft abroad the Russian Federation because of the prohibitive expense associated with importing a business jet into Russia and the difficulty of complying with the complex network of Russian laws and regulations.

Due to the lack of this all the Russian Federation is deprived of a significant amount of revenue in the form of aircraft registration fees. The Russian Federation must consider adopting a regulatory structure that involves a more traditional safety risk assessment and developing new laws and regulations to specifically address the unique needs and circumstances of business aviation.

Tariffs and taxes
Russia has got a very tough import tariff system for the import of jets. Customs regulations impose prohibitively high duties on all aircraft imported into Russia. The customs tariff of the Russian Federation sets the current rate at 20% of the customs duty (www.planes.ru/main.php?idx=83&dir=shownews). An 18 percent value added tax increases the total price of the imported jet by 41.6 of the initial price. The justification for this import tariff is the need to help the national aircraft manufacturer, with its sales program. However this is in our view rather strange the more that Russian manufacturers neither compete today nor have any intention of competing with Western manufacturers in the business aircraft market (www.jetcharter.ru/new/news).

However the Russian Federation is starting to change said policy. It introduced a few years ago a small reduction in the import duty that was clearly drafted with business jets in mind (Decree No. 508, Aug. 11,2007). This decreased the import duty to 10 percent on aircraft with a maximum zero fuel weight of 20,000 kilograms and less than 19 seats. In July 2008 the import duty on those small aircraft altogether was removed for a period of nine months (Resolution of the Government of the Russian Federation 2008, No. 563). Actually the Russian Government’s goal is to abolish import duties on business aircraft (defined as aircraft with a maximum zero fuel weight of 20,000 kilograms or less). It’s well known that Russian business jet operators are often at a great disadvantage compared to their commercial airline counterparts because Russian airlines often receive a temporary release or waiver from the import duties. This means that in daily life special decrees are issued by the government allowing, duty-free import of certain types of aircraft by certain commercial carriers within a limited time frame (www.caica.ru/english/index.htm). Since there is currently an 18 percent VAT imposed on imported business aircraft, as opposed to the 41.6 percent increase in the price of larger imported aircraft the reduction or abolition of import duties will not resolve the issue of the VAT imposed on all aircraft sales. The VAT affects foreign and domestic manufacturers equally and there will be no change in the near future. This makes the aircraft market for prospective owner and operators in Russia comparable to that faced by owner/operators in the European Union because the EU imposes a similar VAT, which also affects foreign and domestic manufacturers equally.

Aircraft certification
The Russian Federation is conducted in accordance with ICAO Standards and Recommended Practices (SARP) and is carried out by the Interstate Aviation Committee (IAC).

The IAC replaced the certification body that existed as a part of the Soviet Union.

The aircraft certification process includes administrative and technical components. The IAC carries out certification in accordance with part 21 of its Aviation Regulations, which places the burden of the necessary groundwork on the aircraft operator. The IAC issues a type certificate (TC) as a design approval when the applicant demonstrates that the aircraft complies with the applicable regulations. In Russia it takes several months to complete the certification process for foreign-manufactured aircraft

An interesting issue is if the applicant’s aircraft is not on IAC certified types list, the applicant will be required to equip the foreign-manufactured aircraft with additional instruments specific to Russian-made aircraft. This is a costly and time-consuming process, and involves a great deal of certification paperwork. In order to avoid the lengthy and expensive certification process some Russian operators prefer to purchase and operate Russian-made aircraft or older Western aircraft types, which constitute the majority of business jets currently certified by IAC.

Aircraft registration
Upon import of the aircraft and a TC issued, the aircraft will be registered on the operator’s Air Operators Certificate (AOC). This is in the Russian Federation a time-consuming process with many difficulties. Indeed the same standards are applicable as for any large AOC holder. One can compare it with the U.S. certification process under FAR Part 121 for commercial air carriers.

Operating a business jet in Russia becomes a far less convenient alternative to commercial flights.

Needless to say that Russian business jet owners have indeed the option of registering the aircraft in other countries, but one should keep in mind that the Russian AOC requirements are also an obstacle for foreign entities operating foreign-registered aircraft. According to the Russian Aviation Code an AOC can only be granted to a company where foreign ownership does not exceed 49 percent, the manager is a citizen of the Russian Federation, and no more than one-third of the people on the managing board are foreign citizens (Paragraph 2, Article 61 of the Russian Aviation Code, March 19,1997). This means that only Russian- controlled entities are allowed to operate Russian-registered aircraft.  

This is all not consistent with the risk-based approach to regulatory requirements, which generally imposes additional regulatory requirements on commercial operators. We understand that the Russian Federation is trying to address the dated approach (the legislation was adopted prior to the evolution of Western regulations governing business jet operations) to the business aviation sector.

What about the crew
According to Article 56 of the Aviation Code the crew of a Russian-registered aircraft must consist only of Russian citizens. The captain of a Russian-registered aircraft should also be a Russian citizen. Russian law requires a Russian operator to employ and arrange training for at least one complete Russian crew months before importing an aircraft. This is indeed a risky issue because the Russian Labor Code does not provide the employer with any legal mechanism for securing the obligation of the employed pilot to remain with the particular operator for a fixed term or to repay the training costs if he leaves the company.

