To develop Hong Kong into an aircraft leasing and finance centre, the Government will create a new tax regime for “offshore aircraft leasing”. Under the new tax regime:
- the tax rate on the qualifying profits of qualifying aircraft lessors and qualifying aircraft leasing managers will be 50% of the profits tax rate for corporations (i.e. half of the prevailing tax rate of 16.5%); and
- the taxable amount of rentals derived from leasing of an aircraft to a non-Hong Kong aircraft operator by a qualifying aircraft lessor will be equal to 20% of the tax base i.e. gross rentals less deductible expenses (excluding tax depreciation).
The Government changed the tax laws in the late 1990s to combat the abusive use of the Hong Kong leveraged leasing product. An unintended effect, however, was that it also discouraged aircraft leasing participants to set up operations in Hong Kong. The new tax regime will clear away this hurdle
- Nigel Ward, Partner, Asset Finance.
The Chinese withholding tax rate applicable to rentals payable under an aircraft lease entered into between a Hong Kong lessor and a Mainland China lessee has already been reduced from 7% to 5%. Hong Kong is further expanding its tax treaty network at a fast pace. In fact, in relation to lessees located in certain jurisdictions, it is already, from a withholding tax perspective, more advantageous to use Hong Kong, rather than any other leasing hub, as the preferred lessor jurisdiction
- Jackson Chow, Partner, Asset Finance.
The new tax regime is intended to be BEPS compliant and will work well with the aircraft leasing and financing structures commonly used in the market. The proposed changes are exciting and will pave the way for Hong Kong to become a competitive alternative to existing aircraft leasing hubs. We expect that market participants will react positively and consider basing their operations in Hong Kong
- William Ho, Partner, Asset Finance.