the changed regulatory environment for the operation of business aircraft in russia

September 12, 2019

Despite improvements to its legal framework, Russia’s current aviation regulatory practices continue to create a host of challenges. Derek Bloom and Petr Koshelev discuss recent changes in Russian regulation of Business Aviation

The year 2019 has been marked by a number of regulatory changes affecting the operation of business aircraft in Russia. The changes are twofold: There has been a drastic change in the application of temporary importation regulations as applied to business jets, and there have been changes to regulations affecting landing permits.

The changes to the regulation of the operation of business aircraft in Russia were initially very confusing to market participants as they encountered an unexplained cessation of business as usual in early 2019. Business as usual had been that foreign (non-Russian) commercial operators of aircraft had been able for decades to conduct domestic flights within Russia on foreign-registered aircraft, based on “one-time flight permits”. The Russian Federal Customs Service (the “Customs Service”) would look the other way and not inspect whether a flight that was declared to be a private flight was, in fact, a commercial flight. Then, suddenly, in the spring of 2019 the acquiescence of the Customs Service was discontinued, though flight permits could still be obtained. It was not clear why Russia had suddenly decided to commence enforcing its own laws that had long declared cabotage flights to be illegal, i.e., commercial flights within Russia on foreign-registered aircraft that are not customs-cleared and placed on to a Russian commercial operator’s certificate for commercial use.

The background to the changed regulatory environment in the spring of 2019 was that a lot of attention was being paid to the illegal operation of foreign-registered aircraft within Russia. There were two related criminal investigations, one directly concerning the illegal operation of aircraft that were not customs-cleared, and the other one concerning the issuance of flight permits in exchange for bribes.

With the commencement of the Sfera Jet case in March 2019, the Customs Service began an across the board halt on the issuance of customs clearances of foreign-registered aircraft for flights within Russia or the Eurasian Economic Union (the “Eurasian Union”).

There was also a case which commenced on July 8, 2018 in the Meschansky district court in Moscow against a now-former employee of the Russian Agency for Air Transportation (“Rosaviatsia”) named Yury Malyshev who accepted a bribe for a flight permit. Filatov, general director of iFly, was arrested for giving a bribe and Malyshev (at the time, a deputy head of a department of Rosaviatsia) was arrested for accepting the bribe.

It had been known for years that there had been large scale, pervasive corruption in the issuance of flight permits and customs clearances for domestic flights within Russia of foreign-registered aircraft. Business Aviation industry leaders in Russia had previously openly advocated the making of false flight plans for domestic commercial flights, declaring such flights to be private when they were, in fact, commercial. There was a low probability of adverse consequences since regulators at Rosaviatsia and in the Customs Service were incentivized not to inspect flights for which a flight permit had been obtained through certain channels.

Flight Permits

The issuance of flight permits by Rosaviatsia is governed by Russian Federation Government Decree № 527, dated April 28, 2018, as further amended by Government Decree № 652, dated May 24, 2019. Even though the practical application of some of the rules is not straightforward, since the commencement of the case involving iFly and Mr. Malyshev in July 2018, Rosaviatsia has not delayed issuances of flight permits without a stated formal reason. Decree № 652, in force since May 2019, created a new requirement that, for a foreign carrier to receive permission for a charter to, from, or within the Russian territory on a foreign-registered business aircraft, the foreign operator must obtain non-objections to the planned flight from Russian commercial operators.

As of June 21, 2019, Rosaviatsia introduced new restrictions on the operation of foreign registered aircraft on flights to, from and within the Russian Federation, including that foreign operators must obtain the non-objection of a number of selected Russian commercial operators who may object to a foreign operator conducting a leg of a flight within Russia, even as part of an international roundtrip of a foreign registered aircraft. An exception is allowed for private flights operated in the interests of an aircraft owner, transit flights through the Russian Federation, flights for the purposes of rendering humanitarian assistance, medical evacuation, transportation of personnel and supplies during natural disasters or in cases of emergency, and certain other flights.

Customs Clearances

Since the spring of 2019, new impediments to operating foreign-registered aircraft within Russia arose from the Customs Service, and not Rosaviatsia. The attention of the Business Aviation community in Russia has, accordingly, shifted to the relevant provisions of the Customs Code of the Eurasian Union (the “Customs Code”) and the related procedural requirements. Customs filings must be initiated as soon as a foreign-registered aircraft lands at an airport in the Russian Federation or another member state of the Eurasian Union.