In other words those restrictions limit the operator’s ability to import and operate a business jet or any foreign-made aircraft in Russia. It is clear that business jet operators are at a disadvantage compared to their commercial counterparts.

Business jet operations
International aircraft operations will be carried out according to the rules, regulations, and aero navigational data contained in the  so called collection (“Collection of Information” of Air Navigation of the Russian Federation”).

This Collection is issued by different authorities and includes federal laws, presidential and government decrees and aviation authorities rulings. It is updated on an ongoing basis since rules and policies change frequently.

As already mentioned the Russian Authorities treat Russian business aviation flights differently from international flights. Such flights are regarded as commercial flights despite the fact that the flights are not operated for compensation of hire. As such a business jet with an AOC that is limited to general aviation may only be operated as a private flight for the transportation of its owner.

Under Western rules, regulations are more appropriately suited to each type of operator and a clear distinction is made between personal flights and flights for compensation or hire.

One will note here that in Russia business jet operations are regulated in the same way as commercial airlines flights.

Flight permissions
All flights require a permission from FAS. A simple notification of intention to fly will not be accepted.

In order to fly a single flight to a particular destination a Russian operator must obtain permission one day prior to the flight. Approvals for regular flights of an air taxi service require the same licenses as those for airlines flying a route. Under Russian law business jet operators are required to issue tickets to their passengers. This ticket becomes a primary binding contract of carriage, superseding any other arrangements that may exist between the customer and the jet operator. This implies that there are additional liabilities and risks for both the passenger and the business jet operator: the operator is responsible for providing the aviation authorities with a list of all passengers onboard and ensuring that all passengers pass through airport security controls. The operator’s exposure to the risks associated with any delays or luggage loss is limited by the standard provisions of the ticket. The Russian Regulation is indeed an unique and burdensome requirement on Russian operators.

Foreign registration – ownership
One can certainly say that the Russian business aviation sector will not overcome all legal obstacles in the same way as commercial airlines.

For the latter there is a favorable government treatment, while business jet operators must find another way to mitigate these cumbersome legal challenges. Due to all this many Russian-controlled companies have registered their air operators abroad to avoid being subjected to the Russian restrictive aviation laws and regulations.

Cabotage
Through performing cabotage flights foreign operators may only carry out such flights from one part of the country to another as a constituent leg of an international operation. The flight must originate and end in a foreign jurisdiction, making it impossible to fly between any two points in Russia without adding at least two additional legs into and out of the country. This is the only approach that makes the foreign operator’s revenue flights legal under Russian law and consistent with the Chicago Convention (Convention on International Civil Aviation (Chicago Convention 1944), ch. 2, art. 7).

Cabotage in Russia is only allowed in special cases, f.i. the transportation of government officials and on special request.

Foreign operators must obtain permission five days prior to the flight. For the Russian-registered counterparts a one-day term is required.

In special cases the obligations will be considered three hours in advance of the flight.

Ownership of a business jet can be full or joint, with order words one or more people can own a business jet. Standalone cabotage flights are permitted by the Russian aviation authorities only for business aviation flights that are at least not revenue-based. Permission for cabotage flights can only be granted by FAS after the operator has submitted a set of required documents, such as AOC, aircraft registration certificate, air worthiness certificate, pilots’ licenses, third-party liability insurance certificates, list of passengers and list of owners if it’s an owners’ flight. Needless to say that the authorities can also require any additional documents which they require appropriate .

Ownership
There is also the phenomenon of fractional jet operations with foreign-registered aircraft. This is a rather new concept in Russian aviation and has developed in response to overregulation of Russian-owned and –operated business jets. One can state that a special market for foreign-owned and –operated business jets has emerged in response to the Russian authorities’ failure to develop laws and regulations that are specific to business aviation. This kind of Regulation would make ownership and operation less complicated.

Customs
If a foreign jet is used for the purposes of a transportation operation it was supposed to complete when it crossed the border and leaves the country immediately after this operation is over, it can remain in the Russian Federation without being subject to an import duty and tax as a good. Otherwise a customs declaration should be submitted within 15 days after the aircraft has crossed the border of the country. Such means that a foreign aircraft can be stationed in Russia for 15 days upon which it must leave the country.

Conclusion
There are still many challenges in the Russian business aviation sector. Reform is started but it will still take some time until the Russian regulatory framework  will be completely open for Russia business aviation. Foreign-registered business jets in Russia today appear to be better positioned than the Russian ones, who face high import duties, restrictions on crew employment, and a complex network of legal restrictions.

One will have to wait what will happen in the near future.

For further information and comment, please contact Arthur Flieger at Flieger@fliegerlaw.com, Website: www.fliegerlaw.com, telephone: +32 3 238 77 66

Copyright A. Flieger
This publication is defined to provide accurate and authoritative information in regard to the subject matter covered. It is transmitted with the understanding that the publisher is not engaged in rendering legal, or any other professional services. If legal advice or other expert assistance is required, professional services should be sought. You can always contact A. Flieger at flieger@fliegerlaw.com.