On 17 November 2023, Hong Kong’s Special Administrative Region Government (“SAR Government”) gazetted the Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023 (“Bill”). The purpose of the Bill is to enhance the aircraft leasing preferential tax regime originally introduced in 2017.
In the 2023/24 Budget, Hong Kong unveiled plans to bolster its concessionary regime, aiming to establish itself as a premier hub for aircraft leasing in the region. On a broader level, the proposed amendments dovetail with the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area. The document highlights the importance of giving full play to Hong Kong’s expertise in financial and logistics services. This is crucial for the development of high-value services in cargo, aircraft leasing and aviation financing.
The Bill has been presented to the Legislative Council for review. Subject to approval, the amendments will take retrospective effect from the year of assessment starting on 1 April 2023.
This article will provide a summary of the key legislative changes to the aircraft leasing preferential tax regime. For information about other tax incentives in Hong Kong, consult our Complete Guide to Hong Kong Tax.
Background: Hong Kong’s aircraft leasing preferential tax regime
In July 2017, the Inland Revenue (Amendment) (No. 3) Ordinance 2017 came into effect. It added Sections 14G to 14N to the Inland Revenue Ordinance (“IRO”). These newly added sections provide for the introduction of tax concessions to qualifying aircraft lessors and aircraft leasing managers in Hong Kong. Under the regime, qualifying aircraft lessors are eligible for a tax concession that only assesses 20% of the net lease rentals. This is to compensate for their ineligibility to claim depreciation allowance on the aircraft. Additionally, qualifying aircraft lessors and leasing managers can enjoy a reduced tax rate of 8.25% on qualifying profits from qualifying aircraft leasing or leasing management activities.
Since the implementation of the concessionary regime in 2017, Hong Kong has witnessed significant growth in the aircraft leasing industry. Several prominent industry leaders from both mainland China and abroad have established operations in Hong Kong. Three of the five foremost global aircraft lessors, according to the number of aircraft, have chosen the city as their strategic base.
Against this backdrop and the imminent implementation of the Base Erosion and Profit Shifting 2.0 global minimum tax framework, a compelling need has arisen to enhance the competitiveness of Hong Kong’s aircraft leasing preferential tax regime.
Eligibility under the regime
The aircraft leasing preferential tax regime applies to qualifying aircraft lessors and leasing managers engaging in qualifying aircraft leasing or leasing management activities.
Pursuant to Section 14H of the IRO, a corporation is deemed a qualifying aircraft lessor if it:
- Is not an aircraft operator;
- Has conducted one or more qualifying aircraft leasing activities in Hong Kong;
- Has not engaged in any activity other than qualifying aircraft leasing activities in Hong Kong.
Pursuant to Section 14J of the IRO, a corporation is deemed a qualifying aircraft leasing manager if it:
- Has only conducted qualifying aircraft leasing management activities;
- Meets the specified safe harbour rule; or
- Has obtained the Commissioner’s determination.
Pursuant to Schedule 17F of the IRO, a qualifying aircraft leasing activity is defined as the leasing of an aircraft by a corporation to an aircraft operator. A qualifying aircraft leasing management activity refers to a wide scope of activities. Its definition includes the following activities:
- Managing another corporation that is a qualifying aircraft lessor;
- Arranging for the procurement or leasing of aircraft;
- Arranging for the operation, upkeep, repair, insurance, storage, scrapping, or alternation of aircraft;
- Arranging for the assessment, appraisal, provision, or inspection of aircraft, airline facilities, or aircraft maintenance facilities.
Overview of proposed amendments
The proposed amendments will allow qualifying aircraft lessors to benefit from tax deductions on the acquisition cost of aircraft. The amendments also expand the scope of the regime to include wet lease and funding lease as well as eliminating the limitation on the lease duration. Additionally, a broader definition of “aircraft leasing activity” will be introduced to cover leasing activities beyond aircraft leasing to aircraft operators.
Furthermore, interest paid on money borrowed from a non-financial institution lender outside Hong Kong to acquire an aircraft will be deductible. This deduction applies even if the lender is affiliated with the borrower. Lastly, threshold requirements will be prescribed for aircraft lessors and aircraft leasing managers. These requirements aim to ensure adherence to the guidelines set by the Organisation for Economic Co-operation and Development (“OECD”).
