Hong Kong Aircraft Leasing Tax Regime Enhancements
Hong Kong has enhanced its concessionary tax regime for aircraft lessors to maintain competitiveness while implementing GloBE rules. Changes include a new tax deduction for capital expenditure on aircraft acquisition costs, expanded lease types coverage, and deductibility of interest on loans for aircraft acquisition. These enhancements aim to improve the tax environment for aircraft leasing in Hong Kong.
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HONG KONG AIRCRAFT LEASING RISE & FLY William Ho Secretary Hong Kong Aircraft Leasing and Aviation Finance Association Ishka, Dublin 14 May 2024 1
Background Background Hong Kong introduced a concessionary tax regime for qualifying aircraft lessors in 2017. Qualifying profits of qualifying aircraft lessors were taxed at half-rate of 8.25%, with 20% tax base concession, resulting in an overall low effective tax rate for qualifying aircraft lessors in Hong Kong. 2
GloBE GloBERules Rules In computing the jurisdictional ETR under the GloBE rules, a deferred tax adjustment which addresses a temporary difference in the recognition of income and expense for accounting and tax purposes can be included as a Covered Tax. But Hong Kong s concessionary tax regime did not involve any deferred tax treatment. Qualifying aircraft lessors in Hong Kong would therefore likely have a lower jurisdictional ETR, and hence be liable for a greater amount of top-up tax, as compared with aircraft lessors conducting business in other jurisdictions which grant depreciation allowances or deductions for aircraft acquisition cost. 3
GloBE GloBERules Rules Hong Kong is committed to implementing the GloBE rules. At the same time, Hong Kong is keen to preserve its competitive edge in aircraft leasing. Since 1 March 2024, Hong Kong has replaced the 20% tax base concession with a one-off tax deduction of the capital expenditure incurred for the aircraft acquisition cost, with retrospective effect from the year of assessment 2023/24. The deferred tax associated with such deduction will bring up a Hong Kong qualifying aircraft lessor s jurisdictional ETR, and will thus reduce the amount of its top-up tax. 4
Further Enhancements Further Enhancements Further enhancement features have been made to Hong Kong s concessionary tax regime for aircraft leasing. Lease types The scope of the tax regime has been expanded to cover not only dry leases, but also finance leases and wet leases. There is no longer any requirement for a minimum lease term. Lessee The tax regime has been improved to allow a lessee to be an aircraft operator or a non- aircraft operator. 5
Further Enhancements Further Enhancements Interest on loan for aircraft acquisition - Interest on a loan borrowed by a Hong Kong qualifying aircraft lessor from a non- associate lender outside Hong Kong whether or not it is a financial institution which is wholly or exclusively used to finance the aircraft acquisition cost is deductible. - For a loan borrowed from an associate lender outside Hong Kong, the interest deduction will be subject to the subject to tax condition and the beneficial ownership test. 6
Further Enhancements Further Enhancements Substantial activities threshold requirements Full-time qualified employees Annual operating expenditure Aircraft lessors 1 HK$2 million Aircraft leasing managers 2 HK$1 million Full-time is not defined and should be given its ordinary meaning. Have the qualification necessary for carrying out the core income generating activities (CIGAs) in Hong Kong. It includes: Finance costs or interest expense that are directly attributable to acquisition of aircraft. Rental expenses, staff costs and other general and administrative expenses. Does not include depreciation of aircraft. 7
Further Enhancements Further Enhancements Bare trust A Hong Kong qualifying aircraft lessor, as the beneficial owner under a bare trust structure, though not the legal owner of an aircraft, is eligible for the concessionary tax regime. Recognition of Irish Stock Exchange With effect from 1 April 2024, interest payable by a Hong Kong qualifying aircraft lessor on the notes listed on the Irish Stock Exchange (trading as Euronext Dublin) is allowed for tax deduction. 8
Recent Developments in Hong Kong Recent Developments in Hong Kong Hong Kong and Dongjiang, Tianjin have entered into a Memorandum of Understanding to promote aircraft leasing. The resulting Hong Kong Dongjiang nexus may facilitate fund flow out of Mainland China for acquisition of aircraft. Hong Kong is sparing no effort in expanding its double tax treaty network. Hong Kong has some favourable double tax treaties, notably, the ones between Mainland China, Japan and Hong Kong. Hong Kong may work together with Ireland to enable Hong Kong to indirectly benefit from the Cape Town Convention. 9
Setting Up Operation in Hong Kong Setting Up Operation in Hong Kong If you are interested in utilizing Hong Kong s advantages in aircraft leasing, you are very welcome to set up a platform in Hong Kong. InvestHK is here at all times to provide you with customised services to facilitate your setting up of an operation in Hong Kong. 10
helps foreign companies Grow in Hong Kong (free services) The new tax regime has attracted many players in the industry. We have supported a lot of Aircraft leasing / Aviation companies to set up in Hong Kong. Planning Set-Up Launch Aftercare / Expansion INVEST_HK investhk.gov.hk Get in Touch! e.weibo.com/investhk (32) 2 775 0077 Mr. Fernando de la Cal Gonz lez Deputy Head of Investment Promotion (Brussels) @InvestHK fernando_delacal@hongkong-eu.org www.linkedin.com/company/invest-hong-kong Hong Kong Economic and Trade Office (Brussels) Rue d Arlon 118, 1040 Brussels, Belgium www.youtube.com/user/investhk www.flickr.com/photos/investhk 11
