On March 10 2017, the Hong Kong government gazetted the
Inland Revenue (Amendment) (No.2) Bill 2017, which formally
introduces a concessionary tax regime for certain aircraft
leasing activities. The law was introduced into the Legislative
Council for consideration and is expected to apply from the
2017/18 year of assessment. The main features of the proposed
- The tax rate on the profits of "qualifying
aircraft lessors" and "qualifying aircraft leasing managers"
will be reduced to 8.25%;
- The taxable income for qualifying lessors
will be calculated as 20% of the gross rentals (less
deductible expenses, excluding tax depreciation; and
- The range of "qualifying aircraft leasing
management activities" is widely defined to include, in
addition to the standard lease management activities of
procuring and leasing aircraft, a range of financing
The rules are designed around a Hong Kong-based manager
using a number of Hong Kong special purpose companies to own
and dry lease aircraft to non-Hong Kong-based airlines. It will
be important that any corporations looking to take advantage of
the new regime take careful note of the qualifying conditions
"Qualifying aircraft lessors" and "qualifying aircraft
leasing managers" must be corporations which conduct only
qualifying activities (with limited exceptions for managers).
Both the manager and lessor must be centrally managed and
controlled in Hong Kong with all the profit generating
activities conducted in Hong Kong and not attributable to any
permanent establishment outside Hong Kong. They must also make
an election in writing to apply the regime.
For lessors, the key restriction is that the concessionary
taxable profits regime only applies to leasing activity:
- For aircraft owned by the company leased
to a non-Hong Kong operator (i.e. a non-Hong Kong-based
airline which is not chargeable to tax in Hong Kong). 'Lease'
is defined to mean a so-called 'dry lease' that requires a
lease of at least one year where the lessor does not provide
the crew and is not responsible for the maintenance. It does
not include leases (or wider arrangements) under which the
title to the aircraft will or may pass to the lessee;
- Carried out in Hong Kong in the ordinary
course of the lessor's business; and
- Where the lessor does not carry on any
other income producing activity in Hong Kong.
While most dry leases to non-Hong Kong airlines should
qualify it is important to note that the definitions included
in the draft law are detailed and would require careful
examination to ensure the proposed leases qualify. In
particular, the existence of even a market value purchase
option in the wider arrangements would be problematic. In
addition, the lessor would need to ensure the counterparty is
not subject to Hong Kong tax as the relevant definition
requires that the airline is not chargeable to Hong Kong
profits tax. Airlines flying to Hong Kong are subject to Hong
Kong profits tax but, where a tax treaty applies, they will
generally be exempt from tax on profits from international
traffic. This condition may be problematic for certain airlines
if they earn fees for incidental activities (such as ground
handling or ticketing services) conducted in Hong Kong which do
not qualify for the exemption under the relevant treaty.
The proposed legislation also contains a provision that
deems an aircraft to be capital in nature if it is held for
three years as part of a qualifying aircraft leasing business.
However, for aircraft sold before the three-year mark, the
position will depend on the relevant facts and circumstances.
Ultimately, it would be wise to assume the Hong Kong Inland
Revenue Department (IRD) is extremely reluctant to allow a
lessor to claim any losses on disposal.
There are a number of anti-abuse and anti-avoidance measures
built into the regime. The key measures are rules to prevent
income subject to the concessionary tax treatment from being
claimed as a tax deduction in Hong Kong.
Overall the new regime is a welcome change to Hong Kong tax
law and would appear to be economically competitive with
regimes in other leasing locations. This is especially true
where Hong Kong has favourable double tax treaties such as with
the China, Japan and Russia.
Lewis Lu (email@example.com) and
Curtis Ng (firstname.lastname@example.org)
Tel: +86 (21) 2212 3421