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What is an Aircraft Trust and How They Work for Nonresidents

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Civil aviation is a very popular pastime in the United States. In order to operate an aircraft in the United States, an aircraft must be registered with the Federal Aviation Administration (“FAA”) Aircraft Registry. The FAA is the primary agency in the U.S. that governs aircraft registration. The United States has the largest registry of the world’s aircraft. For a number of reasons nonresidents register aircrafts with the FAA even if the aircraft is operated in a foreign jurisdiction. In order to register an aircraft with the FAA, nonresidents often utilize aircraft trusts. This article will discuss why nonresidents that wish to register an aircraft with the FAA need to establish an aircraft trust and the U.S. tax consequences of such a trust.

Why Establish an Airplane Trust?

The FAA requires that all aircraft registered with the Aircraft Registry be registered in the aircraft’s owner’s name. The FAA has strict U.S. citizenship requirements. Under these rules, an aircraft can be registered with the Aircraft Registry if the aircraft is owned by:

  1. An individual who is a U.S. citizen.
  2. A partnership in which all the partners are U.S. citizens.
  3. A corporation incorporated in a U.S. state or the District of Columbia, or U.S. territory or possession of which the president and at least two-thirds of the board of directors and other managing officers are U.S. citizens, and in which at least 75 percent of the voting interest is owned or controlled by U.S. citizens.
  4. A citizen of a foreign country that is a U.S. permanent resident.
  5. A U.S. government entity.
  6. A non-U.S. citizen corporation organized and doing business under the laws of the U.S. or one of the States, as long as the aircraft is based and primarily used in the U.S. (.i.e., 60 percent of all flight hours are from flights starting and ending within the U.S.).

If an aircraft owner does not satisfy any of the above discussed rules, the aircraft owner can register the aircraft on the FAA Aircraft Registry by placing the aircraft in a trust that is recognized as a U.S. citizen.

How Does an Aircraft Trust Operate?

Under U.S. law, a trust is defined as a legal arrangement where one party (referred to as a trustee) holds assets for the benefit of another party (referred to as a beneficiary). As with any other form of trust, an aircraft trust involves two primary parties: the beneficiary, who is the beneficiary of the trust, and the trustee, who is responsible for handlining the beneficiary’s assets. Although the trustee holds the legal title to the aircraft and the aircraft is registered with the FAA in the trustee’s name, the beneficiary is the sole beneficiary of the trust. By using an aircraft trust, a nonresident can register an aircraft with the FAA Aircraft Registry.

According to the FAA, in order to register an aircraft that is in trust, the trustee must submit:

  1. An affidavit showing that each beneficiary of an aircraft trust is either a U.S. citizen or a resident alien. This includes each person whose security interest in the aircraft is incorporated in the trust. If any beneficiary of the trust is not a U.S. citizen or permanent resident, the trustee or trustees must provide an affidavit stating that the trustee is not aware of any reason, situation or relationship that would give the nonresident a share of control greater than 25 percent to influence or limit the exercise of the trustee’s authority.
  2. A certified true copy of the complete trust.
  3. An ink-signed bill of sale from the present registered owner to the trustee.
  4. An application for registration showing the trustee or trustees as the applicant, signed in ink by the trustee or trustees.

How is an Aircraft Trust Taxed?

An aircraft trust is taxed for U.S. purposes as a grantor trust. A grantor trust is a term that refers to any trust in which the grantor (the individual or entity that established the trust) is considered the owner of the assets of the trust for income tax purposes. This means, as the grantor, the nonresident is responsible to pay any U.S. tax that is generated from the trust assets. If the nonresident intends to use the aircraft in a U.S. trade or business, the nonresident could be subject to U.S. income tax liability.

If the nonresident intends to rent the aircraft, the rental income received from renting the aircraft could be subject to a flat tax of 30 percent on the gross amount of the income received. Sometimes this 30 percent withholding tax may be reduced or eliminated through a tax treaty. The trustee of the aircraft trust would be required to withhold this tax and pay this tax to the IRS. In certain cases, a trustee of an aircraft trust may also be required to collect a 7.5 percent federal excise tax imposed on taxable transportation of persons under Section 4261(a) of the Internal Revenue Code.

Conclusion

An aircraft trust may be utilized by a nonresident who wishes to register an aircraft on the FAA Aircraft Registry. Anyone considering establishing an aircraft must carefully select a trustee, consider how the trust instrument is drafted, and most important the U.S. income tax consequences of establishing an aircraft trust.

Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Anthony Diosdi

Written By Anthony Diosdi

Partner

Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.

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