Hong Kong’s Budget 2017-2018 introduces a preferential tax regime to incentivise aircraft leasing companies to use Hong Kong as their business base. This is a significant development for the Hong Kong aviation market which is well placed to take advantage of its close physical proximity to mainland China, which Boeing Capital estimates will need about 6,000 new aircraft over the next two decades, valued at more than HK$6 trillion, with a third expected to be financed through leasing.

The Hong Kong Inland Revenue (Amendment) (No.2) Bill which had its third reading on 28 June 2017 and is expected to come into force imminently introduces the new regime, which will apply from the 2017/18 year of assessment. The main features of the regime are:

  • A new tax rate on the profits of "qualifying aircraft lessors" and "qualifying aircraft leasing managers" of 8.25%, which is half the previous tax rate; and
  • A reduced effective tax rate of 1.65% on gross income, calculated as 8.25% of 20% of gross rentals less deductible expenses, excluding tax depreciation.

Broadly, to qualify as a “qualifying aircraft leasing manager”, the manager must meet the following conditions:

  • It must be a corporation that is centrally managed and controlled in Hong Kong;
  • It must ensure that no activities are carried out from a permanent establishment outside Hong Kong;
  • At least 75% of its profits must arise from, and at least 75% of its assets must be used in, the aircraft leasing management business; and
  • It must elect in writing to opt into the regime.

It should be noted that there are a number of other conditions that must be complied with in order to successfully opt into the new regime. Aircraft lessors will also have to satisfy a number of anti-avoidance provisions contained within the legislation.