Aircraft finance and leasing in Serbia

The Aircraft will be purchased by the Owner and leased on an operating lease basis to the Airline pursuant to the Lease.

Is this is the usual structure for transactions of this nature in the Relevant Jurisdiction?

Yes.

Yes; all of the above information is published in the Official Gazette of the republic of Serbia and also on the website of the Serbian Business Registers Agency (“SBRA”).

Both data published in the Official Gazette and data published by SBRA constitute publicly available and immediately accessible data for which no fees are charged.

3.1.1 Is any particular form of transfer required for the transfer to be legally recognised?

When ownership rights and other property rights over an aircraft are acquired based on a legal transaction, such legal transaction will only produce effect if it is compiled in written form.

Ownership over an aircraft can also be acquired on the basis of a court decision, or other competent authority, on the basis of inheritance as well as on other basis as prescribed by the law.

The legal transaction must also be notarised by the notary public, both in case of ownership transfer and in case of lease.

3.1.2 Must any particular conditions be satisfied for the transfer to be recognised?

In addition to the above mentioned written form and notarisation, the aircraft must be inscribed into the Aircraft Registry (“AR”). Inscription in the AR has definitive effect as to ownership.

3.1.3 Will such a transfer still be recognised by the courts of the Relevant Jurisdiction as legally valid where the relevant aircraft is located in another jurisdiction at the time of the transfer?

Yes – this notwithstanding possible views of the court of foreign jurisdiction where the aircraft is located.

3.1.4 Are any duties, taxes or fees levied on such transfer of ownership?

Yes, such transfer is subject to VAT at a 20% rate. Also, such transfer is subject to notarisation and thus notarisation fee, which is dependent on the sale price. Change of ownership in the AR is subject to EUR 30 administrative fee.

Expropriation cannot apply to aircraft. For the purpose of expropriation, the Expropriation Act applies to real estate and defines real estate as only “land and construction objects”.

However, in case the engine/aircraft is used to commit a criminal offense, according to the relevant provisions of the Criminal Proceedings Act it may be temporarily seized in criminal proceedings. The seized asset is returned upon completion of criminal proceedings, unless there are reasons stipulated by law for which the asset should be permanently seized i.e. protection of public safety and safeguarding of public morals.

According to the Serbian Air Traffic Act (“ATA”), the air traffic inspector is authorised to temporarily limit or prohibit the use of an aircraft/engine if such aircraft/engine does not comply with technical requirements and standards. The inspector is not, however, authorised to seize the aircraft/engine.

The Chicago Convention of 1944 on International Civil Aviation?

Yes, deposited notification of adherence on 14 December 2000

The 1948 Geneva Convention on the International Recognition of Rights in Aircraft?

Yes.

The 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft?

No.

The 2001 Cape Town Convention on International Interests in Mobile Equipment and the associated Protocol on Matters Specific to Aircraft Equipment (the Cape Town Convention)?

No.

N/A

Not that we are aware of.

Yes, there is an Aircraft Register in Serbia, it is called the Aircraft Register (Registar vazduhoplova) and it is operated by the Civil Aviation Directorate (“CAD”).

4.5.1 Who is responsible for registering the Aircraft - is it an owner registry or an operator registry?

Only aircraft that are registered with the Aircraft Registry can be used in air traffic. The Aircraft is registered upon request of the owner or upon request of the user. When the user requests registration, it must first obtain authorisation from the owner of aircraft.

4.5.2 What details would normally be recorded on the Aircraft Register upon registration of an aircraft in the Relevant Jurisdiction?

Each aircraft has its own designated Registry section which includes the following three pages:

1. description page, which includes the registration data, category, type, purpose and the main technical characteristic of the aircraft, limitations in the use of the aircraft as well as the data regarding aircraft products which have been built into the aircraft;
2. ownership/usage page, which includes information regarding the owner and the user of the aircraft as well as main data regarding the owner and the user of the aircraft; and
3. encumbrances page, including the main data regarding the holder and the basis of the security. If not normally recorded, is it possible to record the Lease and/or an Aircraft Mortgage on the Aircraft Register?

The Lease and Aircraft Mortgage are normally registered in the Aircraft Registry. However, the newly introduced changes to the Air Traffic Obligations and Property Rights Act (“ATOPRA”) prescribe optional rather than mandatory registration of Lease.

4.5.3 If the Aircraft Register is an operator register, is it possible to record the details of the aircraft owner/lessor and any financier with an Aircraft Mortgage?