The relevant customs regulations and procedures have been in place since May 29, 2014 when Russia, Kazakhstan and Belarus formed the Eurasian Union (the “Eurasian Union”, previously called the “Customs Union”), and Armenia and Kyrgyzstan subsequently joined the Eurasian Union. For an aircraft to arrive in Russia and to be made subject to Eurasian Union customs clearance requirements, a landing permit from Rosaviatsia or another aviation regulator within the Eurasian Union must already be in place, and, as mentioned, Rosaviatsia continues to issue flight permits including for roundtrip international flights that include domestic legs (provided the newly non-objection letters from the Russian operators are in place). Domestic legs are now scrutinized by the Customs Service. What is interesting to note, however, is that there has been no change in governing law, but only a crackdown since the Sfera Jet case commenced.

The Customs Code replaced Russia’s own prior national customs code. And, today, the import of aircraft and other goods into Russia is governed by the Customs Code and relevant decisions of the Commission of the Eurasian Union.

Under the Customs Code, the first way to temporarily import an aircraft into the Eurasian Union that foreign business-jet operators should consider is the procedure by which an aircraft is cleared as a “means of international transportation” that is carrying out an international flight. Under this procedure, upon the first landing of an aircraft at an airport within Russia or another country in the Eurasian Union, the operator is to provide to the Customs Service a Vehicle Declaration (as per Decision of the Commission of the Customs Union No. 422, dated October 14, 2010) and a General Declaration (as per the 1944 Chicago Convention on International Civil Aviation), declaring a route that begins and ends outside the Eurasian Union.

For the purposes of a Vehicle Declaration, an international flight is defined in Article 1 of the 1999 Montreal Convention for the Unification of Certain Rules for International Carriage by Air (the “Convention”). For the purposes of the Convention, the expression “international carriage” means any carriage in which, according to the agreement between the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transshipment, are situated either within the territories of two States Parties, or within the territory of a single State Party if there is an agreed stopping place within the territory of another State, even if that State is not a State Party. Carriage between two points within the territory of a single State Party without an agreed stopping place within the territory of another State is not international carriage for the purposes of the Convention.

Article 1 of the Convention is interpreted to mean that an aircraft that is cleared for use in “international carriage” may not be used to carry passengers or goods within the territory of the Eurasian Union. This does not preclude the aircraft from making more than one landing inside the Union, a point that may be misinterpreted by Russian customs officials who would then refuse to clear an aircraft intending to make more than one stop within Russia or other countries within the Eurasian Union before ultimately departing the Eurasian Union.

For aircraft performing domestic flights, i.e. carrying passengers and goods within Russia or other countries within the Eurasian Union, there are two temporary importation procedures available, depending on whether the aircraft is used privately or commercially. The basis for them is Article 53 of the Customs Code, which sets out general rules for customs duties and taxes for goods imported into the territory of the Eurasian Union. There are different manners of importing goods, which are comparable to imports into the European Union, with the most important distinction being between an import for free circulation within the Eurasian Union and a “temporary import” of an item which is to be re-exported. In the case of a temporary import, foreign goods may be used for a specific period on the territory of the Eurasian Union, and may be partially or fully conditionally exempted from payment of import duties and taxes.

If an aircraft is imported into the Eurasian Union temporarily, and is to be used commercially, Section 3 of Article 223 of the Customs Code provides that import taxes and duties shall be imposed on such imported goods at the rate of 3% per month of the amount of customs duties and taxes which would be due if the goods were imported for free circulation, to remain permanently in the Eurasian Union. Thus, if an aircraft were temporarily imported, and taxes and duties were paid at the rate of 3% per month of the cost of full customs clearance, plus interest on the deferred payments, then the aircraft may lawfully be used commercially within Russia.

