The aviation finance industry continues to expand across Asia, driven by booming air travel in China, India and other regional markets, causing a growing number of aircraft lessors to look at setting up operations in the region to be closer to the action.
In a timely webinar organized by TMF Group in association with Airfinance Journal, titled 'DFTP and Hong Kong – Identify an efficient jurisdiction for aircraft leasing', industry experts engaged in a focused discussion on the merits of China's free trade zones (FTZ) - specifically the Dongjiang Free Trade Port (DFTP) - and Hong Kong for the aircraft leasing industry and provided practical advice on what to look for when choosing a regional base.
Competing yet complementary
The DFTP – designated by the Chinese government as an aircraft finance hub – is by far the most successful aviation finance base among local FTZs, thanks to its robust infrastructure and business-friendly policies, noted Yi Liu, a partner at Rui Bai Law Firm.
The DFTP, which by June 2018 had delivered 1,200 aircraft worth over RMB 450bn, offers several compelling benefits. Leased aircraft imports are exempt from value added tax (VAT) and withholding tax is paid by the Chinese lessee. Lessors enjoy subsidies on office rent and senior executives receive rebates on personal income tax. Lessors also have access to renminbi financing, a big advantage as Chinese airlines prefer rentals to be payable in RMB.
However, setting up in the DFTP means being subjected to restrictions on the movement of capital and foreign exchange in and out of China. A major drawback, Liu noted, is that tax incentives are not gazetted into law, which means they may be subject to ad-hoc changes.
Hong Kong, which ushered in a new tax scheme in 2017 to attract aircraft lessors, is seen scoring over the DFTP on this front and also offers other advantages, such as its common law jurisdiction, low regulatory barriers and overall ease of doing business.
Pointing to its highly developed financial infrastructure, Tejaswi Nimmagadda, a partner at King & Wood Mallesons, noted that the city also provides access to RMB financing without some of the capital flow restrictions imposed by the mainland.
John Timpany, a tax partner at KPMG, added that Hong Kong's attractiveness as a place to live is a big plus for a growing industry looking to attract talent.
At the same time, the experts observed, Hong Kong and the DFTP have the potential to complement each other and are working to coordinate their policies for the benefit of lessors. This is in much the same way as Hong Kong aids China's Belt and Road and Greater Bay Area initiatives by acting as a hub for investors keen to participate in these projects.
While the DFTP and other FTZs mainly serve the domestic market, Hong Kong is expected to function as a base for foreign lessors working with regional carriers, as well as Chinese companies looking to expand out of the saturated home market. Chinese lessors operating in Ireland will also be drawn to Hong Kong by the marginal tax benefits as well as reasons such as geographical proximity, shared language and business culture, Liu noted.
Ultimately, a lessor's decision will hinge on client needs, Timpany noted, highlighting Chinese carriers' preference for lessors to be based in an FTZ in order to reduce their tax liabilities.
Kevin Butler, Managing Director – UK and Ireland, TMF Group, and the webinar's moderator, agreed. "We need to ensure we are keeping our clients front and centre."
The gateway factor
Tax is regarded as a fundamental factor in picking the right jurisdiction because it impacts both lessors and their customers.
Ireland, the industry leader, hosts 90% of the world's lessors thanks to its 72 double tax treaties. In comparison, Hong Kong has only 40 tax treaties. While China's FTZs have 105 bilateral treaties, the quality of these agreements can be an issue, the experts noted. This has prompted Chinese lessors to migrate to Hong Kong or Ireland to garner international business, while retaining a presence in Chinese FTZs for domestic clients.
Adherence to international tax conventions also helps. For instance, Hong Kong is compliant with the OECD's Base Erosion and Profit Shifting regulation and the city's appeal is seen to grow if it adopts the Cape Town Convention, which standardizes tax treaties governing the purchase and use of high-value aviation equipment.
As Timpany put it: "If you don't get the tax right, you are simply not in the game."
A promising future
With the growth in aircraft leasing showing few signs of slowing in coming years, our experts took the unanimous view that there would be ample opportunities for new jurisdictions to expand, with operational infrastructure, legal frameworks, the availability of talent and government support as important factors for success.
The jostling for hub status is not a zero-sum game. The panellists observed that both Hong Kong and the mainland offer means for lessors to achieve their main goal – delivering aircraft to customers at the most efficient price.
As Nimmagadda noted, finding a knowledgeable partner to ensure compliance with the rapidly developing tax and regulatory regimes governing leasing activity in different locations can help lessors avoid compliance missteps and develop the optimal structure for their goals and client base.
"The future for both Hong Kong and DFTP are bright," and these jurisdictions will co-exist and complement each other to provide investors the best possible solution, according to Butler.
Contact TMF Group
Regardless of which hub our clients pick, TMF Group, which has offices in over 80 jurisdictions, including Hong Kong and DFTP, can help you navigate the challenges and seize the opportunities presented by the region's dynamic, fast-growing aircraft leasing market. Make an enquiry to learn how local experts can help your business.
You can listen to the entire webinar here.
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