Details of the aircraft owner/lessor are normally recorded. Financier with an Aircraft Mortgage can be inscribed in the AR.

4.5.4 If the Aircraft Register is an owner register, is registration on the Aircraft Register definitive to determine ownership of the Aircraft?

Ownership title over an aircraft is acquired by inscription of aircraft in the AR. The AR constitutes a public register, consequently there is the presumption that all data included in the AR is correct. This presumption may only be rebutted before the court in Serbia.

4.5.5 Are any distinctions made between aircraft employed on international routes and those used purely for domestic flights?

In relation to registration no distinction is made between aircraft employed on international routes and those used purely for domestic flights.

In order to obtain registration on the Aircraft Register, in addition to information provided in the designated form (please see answer under 4.5.2) the following documents are required:

1. Excerpt from the business registry for the owner/user/person filing the form;
2. Evidence of ownership or evidence of usage rights.

According to the ATA an aircraft may be registered in the AR if the aircraft is not inscribed in a foregn aircraft register, if it fulfills the conditions set forth in the certificate on type of aircraft, and if it is able to participate safely in air traffic, provided that:

1. partial or whole owner of aircraft is the Republic of Serbia, or is a legal person or an entrepreneur registered in Serbia;
2. partial or whole owner of aircraft is a citizen of the Republic of Serbia having domicile in Serbia or outside of Serbia, under the condition that the habitual base of the aircraft is located in the Republic of Serbia;
3. user of aircraft is a legal person, entrepreneuer or a physical person having seat or domicile in the Republic of Serbia

Where owner or user of aircraft is a foreign physical or legal person, the aircraft may be registered only upon prior consent for registration obtained from the Ministry of Construction, Traffic and Infrastructure.

Where an aircraft has been deleted from a foreign registry for the purpose of registration with the AR, the request for registration must be accompanied by the aircraft export cetificate of airworthiness issued by the authorities of the state of origin or by an aircraft airworthiness certificate issued by the Directorate based on a basic aircraft check-up.

No.

If so, what is benefit of such registration?

N/A

No.

Yes.

Yes.

The lease must be in written form and notarised by a Serbian notary, hence also in Serbian language.

Also, before taking an aircraft on lease, a domestic operator must first obtain a permission from the CAD for the conclusion of the lease agreement.

Where a domestic operator leases an aircraft to a foreign operator, the CAD permission is necessary only if the aircraft is leased with the crew. If a domestic operator leases to a foreign operator an aircraft without the crew, the domestic operator is only required to inform the CAD of the lease.

It is possible under Serbian law to also have an English version.

It is possible to provide that the English version should prevail. However, please note that, in case of interpretation of the Lease before Serbian courts, the English version (i.e. the prevailing one) will first need to be translated into Serbian for the Serbian court to be able to interpret it. In this scenario, it is questionable whether the nuances in the English language would be reflected in the Serbian translation.

The lease must contain the following mandatory elements:

1. Subject of lease;
2. Rent;
3. Type of lease;
4. Terms of maintenance and usage of aircraft; and
5. Supervision over aircraft usage.

5.6.1 a secured loan?

Yes - if it does not contain all of the terms listed under 5.5 above and provides for extension of finance in such a way that the lease can be interpreted as provision of security

5.6.2 a finance (or capital) lease?

Yes - if it contains a clause providing for transfer of ownership over the aircraft

There is no separate register for aircraft leases, but the lease can be registered within the general registration of aircraft (under the section “usage rights”).

6.2.1 What documentation and/or consents are required for the registration of the Lease?

The lease agreement must be submitted along with the registration application in order to provide evidence for the registered usage rights.

6.2.2 What registration fees are payable (if any)?

N/A

6.2.3 What information is recorded on the register? How is the eventual discharge of the Lease recorded?

The only data that is registered is the name of the lessee with the accompanying lease agreement.

6.2.4 Does any registration in respect of the Lease remain valid throughout the tenure of the Lease or does such a registration require periodic renewal?

It does not require periodic renewal.

If renewal is required when must this be done and what is the approximate cost of renewal?

N/A

The Owner must first terminate the Lease Agreement, thus depriving the Lessee of legal basis for its possession. However, the owner may not take possession of the aircraft by means of self-help. Self-help remedies are only available to the holder of the asset (presumably in this case the lessee) if there is an immediate, unauthorised assault against the asset, such as attempt by third parties to steal he engine or damage it. In order to be permitted, self-help needs to be necessary and proportionate to the circumstances and to the imminent peril.

