Hong Kong to challenge Singapore as lessor hub

Attractive finanical concessions have created aircraft leasing meccas of Ireland and Singapore. Now they have a rival, Hong Kong, which is setting up a competitive tax regime to develop the Special Administrative Region into a lessor hub.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

March 1st 2017

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The Hong Kong government has unveiled a tax legislative framework to attract aircraft leasing businesses to the Special Administrative Region (SAR) to capture some of the billions of dollars the sector earns worldwide for the local economy. Read More »

In his 2017 Policy Address last month Hong Kong’s chief executive, Leung Chun-ying, said the government would offer tax concessions to companies that domicile their aircraft leasing business in Hong Kong.

Until now, Hong Kong has not been a viable location for the leasing sector because the existing rules preclude Hong Kong lessors from claiming tax depreciation allowances for aircraft leased to overseas airlines.

Given the high investment cost of an aircraft, the denial of the depreciation allowances, together with restrictive deduction rules for interest in Hong Kong, makes it mostly unviable to base an aircraft leasing business in the city.

By comparison, Ireland and Singapore, in addition to granting tax depreciation allowances for acquisition costs incurred on aircraft and permitting more relaxed deduction rules for interest, the two hubs offer attractive corporate tax rates of 12.5% and 5%-10% respectively, on aircraft leasing profits.

An analysis conducted by the Focus Group on Promoting Aerospace Financing in Hong Kong has said that if a tax regime for offshore aircraft leasing was introduced into the SAR, Hong Kong could gradually capture up to 18% of the world’s aircraft leasing business in 20 years.

The forecast is based on financing of at least 3,200 aircraft, that would have an estimated asset value of $91 billion. The sector would add an extra US$1.3 billion to the SAR’s coffers in two decades and create jobs for 1,640 people.

Ten out of ten of the top global aircraft lessors have a business presence in Ireland with eight of them also in Singapore. Only two are in Hong Kong. The top ten are GE Capital Aviation Services (GECAS), International Lease Finance Corporation (ILFC), AerCap, CIT Group, SMBC Aviation Capital (formerly RBS Aviation Capital), Babcock & Brown, BOC Aviation, Aviation Capital Group, AWAS and Macquarie AirFinance. The eight with a presence in Singapore are GECAS, ILFC, AerCap, CIT Group, SMBC Aviation Capital, Babcock & Brown, BOC Aviation and Aviation Capital Group. GECAS and BOC Aviation have offices in Hong Kong, but their operations are not based there.

In Hong Kong, a bill is expected to go before the Hong Kong Legislature in April that will allow:

• Qualifying aircraft lessors and qualifying aircraft leasing managers to be taxed at 8.25% (50% of Hong Kong’s profits tax rate of 16.5%) in respect of their qualifying profits earned from leasing of aircraft to non-Hong Kong aircraft operators.

• The deemed taxable amount of rentals derived from leasing of aircraft to a non-Hong Kong aircraft operator by the qualifying taxpayer will be equal to 20% of the tax base of the taxpayer concerned, i.e., their gross rentals less deductible expenses, but excluding tax depreciation. As a result, the effective tax rate on the net rentals or operating profits (excluding tax depreciation) derived from the offshore leasing of aircraft by a qualifying taxpayer will be 1.65%.

One local lessor already excited about the prospective opportunity is Hong Kong conglomerate, New World Development Company, which has diverse businesses and investments in Hong Kong and Mainland China. Its 18-month-old aircraft leasing subsidiary, NWS Holdings, has a 50% holding in lessor Goshawk aviation in a joint investment with another New World company, Chow Tai Fook Enterprises (CTFE).

The Dublin-based company has a portfolio of 89 Airbus, Boeing and Embraer jets, including 12 on order, and plans to increase its available leasing fleet to more than 100 aircraft. The two companies, along with U.S. lessor, Aviation Capitol Group (ACG), formed a joint venture lessor, Bauhinia Aviation Capital Ltd (BACL), a year ago.

NWS Holdings and CTFE each hold a 40% indirect interest in BACL with ACG the owner of the remaining 20% of the company.

NWS general manager logistics, Steve To, said the company was “very keen” to grow these leasing platforms quickly. “Our group is very interested in aircraft leasing because the return profile and the cash flow yield from aircraft leasing fits quite well into the New World business.”

“The tax law of Hong Kong is not very favourable to aircraft leasing because of the depreciation deductions issue. We are not competitive at all. We, as the New World Group, and CTFI, are Hong Kong-based companies with a long operating history here. The new tax regime will create a more favourable environment for the establishment of an aircraft leasing business.”

The proposed legislation may not put Hong Kong on par with Ireland, which would still have some advantages, that nevertheless, this is a major step forward.

NWS also benefits from the Closer Economic Partnership Arrangement (CEPA) between mainland China and Hong Kong, which provides special trading concessions in dealing with Chinese companies, including airlines wishing to lease aircraft.

Under the agreement, Hong Kong resident lessors that lease aircraft to mainland China carriers would pay a lower withholding tax of 5% in mainland China in respect of the rental. Resident lessors in Singapore and Ireland must pay a withholding rate of 6% in China.

Hong Kong forms aircraft leasing association An influential group of Hong Kong industry leaders held a luncheon seminar in London early this month to introduce the Special Administrative Region’s (HKSAR) proposed tax regime for the aircraft leasing industry. Speakers at the invitation only luncheon for global aircraft lessors were Hong Kong’s secretary for transport and housing, Professor Anthony Cheung Bing-leung; Hong Kong Exchanges and Clearings Ltd chairman, Sir C. K. Chow; Head of Investment Development (TDC), Andrew Davis; partner in Berwin Leighton Paisner, William Ho, and partner PricewaterhouseCoopers, Clarence Leung. The road show was an initiative of the organizing committee of the Hong Kong Aircraft Leasing and Aviation Finance Association, which is being set up to promote Hong Kong as a rival aircraft lessor centre to Singapore and Tianjin. China Aircraft Leasing forecasts 60% profit jump Hong Kong headquartered China Aircraft Leasing Group Holdings Ltd (CALC) has upgraded its earnings forecast for 2016 with the announcement last month that it expected profit for the 12 months to December 2016 is expected to increase by 60% over 2015. CALC said the profit upgrade was “mainly attributable to an increase in lease income, which resulted in expansion of the scale of its aircraft leasing business” and also “the gains from the disposal of finance lease receivables”. CALC will announce its full year results later this month. Asia’s financial skies conference You are invited to the first leasing conference exclusively focused on the development of Hong Kong as an Asian hub for aircraft lessors. Speakers at the inaugural ASIAN FINANCIAL SKIES will outline a new tax regime specifically tailored to benefit aircraft lessors who set up in the Hong Kong Special Administrative Region. For sponsorship and booking inquiries for the inaugural Asian Financial Skies Hong Kong contact Shirley Ho at e: shirley@orientaviation.com. t:+852 2865 1013 Venue: Chatham Room 7/F Conrad Hotel, Pacific Place, 88 Queensway, Admiralty Hong Kong. Date: Monday, May 8, 2017