 |
 |
| Lewis Lu |
Curtis Ng |
The Hong Kong government has revised the concessionary tax
regime for certain aircraft leasing activities to ensure it
requires require real economic substance and activity in Hong
Kong.
Background
The Hong Kong government gazetted a bill on March 10 2017
that introduces a concessionary tax regime for certain aircraft
leasing activities. The new rules apply from the 2017-18 year
of assessment. The main benefits of the proposed regime are
two-fold.
- Aircraft leasing income earned by
'qualifying aircraft lessors' will be subject to concessional
tax treatment i.e. applying a tax rate of 8.25%, which is
half of the normal Hong Kong profits tax rate, to 20% of the
gross rental receipts less deductible expenses such as
funding costs, but excluding tax depreciation; and
- The same 8.25% tax rate will apply to
'qualifying aircraft leasing management activities'. This is
widely defined to include, in addition to the standard lease
management activities of procuring and leasing aircraft, a
range of financing activities such as providing loans to
associated companies to acquire aircraft, providing loans to
airlines to acquire aircraft from qualifying lessors and
providing residual value guarantees.
This legislation was a welcome development given the current
tax regime made Hong Kong uneconomic as a location for
situating international aircraft leasing companies. A key
feature of the proposed regime was that it only applies to a
Hong Kong-based leasing manager using a number of Hong Kong
incorporated special purpose companies to own and dry lease
aircraft to non-Hong Kong based airlines.
Draft legislation
The draft legislation has been subject to consideration by a
Bills Committee in the Legislative Council. At the committee
meetings, there has been universal support for the underlying
intent of the new law to remedy the existing anomaly in the tax
law. The committee held its third meeting on the bill on May 22
2017.
At the latest meeting significant changes were proposed by
the government to the bill. The reason for these changes relate
to informal feedback from the OECD Forum on Harmful Tax
Practices that the law as originally proposed could be seen as
a so called harmful tax practice under the OECD BEPS
initiative. While careful efforts were made in the initial
drafting to ensure the regime would require real economic
substance and activity in Hong Kong to be BEPS compliant, it is
now clear that there is a concern with the fact the regime
targets only leases to foreign airlines which are not also
taxable in Hong Kong.
Revised approach
To address these concerns it is proposed that the
requirement of leasing to a "non-Hong Kong aircraft operator"
will be dropped and the relevant definition deleted. This means
that leases to all airlines will potentially qualify for the
new regime.
The law will now effectively allow Hong Kong leasing
companies to elect to:
- Apply the existing law under section 23C
of the IRO or the proposed section 15(1)(n) (which taxes all
income from aircraft leasing) and claim tax depreciation. The
ability to claim tax depreciation is restricted under section
39E of the IRO, which denies depreciation where an aircraft
is leased to a non-Hong Kong airline; or
- Apply the new regime and be taxed using
the 20% deemed profit regime and apply the concessional 50%
tax rate.
Once an election is made to apply the new concessional
regime this will be irrevocable.
As a consequence of this change in approach there have also
been a number of other amendments especially around the
anti-avoidance rules which sought to limit the scope of the
concessionary regime where a Hong Kong tax deduction is being
claimed. These have been replaced by a new provision that
applies to payments between connected parties that will
restrict deductions for amounts to which the tax concession
applies to offset any tax benefit.
The Bills Committee reported to the House Committee on June
9 2017 supporting the passing of the bill with the aim of a
second reading of the bill in the Legislative Council on June
21 2017.
Comment
Overall, the new regime remains a welcome change. The
underlying issue has been addressed to make Hong Kong a more
attractive base for aircraft leasing and management
activities.
The proposed extension to all aircraft leasing activity is a
welcome change to simplify the regime while allowing companies
the right to continue to use the existing regime when leasing
to local airlines.
Lewis Lu (lewis.lu@kpmg.com) and
Curtis Ng (curtis.ng@kpmg.com)
KPMG China
Tel: +86 (21) 2212 3421
Website: www.kpmg.com/cn