In fact, in case of breach of above limits of permitted self-help, the lessor may be held criminally liable for vigilantism and charged with a monetary fine or imprisonment of up to one year.

In addition, ownership over an aircraft (and, if registered, lease of an aircraft) are information registered in the AC being a public registry. In respect of any information inscribed in a public registry, there is a presumption that such information is valid and that third parties are aware of them.

No. Please see answer under 7.1 above.

7.3.1 What documents would the Owner as lessor need to present in order to obtain possession of the Aircraft, both before and subsequent to judgment? Can documents be copies?

The Owner as lessor would need to provide an original excerpt from the relevant registry demonstrating its ownership title over the aircraft, notarised if applicable to the country of origin, and accompanied by a certified translation in Serbian. The Owner as lessor would possibly be required to submit certified copies of documents based on which it acquired the ownership over the aircraft – purchase agreement and the like.

7.3.2 What is the approximate cost of issuing proceedings?

The Serbian court will request payment of the court fees stipulated by the Court Fees Act (“CFA”). In addition to potential obligation of the plaintiff to post a bond, the plaintiff is obliged to pay the court fees for filing the legal action and for issuing the first instance judgment. Other fees (e.g. fee for filing the appeal, for proposing expert witness etc.) will be incurred by the party which undertakes/requests such evidence. The amount of court fees depends on the value of the case, but there are limitations.

Likely legal costs in litigation include:

• the first instance court fees of up to RSD 390,000 (approx. EUR 3,400) for filing the claim plus RSD 390,000 (approx. EUR 3,400) for issuing the first instance judgment
• the second instance court fees of up to RSD 390,000 (approx. EUR 3,400) only in case of filing the appeal against the first instance judgment, and in that event it is necessary to pay additional RSD 390,000 (approx. EUR 3,400) for issuing the second instance judgment + RSD 195,000 (approx. EUR 1,700) only in case for filing legal response against the appeal;
• enforcement proceedings fees of up to RSD 195,000 (approx. EUR 1,700) for filing the enforcement proposal plus RSD 195,000 (approx. EUR 1,700) for issuing first instance enforcement decision;
• the third instance court fees of up to RSD 780,000 (approx. EUR 6,700) only in case of filing the extraordinary appeal against the first instance judgment, and in that event it is necessary to pay additional RSD 1,170,000 (approx. EUR 10,000) for issuing the third instance judgment + RSD 195,000 (approx. EUR 1,700) only in case for filing legal response against the extraordinary appeal;
• costs of expert opinions and any other evidence – to be incurred by the party requesting such evidence; and
• (potentially significant) attorneys’ fees.

7.3.3 Would the Owner be required to provide a bond, guarantee or other security in order to issue proceedings?

A foreign lessor is free to utilize the Serbian courts only if the lessee has its registered seat in Serbia. If this condition is satisfied, the lessor can bring proceedings before the Serbian courts.

Once the lessor brings proceedings before the Serbian courts, it may be required to post a bond. The obligation to post a bond is excluded where there is reciprocity with the State of registered seat of the lessor. This is true if the State of the lessor is signatory to:

1. a bilateral treaty with Serbia; or
2. the Hague Convention on Civil Procedure (1 March 1954); or
3. the Hague Convention on International Access to Justice (25 October 1980)

If neither 1), 2) or 3) is satisfied (which is the case with both the Republic of Ireland and the United States), an opinion may be requested from the Serbian Ministry of Justice regarding existence of formal or factual reciprocity. If the obtained opinion is positive, the lessor cannot be obliged to post a bond when bringing proceedings before Serbian courts.

If there is no reciprocity, the lessor may be ordered by the court to post a bond as security for potential damage which the Serbian defendant might incur through litigation. The court order is not ordered automatically; rather, it may only be issued upon request of the Serbian defendant. If the lessor fails to post a bond within the deadline set by the court order, the claim will be considered withdrawn.
Please note that, if the parties explicitly agreed on exclusive competence of a foreign court (e.g. New York or Ireland), then the Serbian court may, upon objection of the defendant, find that it is not competent to hear the dispute and dismiss the lessor’s claim.

7.3.4 What is an estimate of the normal duration of possession proceedings from time at which all required documentation is made available – if uncontested?

Time scale of proceedings cannot be predicted in exact terms. However, assuming that the proceedings end in the first instance, the very minimum (and unlikely) time scale is approximately 6 months for obtaining the first instance judgement.

