Hong Kong and Singapore introduced new legislation to offer competitive tax advantages to the aircraft leasing business. However, taxation should not be the only consideration when determining where to set up an aircraft leasing entity.
Hong Kong and Singapore have long been competing to attract lucrative aircraft leasing business. In the first quarter of 2017, both governments rolled out new legislation to offer competitive tax advantages to aircraft leasing and aircraft leasing management businesses. Here, we outline some of the legislative changes in both jurisdictions.
On 20 February 2017, the Singapore government announced an updated Aircraft Leasing Scheme (ALS), extending it for five years longer than expected, to 31 December 2022. Any approved aircraft leasing company can benefit from the following incentives:
- a concessionary tax rate of 8% on income derived from the leasing aircraft or aircraft engine and qualifying ancillary activities
- a withholding tax exemption on interest and qualifying related payments on loans obtained for the purchase of aircraft or aircraft engines.
Shortly after Singapore's enhancement, on 10 March 2017, the Hong Kong Inland Revenue introduced a legislative bill for a proposed dedicated tax regime, including:
- a concessionary tax rate of 8.25%, which is 50% of the current profits tax rate of 16.5%, for both qualifying aircraft lessors and qualifying aircraft leasing managers
- as compensation for the loss of depreciation allowances, the deemed taxable amount in respect of income derived from the leasing of aircraft to a non-Hong Kong aircraft operator by a qualifying aircraft lessor will be equal to 20% of the tax base of the lessor concerned, i.e. their gross rentals less deductible expenses, but excluding tax depreciation.
The proposed concessionary tax treatment for qualifying profits of a qualifying aircraft lessor and a qualifying aircraft leasing manager will apply to sums payable, received or accrued on or after 1 April 2017.
The proposed deeming provision for the relevant gains or profits of an aircraft leasing business and aircraft leasing management business in Hong Kong will only apply to sums received or accrued on or after the date on which the Bill is enacted into law.
At a glance, both jurisdictions offer a similar attractive tax rate: 8% in Singapore vs 8.25% in Hong Kong. However, taxation should not be the only consideration in determining where to set up an aircraft leasing entity.
To enjoy the concessionary tax rates in these jurisdictions, there must be demonstration of substance over form, in order to qualify as a tax resident business in either of these jurisdictions.
A potential lessor and aircraft management company must establish substantive activities in these jurisdictions, which include establishing a local office with payroll employees, making strategic and important decisions in relation in the management of the leases and financial functions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.