Hong Kong, the future aircraft leasing gateway to China

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.

Hong Kong is the number four finance center in the world. But the present tax rules prohibits aircraft leasing companies to establish Hong Kong as their hub for China and Asia.

The companies cannot deduct the costs of the aircraft ownership from their lease revenue, for non-Hong Kong operators. This will now change.

The tax problem

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 as an aircraft leasing center

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:

  • The Chinese airline market is the world’s largest market going forward. The market will need 6,000 new aircraft in the next 20 years.
  • The Asian region outside China needs another 10,000 aircraft in the time period.
  • Hong Kong is an established financial center, with all the financial and legal competence to support an aircraft leasing business.
  • Hong Kong has a lot of independence from China, especially on the economic side. Hong Kong operates under the “one state, two systems” principle. This offers Hong Kong a full market economy while still being part of China.
  • The capability of Hong Kong to correct its deficiencies in tax rules for aircraft leasing, only two years after realizing the deficiencies and the potential of the business, shows the strength in the areas independence and agility.

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.

5 Comments on “Hong Kong, the future aircraft leasing gateway to China

  1. Seems like madness. There’s already nowhere for them to live. Hong Kong is massively overpopulated and most live in matchbox apartments.

    In other news 737 MAX flights are suspended over problems with the low pressure turbine. It’s the LEAP-1B and it doesn’t affect the A320 NEO family (LEAP-1A/PW).

    • What madness?

      This is about HK potentially becoming a ‘hub’ for lessors registered here to more easily attract global capital to invest in their aircrafts and for Chinese/Asian operators to more easily seek aircraft leasing deals(e.g. leasing contracts @ very competitive rates) fm those lessors.

      All these hv nothing to do with more aircrafts owned by HK-based lessors to be physically parked in HK waiting for customers to lease/pick-up/return….aircraft leasing industry is not the same as car rental companies. Almost all aircrafts owned by these lessors will probably never land/take off in HKG fm the day they are built till they are scrapped. It’s simply about more $ flowing between investors, lessors and airline operators via the HK banking system. And $, even trillions, take up so little space inside a bank server located somewhere in the congested HK landscape….

  2. You won’t take a reply on today’s regional article. so I leave it here. You got the dateline wrong, again. I strongly suspect you also got the mtow wrong, should be 86klbs.

  3. ‘Integration’ of HK with China was in 1997 (not 1987) – typo I know, but important to get right….

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