Please note that, regardless of the type of breach or likelihood of success, under Serbian law a party may only give up its right to appeal after the first instance decision has already been rendered.

7.3.5 What is an estimate of the normal duration of possession proceedings from time at which all required documentation is made available – if contested?

Time scale of proceedings depends largely on whether the dispute revolves around legal or factual issues. Proceedings may be significantly prolonged and the exact time scale cannot be predicted with certainty.

If only legal issues are a matter of dispute, and assuming that the proceedings end in the first instance, the very minimum (and unlikely) time scale is approximately six months for obtaining the first instance judgement. It is more likely, however, that proceedings are prolonged, often significantly. In case of dispute on facts and, consequently, drawing of evidence, the likely time scale for first instance proceedings is prolonged by at least additional six months to one year.

The minimum timescale for obtaining a second instance judgement is approximately nine months to one year.

The time scale for third instance proceedings varies depending on the extraordinary remedy, but is likely to last one year at the very minimum.

7.4.1 Is there a waiting period before action may be taken?

N/A

7.4.2 Is there a long stop date by which action must be taken?

N/A

7.4.3 Is a Public Auction of the aircraft required?

N/A

No.

No. If so, please provide details of any matters or issues of which an Owner should be aware.

Other than in bankruptcy, it is highly unlikely that the sums expressed to be payable under the Lease/obligations expressed to be assumed by the Airline in the Lease would be unrecoverable or unenforceable in Serbia.

However, where the Lessee is a wholly or a predominantly State-owned company, there is a theoretical risk that, upon completion of judicial proceedings in favour of the Owner, the sums owned under the Lease may still be unrecoverable – all this based on a regulation entitling the Government to block payments from the state treasury, even where there is a court decision regarding payment.

In accordance with the ATOPRA, a statutory pledge is established over an aircraft, for the purpose of securing:

1. expenses incurred by creditors in enforcement proceedings seeking to settle their claims against the aircraft;
2. remuneration for provided services of search and salvation of aircraft; and
3. extraordinary expenses incurred for aircraft maintenance.

Holder of a statutory pledge over an aircraft is entitled to request inscription of its pledge in the Registry of Pledges kept with the SBRA. According to the ATOPRA, its claim will rank in priority to all other claims against the aircraft.

In addition to the specific provisions of the ATOPRA that apply to aircraft, the general provisions of the Obligations Act (“OA”) provide for two types of statutory liens that may apply to the engine:

1) Retention rights
Any creditor holding a claim that has fallen due, having in its possession an asset of the debtor, may retain the asset of the debtor as security for its claim. Where the debtor has become insolvent, retention rights may be exercised even if the claim is not yet due.

If the creditor is provided with other type of security, it automatically loses its retention rights over the asset of the debtor. Otherwise, the creditor may settle its claim in the same way as a pledgee would – from the sale proceeds of the asset. However, the creditor must inform the debtor of the planned sale in due time.

2) Statutory pledge of service provider
According to the relevant provisions of the OA, the service provider in a service agreement (ugovor o delu) holds a pledge over the manufactured or repaired asset, as security for remuneration for the work done and cost of the material used, as well as for other contractual claims related to such asset. The pledge is effective so long as the service provider willingly keeps the asset in its possession.

No, there are no export restrictions on export of a repossessed aircraft.

The owner can apply for deregistration of the Aircraft and there is no time period within which such application should be made. 

Yes, both the owner and the user i.e. Airline need to provide their consents for the aircraft to be deregistered.

Deregistration normally takes up to seven days from the moment the request is submitted. Deregistration is not possible if there is no consent of Airline.

There is no export licence or permit, but export customs documents can be obtained in advance.

Export customs documents can usually be obtained in just a few days. Costs involve freight agent costs and minor customs administrative fees.

No.

There is no provision in the Serbian mandatory rules, which would preclude (an irrevocable) export and deregistration Power of Attorney from producing effect. However, a Power of Attorney does not constitute an enforceable title under the Enforcement and Security Act (“ESA”). This means that refusal by the lessee to comply with the Power of Attorney/hand over the aircraft would not prevent regular litigation proceedings and would not provide the lessor with any additional protection/summary procedure.

Similarly, there is no provision in the Serbian mandatory rules, which would preclude the courts from recognising a power of attorney in the form of an IDERA and governed by English law.

Please see answer under 8.7 above.

Yes.

9.1.1 Would the airline be required to file for insolvency protection?

The airline would not be required to file for insolvency protection. However, insolvency would likely be instigated by any one of the creditors or by the liquidation manager where liquidation is not successful or by the airline itself but only as a discretionary right.

