Hong Kong’s revised Aircraft Leasing Preferential Tax Regime: What’s Changing?

The Hong Kong Government recently gazetted the Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023 (the “Bill”)[1].

The aim of the Bill is to revise and enhance Hong Kong’s existing aircraft leasing preferential tax regime (in place since 2017), and to strengthen Hong Kong’s competitiveness in the global aircraft leasing industry[2]. To enable the early implementation of the enhancement measures, upon passage of the Bill, the legislative amendments will take retrospective effect from the year of assessment beginning on 1 April 2023.

This note briefly recaps the principal tax concessions under the existing aircraft leasing preferential tax regime and summarises some principal points under the proposed revised regime.
 

Recap: the existing Aircraft Leasing Tax Concessions regime since 2017 (the “2017 Regime”)

In 2017 the aircraft leasing preferential tax regime was introduced to provide competitive tax concessions in Hong Kong to qualifying aircraft lessors and qualifying aircraft leasing managers. That 2017 Regime: [3]

1. provides for a reduced tax rate concession: the tax rate on the qualifying profits of qualifying aircraft lessors and qualifying aircraft leasing managers is reduced to only 50% of the prevailing profits tax rate for corporations (i.e. 16.5% prevailing profits tax rate x 50% concession = 8.25% tax rate); and
    

2. provides for a reduced ‘20% tax base’ concession: the assessable profits derived from the leasing of an aircraft is equal to only 20% of the net lease payments (i.e. gross lease payments less deductible expenses excluding depreciation allowance).
    

Market Developments and Limitations of the 2017 Regime

In putting forth the Bill, the Legislative Council noted the aircraft leasing industry has changed and developed since 2017 and there is a need to enhance the 2017 Regime to maintain the competitiveness of Hong Kong’s aircraft leasing industry in a global context[4].

Some recognised limitations of the 2017 Regime are:

• only dry leases that are operating leases for a term exceeding one year come under the 2017 Regime;
• the scope of ‘aircraft leasing activity’ only covers leasing to aircraft ‘operators’[5];
• interest payments incurred by a qualifying aircraft lessor under an aircraft financing may not be tax deductible if made to a lender (other than a financial institution) outside Hong Kong who is an associate of the borrower. This circumstance comes from requirements under the 2017 Regime that interest is only allowable for deduction if:

  • the money is borrowed from a lender who is a financial institution, or from a lender whereby the interest payable is chargeable to Hong Kong tax under the Inland Revenue Ordinance (Cap. 112) (“IRO”); or

  • the money borrowed is wholly and exclusively used for financing the acquisition of an aircraft and the lender is not an associate of the borrower.

As such, the Hong Kong Government has introduced the Bill partly to address issues arising from these limitations and to expand the scope of the 2017 Regime.
 

The revised Aircraft Leasing Tax Concessions regime (the “Revised Regime”)

The Bill seeks to revise and improve the existing tax concession regime in the following ways[6]:

1. To provide qualifying aircraft lessors with a tax deduction of the acquisition cost of the aircraft.
   • The IRO is being amended to replace the prevailing 20% tax base concession under the 2017 Regime with a new deduction allowance of the full acquisition cost of the aircraft for qualifying aircraft lessors.
      
2. To expand the scope of the concession regime by including wet leases and funding leases and by removing the 1-year lease term threshold.
   • This relaxes the requirements under the 2017 Regime requiring the leasing of an aircraft under a dry lease that is an operating lease for a term exceeding one year.
      
3. To allow a more general meaning of "aircraft leasing activity" by covering leasing to entities other than aircraft ‘operators’. 
   • This change will give more flexibility by including the leasing of aircraft by an aircraft lessor to both aircraft ‘operators’ and to other entities (e.g. private companies, public organisations or individuals)[7] under the scope of “aircraft leasing activity”.
      
4. To allow deduction of interest payable under the financing of the acquisition of aircraft to a financier outside Hong Kong who is not a financial institution and may be an associate of the borrower.
   • Subject to various requirements, interest payable by a qualifying aircraft lessor on money borrowed to wholly and exclusively finance the acquisition of an aircraft may be deductible: (i) if the lender is not an associate of the borrower (regardless of whether the lender is outside Hong Kong or is a financial institution); and (ii) if the lender outside Hong Kong is an associate of the borrower (subject to certain anti-abuse provisions to prevent tax avoidance schemes that reduce assessable profits in Hong Kong).
      

5. To prescribe threshold requirements to comply with the requirements of Organisation for Economic Co-operation and Development (OECD).

   • The OECD considers whether a preferential tax regime meets the international standards against harmful tax practices partly by reference to a substantial activity requirement. In particular, the OECD expects that a qualifying taxpayer in the jurisdiction where the regime is in place should:
     1. Employ an adequate number of full-time qualified employees; and
     2. Incur an adequate amount of operating expenditure.
   • To meet the requirements set out by the OECD, the following threshold requirements for qualifying aircraft lessors and qualifying aircraft leasing managers have been prescribed in the Revised Regime:

Final Thoughts

As the aircraft leasing industry evolves in Hong Kong, the Hong Kong Government is taking steps to update, broaden and enhance the applicable tax concession regime. The updates are intended to address general developments in the aircraft leasing industry and some specific limitations under the existing 2017 Regime. The Revised Regime is intended to attract more industry investment to Hong Kong, to promote further aircraft leasing industry growth in Hong Kong and to support Hong Kong’s competitiveness in the global aircraft leasing industry generally.

This publication is intended to be used for general reference only. It does not claim to be comprehensive or provide legal or other advice. Whilst every effort has been made to ensure information provided herein is accurate and up-to-date, no assurances are provided in this regard. For these reasons, it is not intended to supplement or be a substitute for the expertise and judgment of your independent legal advisor. Any reliance on the information provided herein is solely at your own risk. Accordingly, to the fullest extent permitted by applicable law, Clyde & Co excludes any liability or responsibility for any loss which may arise from reliance upon information provided herein.

[3] Section 14G to 14N of Cap.112 Inland Revenue Ordinance

[4] Legislative Council Brief, Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023

[5] Aircraft ‘operators’ are persons carrying on an aircraft operation business, which is a business of operating aircraft as an owner or a charterer for providing services for the carriage by air of passengers, cargo or mail, but does not include dealing in aircraft or agency business in connection with air transport (s.14G(1) of the IRO).

[6] Legislative Council Brief, Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023

[7] Legislative Council Brief, Inland Revenue (Amendment) (Aircraft Leasing Tax Concessions) Bill 2023