By Bjorn Fehrm
May 11, 2017, ©. Leeham Co: We are attending the ISTAT (the International Society of Transport Aircraft Trading) conference in Hong Kong this week. The conference was opened by the Chief Executive for the Hong Kong region of China, Mr. C. Y. Leung. He gave an interesting perspective of the future of Hong Kong in the aviation finance market.
The companies cannot deduct the costs of the aircraft ownership from their lease revenue, for non-Hong Kong operators. This will now change.
Each of the countries which house aircraft leasing companies tax the profits on the companies operating in these countries. Ireland has a 12.5% profit tax, China 25%, Singapore 20% and Hong Kong 16.5%.
The key is how the costs of the operation are handled and if any special rules apply for aircraft leasing companies. In Ireland and Singapore, it’s OK to deduct your aircraft ownership capital and depreciation costs from your global leasing incomes.
In China and Hong Kong, it’s not. For Hong Kong, not unless your customer is a Hong Kong airline. This will now change. From 1 April 2017, a Hong Kong aircraft leasing company can deduct aircraft capital and depreciation costs and will be taxed with 1.65% on any resulting profits of any lease rentals.
For Hong Kong, this will change everything. So far, the region could not attract leasing companies because of the tax rules. With the changed rules, Hong Kong’s strengths as a financial center can now come into play.
Hong Kong is, since the integration with mainland China in 1987, uniquely positioned as China’s financial gateway to the world. And at the same time, it’s the world’s financial gateway to China.
It’s in this financial crossroads that Hong Kong has a number of advantages outside the new tax regulations:
To support the expansion of Hong Kong as an aviation financial center, the Hong Kong administration is investing heavily in infrastructure. There is a new bridge built over the Pearl River delta, connecting Hong Kong, Macau and 11 other large cities in the region. This creates a region of 11 million people, with Hong Kong and its airport as the center.
At the same time, the Hong Kong airport, which today is serving 70m passengers and 40m tonnes of cargo per year, will get a third runway in 2018. This enables an expansion of the airport to 100m passengers and 60m tonnes of cargo.
The present aircraft leasing centers of the world are Dublin and Singapore. Seems they will get company soon.