9.1.2 Do the available forms of insolvency protection in the Relevant Jurisdiction involve the appointment of either an officer of the court or a specifically court appointed official to take control of the Airline (an Insolvency Official) while in insolvency protection?

Yes, the court appoints an Insolvency Administrator which replaces the management of the Airline while the airline is in insolvency. This applies to both forms of insolvency in Serbian law: reorganisation as well as bankruptcy.

9.1.3 Does the Insolvency Official have authority to negotiate and reach agreement with the Owner in relation to matters such as the payment of unpaid rent, continuation or termination of the Lease and repossession of the Aircraft without the need for court approval?

InIn commercial transactions an Aircraft has the status of real estate. In this sense, the Lease continues to produce effect upon opening of insolvency while the Owner can only settle its claims that arose prior to insolvency, within insolvency proceedings.

The Insolvency Administrator is entitled to terminate the Lease with 30 days’ notice, regardless of the terms of the Lease. In this case, the Owner would be entitled to claim damages, but only up to the amount of half year rent.

If the Lease remains, then the Insolvency Administrator has to settle its obligations arising therefrom, while the claims against the Airline arising from the Lease will be considered as claims against the insolvency pool of assets.

9.1.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official in the Relevant Jurisdiction have the effect of prohibiting the Owner from taking the following actions to enforce the lease after commencement of such protection:

• Applying any security deposit held by the Owner against any unpaid amounts due under the Lease? No.
• Accepting payment of rent or other lease payments from:
  1. (i.) the Airline? No, if such payment is made by the Insolvency Administrator
  2. (ii.) a guarantor? No
  3. (iii.) a shareholder? No
• giving notice of default under the lease? Yes, if due to default by Airline upon opening of insolvency proceedings.
• obtaining a judgment or arbitral award for unpaid lease payments? Yes.
• giving notice to terminate the leasing of the Aircraft? Yes, if the Owner wishes to terminate due to default of Airline that took place upon opening of insolvency proceedings.
• exercising rights to repossess the Aircraft? No, under the condition that the repossession is carried out within insolvency proceedings.

9.1.5 Can the commencement of Insolvency Proceedings have retrospective effect in relation to any such actions taken before commencement? If so, for what period can there be a look back?

The commencement of Insolvency Proceedings can have a claw - back effect if the actions taken before commencement: 1) can be qualified as detrimental to other creditors/privileging the Owner; and 2) if they fall within the prescribed time window for claw - back.

Commercial transactions and other commercial actions concluded or undertaken prior to the opening of insolvency, which jeopardise the pari passu settlement of/cause damages to insolvency creditors, as well as commercial transactions and other actions privileging certain creditors, may be rebutted for the Airline by the Insolvency Administrator.

9.1.6 Is there, either under law or as a matter of practice in the Relevant Jurisdiction, a period of time within which the Insolvency Official will either “adopt” the lease and pay rent and other lease payments as an expense of the insolvency or “reject” the lease and permit the Owner to enforce such rights as it may have under the lease?

The Insolvency Administrator is entitled to terminate the Lease with 30 days’ notice, regardless of the terms of the Lease. In this case, the Owner would be entitled to claim damages, but only up to the amount of half year rent.

9.1.7 If the Lease remains, then the Insolvency Administrator has to settle its obligations arising therefrom, while the claims against the Airline arising from the Lease will be considered as claims against the insolvency pool of assets. If the lease is “adopted” will the Insolvency Official also pay any unpaid lease payments due as at commencement of the insolvency protection?

Please see answer under 9.1.6 above

9.1.8 If not or if the lease is “rejected”, would the Owner’s claim for any outstanding sums rank equally with other ordinary unsecured creditors of the Airline?

Yes.

9.1.9 Are there certain types of preferred creditors whose claims will rank above claims of the Owner?

Lessor’s monetary claim towards the lessee ranks behind expenses of insolvency proceedings, obligations of the insolvency asset pol (e.g. employee claims) and secured creditors.

In relation to the asset – no claims rank in priority to the lessor if the lessor is the owner of the asset. The owner is not considered to be an insolvency creditor. It is entitled to request that the asset be excluded from the insolvency pool of assets. However, if its ownership title is disputed, the lessor must provide the excerpt from the Aircraft Registry and evidence its ownership title before courts in Serbia.

