Derek Bloom, Partner of Capital Legal Services

As you plan your acquisition of an aircraft, you are really planning a new small business and need a detailed business plan. This new business shall have a budget, income statement and balance sheet, just like any other business. You may plan that the income of your new small business shall be zero, and you are so wealthy that you are satisfied with a business that makes only losses.

Are you such an oligarch? Or, do you want your business to have an income? Shall you charter the aircraft to members of the public? Have you chosen the optimal aircraft? The main point is to choose an aircraft that accomplishes your mission as economically efficiently as you decide is necessary. Russian buyers have tended to buy aircraft that are more costly to acquire and operate than they need to fly their planned flights. This decision about what equipment you are going to buy is critical to the success or failure of your new business.

Are you willing to operate the business at a loss in cash terms, but to place a high value on a lower Net Cost to you as the owner of the aircraft for your own hours flown (EUR 2,500 per hour as compared to EUR 5,500 as discussed below)? Are you putting a value on depreciation of your aircraft? Is your corporate structure going to allow you to use depreciation deductions?

What is your plan for paying import VAT, and possibly offsetting it against VAT inputs in a larger Russian business? Is your corporate structure going to allow you to offset a VAT expense against unrelated VAT inputs?

Your small business is likely going to be a joint venture company, unless you are going to form a subsidiary flight department company. This is done very rarely in Russia.

You will likely need to form a partnership with an Operator that holds an AOC (an aviation operating certificate). You will share the income of your business with your joint venture partner.

But, this is an interesting partnership. You shall pay all the expenses. Your partner will keep a percentage of gross revenues. Who needs a partner like that? Well, it turns out you do.

Where shall you organize this new business?

Unfortunately, of the approximately 450 business aircraft owned by Russia businesses and individuals, only approximately 30 of these aircraft are registered in Russia.

The businesses that operate the other 420 aircraft are all located outside of Russia.

This is the Big Missed Opportunity for St. Petersburg I am referring to.

Today, due to the import VAT of 18%, ninety-five percent of Russian owners of business aircraft register their aircraft anywhere and everywhere but in Russia.

There may be some good news in this connection, as I will discuss in a moment. There seems to be some receptivity in the Russian government to removing import VAT for business aircraft that are imported to Russia and placed on a Russian AOC.

Let's take a look at the business plan for a aircraft one of our clients is acquiring.

This business is being organized in Central Europe, not in Russia. The aircraft will be flown to Russia, and between points in Russia under the cabotage limitations that apply to operating a foreign-registered aircraft in Russia.


In this case, the aircraft is planned to be flown 200 hours a year by its owner, and 500 hours a year by charter customers.

As for Income, if the 500 charter hours happen, and are charged at EUR 5,500 per hour, this aircraft will generate gross revenue from charter sales of EUR 2,750,000 in a year.

After sales commissions of EUR 330,000 per year (the 12% of sales going to the Operator), the Net Charter Sales shall be EUR 2,420,000.

As for "the cost of goods sold", the total costs to operate this aircraft for one year shall be EUR 2,923,164.

There are fixed costs of EUR 966,864 per year for management, maintenance, crew salary and crew expenses.  


The fixed management cost will be EUR 169,200 per year, on top of the EUR 330,000 of sales commissions

There will be 4 pilots working full-time to fly this aircraft, and 2 flight attendants. They will earn EUR 444,000 per year.

The total variable costs to operate this aircraft, including fuel, maintenance, handling, and other costs will be EUR 1,787,100 per year.

From the point of view of the owner, it is projected the cost of operating the aircraft for 700 hours will exceed revenue by EUR 503,164. (This is EUR 2,923,164 minus EUR 2,420,000.) This means it will cost the owner EUR 2,516 per hour to use his aircraft for 200 hours in a year.

From the point of view of the Government of St. Petersburg, approximately EUR 3,000,000 will be expended in the local community where this one aircraft is based due to fixed and variable costs.

The problem for the Government of St. Petersburg is that the local community in question is not St. Petersburg, but is a city in Central Europe.

Would the City of St. Petersburg, in principle, like to have that income being earned in St. Petersburg?

I know of several residents of St. Petersburg who own business jets and who base them in Europe and not here in St. Petersburg, or elsewhere in Russia.


Let's suppose 20 business jets would be based in St. Petersburg if the cost of import VAT did not make it economically impossible to base these aircraft here.



EUR 3,000,000 multiplied by 20 equals EUR 60,000,000.

Each year, the current state of affairs is resulting in lost income to St. Petersburg of EUR 60,000,000.

There would be 80 highly paid pilots, and 40 cabin attendants. There would be 80 highly paid mechanics. There could be 2 or 3 new fixed base operators in St. Petersburg to support these aircraft. Substantial sums would be invested in the construction of hangars and other facilities for these aircraft.


It is apparent that there is a large loss of revenue occurring every year that the great majority of Russian-owned business aircraft are registered not in Russia.

In this connection, there is reason to believe that progress is being made to address this situation this year.

We at Capital Legal Services are leading an effort with the Russian United Business Aviation Association (ONADA) to make government officials aware of their ability to cause economic growth in Russia's major cities by exempting business aircraft that are used commercially from the 18% import VAT.

As of today, certain key staff members in the White House and in the Ministry for Economic Development and the Ministry for Transportation are supporting the proposal to remove import VAT for business aircraft that are used commercially.


It has long seemed to me that the day would come when the powerful and well-to-do Russians who own and use business aircraft would use their power in Russian society to bring about the necessary legal and tax law changes that would allow them to make a rational decision to base their aircraft in Russia.

Such a change in law would, we believe, create the basis for private sector investments and annual revenues of many tens billions of rubles. This would be good for St. Petersburg, and this would be good for Russia.

We hope that the necessary persons in the government of the City of St. Petersburg will support the attached repeal of import VAT on business jets.

A decision not to support the repeal of import VAT on business jets imported to Russia and used commercially in Russia is really a decision to let numerous other, already quite wealthy European countries carry on earning this several billion of Euros each year that Russian owners of such aircraft are spending.

Russia really ought to do what is necessary to get a lot of that money spent and invested in Russia. Now, assuming we are successful, coming back to your aircraft and your small business, it would be much more likely, or at least less unlikely, that you will choose to form your new business here in Russia.

The main documents your lawyers will negotiate for you will be:

1.    A Memorandum of Understanding
2.    An Aircraft Purchase and Sale Agreement

3.    Aircraft financing documents, including a loan agreement, pledge agreement, and likely a personal or corporate guarantee agreement. These will place restrictions on use of the aircraft.

    Possibly, there will be a Lease Agreement.

    Possibly, there will be a Fractional Ownership Agreement

4.    An Aircraft Management and Charter Agreement, essentially, your joint venture agreement with your Operator.

We would like to prepare these documents with a plan for your aircraft to be based here in Russia.