Tax deduction on aircraft acquisition costs
In light of the substantial outlays incurred in aircraft acquisition, the tax implications related to acquisition costs play a key determining role in the decision-making process for selecting a business location. In other words, beneficial tax treatment of acquisition costs could tip the balance on the decision. The current 20% tax base concession falls short of maintaining Hong Kong’s competitive edge as an aircraft leasing hub. Hence, as a remedial measure, the 20% tax base concession will be replaced with a more effective tax deduction.
Under the proposed amendments, aircraft lessors will be able to deduct the entire acquisition cost of an aircraft after the effective date, that is, in the year of assessment starting on or after 1 April 2023. For the transition period, a grandfathering arrangement will be introduced. Aircraft lessors can either retain the existing 20% tax base concession or choose to leverage the new tax deduction for aircraft acquisitions prior to the effective date. However, it should be noted that once a choice has been made, the other alternative cannot be chosen.
Anti-tax avoidance measures similar to those used for the 20% tax base concession will be applied to determine aircraft lessors’ eligibility for the new tax deduction. Under the current regime, the 20% tax base concession will not be applicable if a qualifying aircraft lessor or a connected person has already received capital allowances for the aircraft. To alleviate concerns from the industry, however, there will be exceptions where the anti-avoidance provisions will not be enforced. This is to prevent legitimate instances that do not involve tax evasion from being disqualified for the tax deduction.
Expansion of the regime’s scope
The existing regime permits the leasing of an aircraft solely under specific conditions. Specifically, an aircraft can only be leased under a dry lease arrangement that extends for a period beyond one year. There has been an emerging trend in the use of wet lease and funding lease arrangements. Additionally, lease terms, particularly in the wake of the pandemic, have become shorter in duration.
A dry lease refers to an arrangement where the lessor supplies an aircraft without a crew, and the lessor is not held accountable for the aircraft’s airworthiness. Conversely, a wet lease refers to an arrangement where the lessor provides an aircraft, a crew, maintenance, and insurance to a lessee. Typically, a lessee is either an airline or a broker of air travel. In most cases, the lessee compensates the lessor based on the number of hours the aircraft is operated.
The Bill expands the scope of a qualifying lease and removes the limitation on the lease term. The expanded scope will include dry and wet leases as well as funding leases. On a separate front, the definition of qualifying aircraft leasing operations is currently limited to the leasing of an aircraft specifically to an aircraft operator. Acknowledging the prevalence of different leasing activities, the SAR Government has decided to broaden the scope of “aircraft leasing activity”. It shall include non-aircraft operators, such as private companies, public entities, and natural persons.
Easing of interest deduction rules for financing aircraft acquisition
At present, the interest paid on funds borrowed from an overseas lender to finance the acquisition of an aircraft is only deductible if the lender is either an overseas financial institution or has no affiliation with the borrower. To reflect the evolving financing landscape, the IRO will be amended to allow deduction on interest paid to an overseas lender that is not a financial institution, irrespective of whether the lender is an associate of the borrower.
Where the overseas lender is an associate of the borrower, specific anti-abuse measures will be applied to counteract tax avoidance practices that involve generating interest expenses to lower taxable profits in Hong Kong.
Threshold requirements will be introduced that aircraft lessors and aircraft leasing managers must meet to adhere to the OECD’s rules. When assessing the compliance of a concessionary tax regime with global anti-tax avoidance standards, the OECD considers whether the regime prescribes a substantial activity requirement. This criterion ensures that only entities engaged in their primary income-generating activities are eligible. In particular, the OECD requires that a qualifying entity meet certain requirements in respect of the number of full-time qualified employees and amount of annual operating expenditure.
The Bill proposes the following threshold requirements:
|Full-time qualified employees in Hong Kong
|Annual operating expenditure incurred in Hong Kong
|HKD 2 million
|Aircraft leasing managers
|HKD 2 million
How CW can help you
With over thirty years of professional experience, our team of seasoned tax experts offers a wide array of tax advisory services to clients across various industries, including manufacturing, wholesale, retail, real estate, information technology, hospitality, logistics, shipping, aviation, and financial services. Proficient in the intricacies of local tax laws, we can assist you in assessing the implications of the enhanced aircraft leasing preferential tax regime and its applicability to your business.
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