9.1.10 If the Aircraft is in the possession of a person other than the Airline at the commencement of Insolvency Protection of the Airline, for example an independent maintenance facility, will such person be entitled, under the laws of the Relevant Jurisdiction, to assert a lien arising under law or contract over the Aircraft in respect of amounts then due and unpaid to such person by the Airline?

In addition to the specific provisions of the ATOPRA that apply to aircraft (please see answer under 7.8 above), the general provisions of the OA provide for two types of statutory liens that may apply to the engine:

1. Retention rights
   Any creditor holding a claim that has fallen due, having in its possession an asset of the debtor, may retain the asset of the debtor as security for its claim. Where the debtor has become insolvent, retention rights may be exercised even if the claim is not yet due.
   If the creditor is provided with other type of security, it automatically loses its retention rights over the asset of the debtor. Otherwise, the creditor may settle its claim in the same way as a pledgee would – from the sale proceeds of the asset. However, the creditor must inform the debtor of the planned sale in due time.
2. Statutory pledge of service provider
   According to the relevant provisions of the OA, the service provider in a service agreement (ugovor o delu) holds a pledge over the manufactured or repaired asset, as security for remuneration for the work done and cost of the material used, as well as for other contractual claims related to such asset. The pledge is effective so long as the service provider willingly keeps the asset in its possession.

9.1.11 Is a person other than the Airline, for example an airport authority, entitled under the laws of the Relevant Jurisdiction to seize possession of the Aircraft after commencement of Insolvency Protection and assert a lien arising under law or contract over the Aircraft in respect of amounts then due and unpaid to such person by the Airline.

In addition to retention rights set forth under 9.1.10 above, in accordance with the ATOPRA, a statutory pledge is established over an aircraft, for the purpose of securing:

1. expenses incurred by creditors in enforcement proceedings seeking to settle their claims against the aircraft;
2. remuneration for provided services of search and salvation of aircraft; and
3. extraordinary expenses incurred for aircraft maintenance.

Holder of a statutory pledge over an aircraft is entitled to request inscription of its pledge in the Registry of Pledges kept with the SBRA. According to the ATOPRA, its claim will rank in priority to all other claims against the aircraft.

10.1.1 the Owner is incorporated and is tax resident in Ireland?

DTT – Yes.

The applicable DTT treats income from lease of aircraft as income from performing international traffic, if an aircraft is leased without crew and fuel, while the leasing represents Lessor’s auxiliary business activity. Such income is taxable only in Ireland. The Lessor must prove it is an Irish resident prior to lease payment by the Lessee, otherwise, general 20% WHT rate will apply instead.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the Serbian Corporate Income Tax (“CIT”) on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, withholding tax (“WHT”) will not apply on lease payments, but CIT will apply instead.

10.1.2 the Owner is incorporated and is tax resident in the United Kingdom?

DTT – Yes.

The applicable DTT treats income from lease of commercial equipment as royalties subject to a 10% WHT in Serbia, provided that a lessor is the beneficial owner of such income. The Lessor must prove it is a UK resident prior to lease payment by the Lessee, otherwise, general 20% WHT rate will apply instead.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will not apply on lease payments, but CIT will apply instead.

10.1.3 the Owner is incorporated and is tax resident in Hong Kong?

DTT – No.

Lease payments are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

10.1.4 the Owner is incorporated and is tax resident in Singapore?

DTT – No.

Lease payments are subject to a general 20% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will not apply on lease payments.

10.1.5 the Owner is incorporated and is tax resident in Malta?

DTT – Yes.

The applicable DTT treats income from lease of commercial equipment as royalties subject to a 10% WHT in Serbia, provided that a lessor is the beneficial owner of such income. The Lessor must prove it is a resident of Malta prior to lease payment by the Lessee, otherwise, general 20% WHT rate will apply instead.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will not apply on lease payments, but CIT will apply instead.

10.1.6 the Owner is incorporated and is tax resident in the Channel Islands?

DTT – No.

Lease payments to residents of Guernsey and Jersey are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

10.1.7 the Owner is incorporated and is tax resident in the Isle of Man?

DTT – No.

Lease payments are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

10.1.8 the Owner is incorporated and is tax resident in Mauritius?

DTT – No.

Lease payments are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

10.1.9 the Owner is incorporated and is tax resident in Bermuda?

DTT – No.

Lease payments are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

10.1.10 the Owner is incorporated and is tax resident in the Cayman Islands?

DTT – No.

Lease payments are subject to a special 25% WHT rate.