If a temporarily imported aircraft is to be used privately by its owner, it may be fully exempted from payment of duties and taxes. Such regime is referred to as “Import 53”. Chapter 29 of the Customs Code is supplemented by three decisions of the Commission of the Eurasian Union affecting business aircraft, i.e. decisions numbered 331, 662, and 1388, discussed below. These three decisions provide that a complete exemption from import duties and taxes is provided for a civilian passenger aircraft having a number of passenger seats for not more than 19 people, if the aircraft is owned by a foreign person or legal entity and is used within the customs territory of the Eurasian Union on irregular (not commercially scheduled) flights, and provided further that such use is not intended to generate revenue. A foreign owned aircraft that is imported to Russia temporarily and without any payment of import duties may not be used commercially within Russia.

If a foreign, non-Russian-registered aircraft having no more than 19 seats, weighing no more than 28 tons empty weight and owned by a foreign entity or person is flown to Russia for use within Russia and other countries that are members of the Eurasian Union, and if the aircraft is not used on commercial flights while within Russia and the Eurasian Union, and the aircraft is flown out of the Eurasian Union by the date stated in the customs declaration filed with the Russian Customs Service upon arrival of the aircraft in Russia or another country in the Eurasian Union, then the aircraft may be used within Russia on private flights by its owner without payment of otherwise applicable taxes and duties.

Additional caution is required for any aircraft that are to be used commercially within Russia or another country in the Eurasian Union. If an aircraft is flown into Russia or another country in the Eurasian Union, and a customs declaration is filed claiming the exemption from customs duties that applies to tax-free temporary imports that are not to be used to generate revenue within the Eurasian Union, and the aircraft is then used to generate revenue while present in Russia or elsewhere in the Eurasian Union, then the rules governing a tax-free import will have been violated.

Further Developments

At the present time, there are consultative meetings being held between representatives of the Russian Business Aviation community and government officials representing the Ministry for Economic Development and Rosaviatsia. There are drafts of possible legislation concerning the creation of a new Russian registry for business jets to be used on private flights within Russia.

It is reported in conversations by participants in the consultative meetings that one aspect of the current draft proposals is that Russian owners of aircraft registered outside of Russia who desire to fly their aircraft within Russia will be required to customs-clear their aircraft in Russia and to place them on a Russian operator’s certificate. This, reportedly, will be required for aircraft that are to be operated privately or commercially in Russia. There are conflicting reports whether Ministry for Economic Development is considering an exemption from import VAT of 20% for aircraft imported to Russia to be operated privately. There are reports that the weight limit for the exemption from customs duties, as opposed to import VAT, of another 20%, will be increased to equal the weight of a Gulfstream G650. Accordingly, at the present time, August 2019, it is necessary to await the publication of the proposed new legislation governing the import of business jets.

Given the current unknowns about the pending new legislation governing the import of business jets, a foreign owner of a business jet who desires to operate the aircraft within Russia or another country in the Eurasian Union must analyze the cost of customs-clearing the aircraft and placing it on to a Russian operating certificate. The selected aircraft placed onto such a certificate may then be lawfully operated on charter flights within Russia and the other countries of the Eurasian Union.

It would be necessary to select an operator that is a Russian company that holds a Russian aircraft operating certificate (AOC). This is because Chapter 15 of the Russian Air Code requires that only a carrier that is an operator which holds a license to perform domestic air carriage where the point of departure, the point of arrival and all landing points are located on the territory of the Russian Federation may conduct such flights. Chapter 11 of the Russian Air Code deals with the arrival and departure of foreign aircraft.

Possibly, an aircraft owner may choose to shift the aircraft it desires to import and customs clear for operation in Russia to a Bermuda or Ireland registration. Such a change in aircraft registration would permit utilization of the 83-bis agreement between Bermuda and Ireland and Russia which allows Bermuda or Ireland-registered aircraft to be used commercially within Russia. All Sirius-Aero and Aeroflot aircraft are, for example, registered in Bermuda.

However, in this connection, Rosaviatsia issued a letter suggesting that Russia may no longer permit the registration of aircraft in countries such as Bermuda, and that aircraft maintenance and crew training obligations must be transferred to Russian commercial operators pursuant to Article 83-bis of the Convention on International Civil Aviation if there is any discrepancy between the actual condition of an aircraft and its Russian type certificate.

 

Authors

Derek Bloom

Of Counsel, Marks & Sokolov, LLC

Moscow, Russian Federation, and

Partner, Atlantic Aviation Legal Services, LLC

Washington, D.C.

 

Petr Koshelev

Managing Director, Streamline Flight Support

Moscow, Russian Federation