In recent years, the traditionally limited pool of lenders into JOLCOs has widened, from consisting mainly of Japanese banks and the Tokyo branches of non-Japanese banks, to include overseas lenders from, for example, Germany and Holland. Recent double tax treaties have made this possible. Now, in seeking to implement Action 4 of the OECD's final report on BEPS (Base Erosion and Profit Sharing), the Japanese government is considering a December 2018 proposal that may reverse this trend. Under this proposal (the Proposal), where interest is paid to a non-Japanese lender, the amount of that interest a Japanese aircraft lessor can deduct from its tax liabilities will be limited to 20 per cent of its EBITDA (earnings before interest, tax, depreciation and amortisation).

This 20 per cent figure is lower than the 30 per cent recommended by the OECD in Action 4 of its 2015 final report on BEPS. Action 4 aims to create "best practices for preventing [tax] base erosion through the use of interest expense, for example … to achieve excessive interest deductions or to finance the production of exempt or deferred income". If Japan implements the Proposal with a 20 per cent limit on deductions it will be taking a more aggressive stance to that recommended by the OECD.

It is believed the Proposal may be adopted by the Japanese government imminently and take effect from April 2020. If adopted and implemented, the Proposal could render future participation in JOLCOs by non-Japanese lenders less beneficial to Japanese equity investors. That said, full details of the Proposal and the form in which the Japanese government may adopt it are not currently available. So, among other things, it is not clear how the Proposal would interact with Japan's double tax treaties and apply to overseas banks that are "treaty lenders" and benefit from these treaties.

Nor is it clear whether the Proposal will be implemented with retrospective effect. If implemented retrospectively, this would raise the question of whether this would lead to existing JOLCOs being restructured or prepaid and unwound. At the moment, it is not clear that it would. This is because the impact of the change in Japanese tax law may only affect the economics of the transaction for the Japanese equity investors, but would not have the necessary impact on the lessee or the lenders to produce a termination event under a JOLCO lease.

If the Proposal is adopted, it seems unlikely to affect the short or long-term viability of the JOLCO, which seems capable of thriving even with its traditionally limited pool of Japanese, or Japan-based overseas, lenders.