Provided that the Owner is a non-resident, and that no PE was constituted in Serbia, the Owner is not subject to the CIT on the lease income received from Serbia. Principally, a lease of an aircraft itself does not constitute a PE. Still, if the Owner has a branch or constitutes a PE in Serbia, WHT will apply in the moment of lease payment.

The Owner (Lessor) will be subject to a WHT on lease of movable assets. The WHT is usually calculated and paid (deducted) by the income payer (Lessee). Exceptionally, if the Lessee is not required to calculate and pay WHT, the Owner is required to file a tax return in Serbia, at the place of Lessee’s registered seat, via a tax proxy within 30 days from the receipt of lease payment, where upon the decision of the Tax Authority on the amount of the tax liability, the Owner will be required to pay taxes in Serbia.

The “gross up” clause is not only recognised and enforceable in Serbia, as a part of contract price determination, but in order for the income recipient (Lessor) to retain the agreed upon net amount, it is also highly recommended to implement an “extended gross up” clause, which would shift the burden to the payer of income (Lessee) of any VAT, WHT, customs and stamp duties, any other fiscal or para-fiscal charges, and any other tax, duty or charge that may be introduced in the future, including any increase in existing taxes, duties or charges.

Serbian VAT at a 20% rate would apply on importation or leasing of an aircraft in Serbia. If a non-resident Lessor does not have a branch, a PE or a tax proxy in Serbia, Lessee would apply the reverse charge mechanism, but would not be entitled to deduct input VAT. However, if an aircraft is leased for use in international traffic, such lease would be VAT free.

If an aircraft is used for personal transportation, amateur or sports flying, such use would give rise to a special Aircraft Usage Tax, which is payable by the aircraft user (Lessee).

Importation of an aircraft is subject to a customs duty at a rate of 1%. Zero rate applies for importation from EU Member States, CEFTA states, Russia, etc. Freight agent charges and minor customs administrative fees may apply as well.

Sale of an aircraft located in Serbia between two non-resident Lessors may trigger VAT.

It is recommended to notarise the Aircraft Lease Agreement in Serbia, as for non-tax purposes an aircraft is treated as an immovable asset. The amount of a notarial fee is dependent on the value of the agreement.

In addition, if the Lessor chooses to register the lease agreement with the AR, additional fee of RSD 150.000 would apply.

N/A

10.6.1 being owner and lessor of an aircraft registered in the Relevant Jurisdiction and operated/leased by a company incorporated or registered in the Relevant Jurisdiction?

All payments from the Lessee to the Lessor are subject to Serbian transfer pricing rules.
A Lessor is considered a related party:

1. if it (in)directly holds or controls at least 25% of the Lessors shares or voting rights in the Lessee, or
2. if it has the same legal entities or individuals participating in control, management or capital of both the Lessee and the Lessor in the same percentage, or
3. if it is a non-resident legal entity from a preferential tax jurisdiction (“tax heaven”), irrelevant of the percentage.

10.6.2 making available a lease facility to a company incorporated or regulated in the Relevant Jurisdiction?

WHT on interest payments, transfer pricing and thin capitalisation rules may be applicable to a lease facility provided by a non-resident.

10.6.3 The Serbian thin capitalisation rules specify that interest and related costs in connection with a loan from a related party exceeding 4:1 debt-to-equity ratio (10:1 for banks and financial leasing companies) will not be deductible for tax purposes. Receiving rent and other lease payments under the Lease from the lessee incorporated or registered in the Relevant Jurisdiction?

N/A

Export of an aircraft is principally not subject to any taxes or customs export duties. Freight agent charges and administrative fees may apply.

10.6.5 Selling the aircraft at a profit, whether such sale is after repossession or is subject to the Lease and the lessee’s rights?

Selling of an aircraft in Serbia is subject to VAT. Hence, selling an aircraft by the Lessor after repossession in Serbia may trigger VAT and raise some tax issues for the Lessor.

In addition, if the VAT does not apply, RETT at a rate of 2,5% may be applicable instead. In such a case, the seller is obliged to file a tax return via a tax proxy and pay the RETT.

In principle, payments to non-residents are free of any restrictions.

N/A

Yes, the Mandatory Insurance Act and the ATA require mandatory insurance of an aircraft.
Also, based on information obtained from the CAD, the only form of mandatory insurance is the insurance of the aircraft against potential damages incurred by third parties.

Yes, the primary insurance must first be reinsured with a local insurer prior to any further reinsurance outside Serbia.

The regulations are not clear on this point, but it appears that there is no minimum percentage of cover which a local insurer is obliged to retain.

