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Lease Agreement Withholding Tax

The text of the judgment of the Russian Supreme Court`s economic dispute panel in the Coiltubing Service LLC case (the «company») was published on 6 October 2020.1 The Supreme Court referred the case to the review of the proceedings and stated that the courts had failed to properly assess the terms of the tenancy agreement and the possible applicability of the provisions of a bilateral tax agreement to the lender`s levy. This is a pioneering judgment in understanding the Supreme Court`s approach to taxing «passive income,» and in particular leasing revenues. At a time when many governments around the world are supporting airlines considered strategic, Brazil appears to be increasing the risk of airline failures. Airlines can successfully challenge the legality of withholding tax; however, this requires the use of legal and administrative resources that could have been used elsewhere to strengthen airlines. In any event, the likelihood that owners will be held responsible for withholding tax decreased significantly after the final text of the legislation. The deposit received by the lessor, whether the lessor uses the demarcation note or the cash billing method, should be considered a liability at the time of receipt and counted as VAT-subject income at the time of the application. On the other hand, the taxation of leases has generally remained unchanged since the issuance on 1 January 1987 of the income scale (RR) No. 19-86, which imposes the rules for the tax treatment of leases. It should be noted that the agreement may include provisions that may allow the purchaser to recover his PDP if he can prove to the court that these payments are in fact sureties to the manufacturer and not compensation for the costs of building the aircraft. To avoid this for most sales contracts, PDPs are called absolute and unconditional payments to the producer and, as such, only the manufacturer is interested in PDPs and not the buyer.

In general, the recovery of PPDs should not occur if the manufacturer`s interest is maintained. Events in Brazil have developed so rapidly that it is difficult to write about any subject without an article being immediately obsolete. Among the most recent developments are the presentation of Chapter 11 of the Chilean Latam Airlines Group, which subdivide a significant portion of its fleet to its Brazilian subsidiary TAM Linhas Aereas, as well as the emergency bill to deal with the economic consequences of COVID-19 (for more details, see «Emergency Bill may violate the Cape Town Convention»). This emergency legislation is currently being evaluated by the Senate. In the case of a sale and leasing transaction, the taker (airline) would purchase an aircraft from a manufacturer and finance a percentage of its PPPs through a secured loan from a bank or a third party. Interest is payable for the duration of the loan and the principal amount is payable upon delivery of each aircraft subject to the loan. As collateral, the buyer (Lessherr) grants a lien to the lender because of his rights to the aircraft purchase contract. The buyer will also agree on a tripartite agreement with the manufacturer. These include the manufacturer`s recognition of the lender`s pledge rights and contractual agreements on how the parties` rights to the aircraft and PPDs can be concealed after a buyer`s delay. Such an agreement would protect a lessor by allowing him to follow in the buyer`s footsteps in the event of delay or financial difficulties for the taker (Gee, 2009).

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