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Hong Kong: Hong Kong plans new tax regime for aircraft leasing


Khoonming Ho

Ayesha Macpherson Lau

The Hong Kong government briefed the Legislative Council Panel on Economic Development on January 23 2017 about a proposed new tax regime for aircraft leasing in Hong Kong. This development comes at an opportune time when, for example, Boeing is forecasting global demand for 39,600 new airplanes over the next 20 years, with 38% for Asia-based airlines, of which 17% are for China.

Equity, bank and capital market debt, finance leases and operating leases all underpin aircraft financing, with the latter supporting one third of new deliveries globally.

Given the high level of Asia and China demand in the future, Hong Kong, with its established financial and business infrastructure, should be a natural venue for aircraft operating lessors.

While the Hong Kong tax regime has needlessly impeded the development of the aircraft leasing business to-date, the new proposals, alongside the continued expansion of Hong Kong's double tax treaty network, have the potential to finally make Hong Kong truly competitive in the global aircraft leasing market.

Hong Kong's tax regime

From a Hong Kong profits tax perspective, a lease agreement will generally either be regarded as a "hire-purchase agreement" or a "lease", i.e. an operating lease. The accounting classifications of a finance lease or operating lease does not determine the tax characterisation.

The Inland Revenue Ordinance (IRO) sets out rules for hire purchase arrangements, under which the lease payment consists of an interest component and the repayment in principal of a deemed loan used to fund the purchase of the aircraft (the amount of the loan is equivalent to the cost of the aircraft). A Hong Kong company should be subject to Hong Kong profits tax on the deemed interest payments to the extent that it is sourced from Hong Kong and it is from a business carried by that company in Hong Kong. With appropriate structuring, it should be possible to ensure the Hong Kong lessor is not taxable on the interest income.

More important for the leasing industry, however, are the IRO's specific provisions governing the taxation of income from an aircraft owning business, which include section 23C for "resident" aircraft owners and section 23D for "non-resident" aircraft owners. Resident aircraft owners are, under a complex calculation termed the maritime formula, subject to tax on all their rental income from chartering aircraft. In addition, under section 39E, depreciation allowances are denied where the aircraft is leased to a "non-Hong Kong operator" (i.e. a non-Hong Kong headquartered airline).

The tax law in Hong Kong is a major impediment to the development of aircraft leasing activity because it taxes the full rental income while denying deductions for aircraft depreciation. Ironically, Hong Kong has the most competitive withholding tax rate for aircraft leases into China, but other jurisdictions such as Ireland and Singapore are much more attractive options overall with much lower effective tax rates.

The proposal

To make Hong Kong more competitive for operating leases, a new set of tax rules for offshore aircraft leasing (i.e. leasing to non-Hong Kong headquartered airlines) is being proposed. The main features of the new regime are:

  • The tax rate on the profits of "qualifying aircraft lessors" and "qualifying aircraft leasing managers" will be only 8.25% (i.e. one half of the normal Hong Kong profits tax rate); and

  • This reduced tax rate for lessors will be applied to only 20% of the usual tax base (i.e. gross rentals less deductible expenses, excluding tax depreciation). Implicitly, this suggests a 1.65% tax rate on gross rental income before deductions.

The new regime will contain anti-abuse features including:

  • Measures to ensure that the concessions will not apply where the rental payments are tax-deductible in Hong Kong to the lessee;

  • Requiring qualifying aircraft lessors and qualifying aircraft leasing managers to be standalone corporate entities. They must also conduct business transactions with associated parties on an arm's length basis; and

  • Imposing a substance requirement, by stipulating that the central management and control of these entities, as well as their profit generating activities, must be located in Hong Kong.

The Hong Kong government proposes to introduce the necessary legislation into the Legislative Council in April 2017.

The proposal to effectively allow tax depreciation through a deemed profit of 20% of the net rental income is a simple solution to what has been an intractable problem. In addition, the tax rate concession is very attractive to leasing managers. At face value, these proposals should make the Hong Kong tax regime competitive globally.

As always, the "devil is in the detail", particularly around the issue whether the overall economics will make sense compared to operations in Ireland, Singapore and the special free trade zone regimes in mainland China. Recent experience with enhancements to concessionary regimes such as the expanded offshore funds regime and corporate treasury centres, while good proposals on paper, have proved to be less useful in practice due to the overly complex anti-abuse measures. Nonetheless these proposals are a step in the right direction.

Khoonming Ho ( and Ayesha Macpherson Lau (

KPMG China

Tel: +86 (10) 8508 7082 and +852 2826 7165


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