It is possible for local insurance to assign contracts of reinsurance. There is no explicit provision in the Serbian mandatory rules rendering a cut-through clause unenforceable.

Can the Owner be strictly liable - liable without a requirement to prove fault or negligence - for any damage or loss caused by the Aircraft assuming Owner is an innocent owner with no operational control of the Aircraft?
There are no provisions of Serbian law that explicitly prescribe cases in which an owner of an aircraft would be held strictly liable for a claim arising out of the use and operation of Aircraft by the Airline.

However, the risk cannot be entirely excluded because, in certain cases, it appears that the carrier could be partly or fully exonerated by proving liability of third parties (presumably, Aircraft Owner).

According to the relevant provisions of the Montreal Convention (Unification of Certain Rules for International Carriage by Air – Montreal, 28 May 1999) and the corresponding provisions of the ATOPRA, the carrier which already paid damages to incurred by claimants due to failure to board, delay, or flight cancellation, is still entitled to fully or partly exonerate itself by proving liability of third parties. Although the risk appears to be minimal, it can be contemplated that, in a particular situation, the airline company would reclaim damages paid to claimants by proving exclusive liability of the Aircraft owner.

In case the Aircraft is used to commit a criminal offense, according to the relevant provisions of the Criminal Proceedings Act it may be temporarily seized in criminal proceedings. The seized asset is returned upon completion of criminal proceedings, unless there are reasons stipulated by law for which the asset should be permanently seized i.e. protection of public safety and safeguarding of public morals.

According to the ATA, the air traffic inspector is authorised to temporarily limit or prohibit the use of an aircraft/engine if such aircraft/engine does not comply with technical requirements and standards. The inspector is not, however, authorised to seize the aircraft/engine.

The seized asset is returned upon completion of criminal proceedings, unless there are reasons stipulated by law for which the asset should be permanently seized i.e. protection of public safety and safeguarding of public morals. In such a case, although highly unlikely, it may be conceived that the aircraft is sold without the Owner being informed of it.

No such immunity from suit is provided by Serbian regulations. However, in accordance with the recently adopted Insolvency Act (“IA”), a legal entity established by the Government cannot enter insolvency. The national Airline i.e. Air Serbia is a Government-founded and Government predominantly-owned legal entity. As such, Air Serbia would potentially be exempt from insolvency proceedings. However, the courts have only applied this provision under the condition that it is proved that the legal entity is predominantly State- financed.

No, the provisions of the IA constitute mandatory rules of Serbian law.

1. there would be no need for recognition of a foreign award; and
2. most probably the assets of defendant would be located in the Relevant Jurisdiction i.e. in Serbia.

Alternatively, a different choice of dispute resolution can be stipulated if the courts of Serbia (based on diplomatic or factual reciprocity) recognise court decisions rendered in the jurisdiction in question.

Yes, the laws of Serbia permit and recognise the described “asymmetric” submission clause.

Judgements of foreign courts are recognised in Serbia if the condition of reciprocity is satisfied. Reciprocity will exist if:

1. there is a bilateral treaty on recognition of foreign judgments between the relevant foreign jurisdiction and Serbia (diplomatic reciprocity); or
2. laws in the relevant jurisdiction provide for recognition of Serbian judgments (formal reciprocity); or
3. there is no diplomatic or formal reciprocity, but in practice the courts in the relevant jurisdiction recognise Serbian judgments and courts in Serbia in practice recognise judgments rendered in the relevant foreign jurisdiction (factual reciprocity).

There is no diplomatic reciprocity between Serbia and England.

In order to establish whether there is formal or factual reciprocity with a certain foreign jurisdiction, an official opinion needs to be obtained from the Serbian Ministry of Justice.

Yes, Serbia is party to both the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the Washington Convention).

No, but please note that no separate registry is kept for aircraft engines and the only data which is recorded and concerns aircraft engines is the type of engine – not the registration number.

Yes, but such ownership is not separately recorded due to the fact that engines are considered movables and no separate registry of engines is kept with the CAD.

No, please see answer under 17.1 above.

Are there any other matters, issues, recommended courses of action or steps which can be taken to protect and/or perfect the Owner‘s interests, as owner and lessor of the Aircraft in the Relevant Jurisdiction or of which the Owner should be aware when contemplating leasing an aircraft to a company incorporated and operating in the Relevant Jurisdiction?

Please note that, due to a very limited and underdeveloped market in this area, Serbian regulations remain unclear and there is insufficient practice by courts and other authorities.