A committee of Hong Kong’s legislature has held a second meeting to discuss draft legislation to implement a special tax regime for aircraft leasing.

Airfinance Journal reported on 28 March that the region was close to implementing a concessionary tax regime that could see only 20% of rentals subject to tax at 8.25% -- an effective rate of 1.65%.

On 26 April, the Bills Committee on Inland Revenue (Amendment) (No. 2) Bill 2017 had a second meeting in which representatives from “various professional bodies and aviation industry participants generally indicated their support for the HKSAR Government’s move”, according to a statement from accountancy firm PwC.

The representatives were from law firm Berwin Leighton Paisner, Hong Kong Aircraft Leasing and Aviation Finance Association, PwC, Deloitte, Hong Kong Institute of Certified Public Accountants and The Taxation Institute of Hong Kong. These six parties also made written submissions declaring their support for the Bill.

Cathay Pacific Airlines, Hong Kong Dragon Airlines, Hong Kong Airlines and Hong Kong Exchanges and Clearing made written submissions in support of the Bill, but did not attend the meeting.

The attendees also made submissions on the economic impacts of the Bill on the development of the aircraft leasing industry in Hong Kong and provided their comments on the technical details of the Bill.

Representatives from the Transport and Housing Bureau, the Financial Services and the Treasury Bureau and the Inland Revenue Department (IRD) also attended the meeting and responded to some of the questions raised by the “business/profession” deputation, as well as members of the Legislative Council, Hong Kong’s legislature.

PwC says that attendees were “generally supportive of the Bill” and that the development of Hong Kong as a major aircraft leasing hub will also “help to promote and consolidate Hong Kong’s position as a global business and financial centre, and to create job positions for the future generations.”

Issues raised

Some of the major issues raised during the meeting include the fact that, based on the current definition of "non-Hong Kong aircraft operator" in the Bill, it is not absolutely clear whether an overseas airline that has flights flying to Hong Kong for uplift of passengers or goods can qualify as a non-Hong Kong aircraft operator. This is because the overseas airline will technically be chargeable to profits tax under Section 23D of the Inland Revenue Ordinance (IRO), even though it may be subsequently exempt from profits tax by virtue of a Hong Kong Double Taxation Agreement.

In addition, some deputations recommend that the scope of allowable leasing arrangements between a Hong Kong aircraft lessor and a non-Hong Kong aircraft operator under the proposed tax regime be extended to cover finance leases.

Moreover, attendees sought clarification on whether the aircraft will be regarded as being leased to an “aircraft operator” if an aircraft lessor leases an aircraft “indirectly” to an aircraft operator in the course of a normal business practice. For example, if a Hong Kong aircraft lessor leases aircraft to a special purpose vehicle (SPV) set up within an overseas airline group and the SPV then sub-leases the aircraft to an aircraft operating company within the same airline group.

PwC says it is “encouraging” that the deputy commissioner of Inland Revenue has clarified three points, namely:

• non-Hong Kong aircraft operators which are chargeable to profits tax under the IRO but subsequently exempt from profits tax under a Hong Kong Double Tax Agreement will qualify as a “non-Hong Kong aircraft operator”.
• When assessing whether an aircraft lessor or an aircraft leasing manager satisfies the “central management and control” test, the IRD will take into account the circumstance of the aircraft lessor/aircraft leasing manager for the whole basis period of the year of assessment concerned.
• The IRD will issue a Departmental Interpretation and Practice Note to provide further clarification and guidance on the operation of the concessionary tax regime.

The next meeting was due to be held on 2 May, but the Legislative Council website states that this meeting has been cancelled, without stating a reason.