Shanghai and Tianjin are jostling to be the mainland's aircraft financing hub, with the world's second-largest aviation market expected to see US$480 billion worth of aircraft acquired in the next 20 years.
Tax concession measures in Shanghai's free-trade zone for imported aircraft, which are currently subject to 22.8 per cent import tax, would ensure more aircraft finance leasing companies were registered in the city. The new policy, only applicable to mainland companies, would also help them meet competition from overseas rivals.
Industry insiders said that because of foreign-currency controls in the country, it cost a mainland lessor more to get US dollar funds on the mainland to acquire aircraft. The 100- to 200-basis-point difference in finance cost has made the mainland lessors vulnerable to competition from aboard.
"The tax concessions could help increase the competitiveness of mainland companies and increase our market share in aircraft leasing," said David Wang, vice-president of aviation financing department at ICBC Financial Leasing, a subsidiary of Industrial and Commercial Bank of China.
Wang said for every three aircraft finance leases on the mainland, one was funded by foreign financial institutions.
It is still not clear what the specific concession measures adopted in the Shanghai free-trade zone will be.
Aircraft import taxes on the mainland are high and amount to 17 per cent value-added tax and 5 per cent tariff. For example, a Boeing 737 with a listed price of US$89 million attracts US$20.5 million in tax.
"If the concession measures in Shanghai are more beneficial than those in Tianjin, it would be possible that the aircraft leasing company would move to Shanghai," said a manager from one of the Big Three aircraft leasing companies on the mainland.
As a testing ground for concessions for value-added tax, any finance leasing companies registered in the Shanghai free-trade zone, including its branch office, will benefit from the new policy for financing aircraft with at least 25 tonnes in payload, a category commonly deployed by commercial airlines.
Before the setting up of Shanghai's free-trade zone, Tianjin Dongjiang free-trade zone was the preferential home for finance leasing companies. Minsheng Financial Leasing and ICBC Financial Leasing are among the 350 aircraft leasing companies registered in Tianjin Dongjiang.
In Dongjiang, the 22.8 per cent import tax could be paid within seven years or so, according to the aircraft leasing period cited in the usual contract signed between the lessee (the ultimate owner of the aircraft) and the lessor (the aircraft leasing company).
As a result, the number of aircraft leasing companies registered in Dongjiang doubled to 346 as of September this year and more than 240 aircraft have been financed in Dongjiang, according to a local official.
In response to the establishment of the Shanghai free-trade zone, Tianjin deputy mayor Cui Jindu said the city had submitted a proposal to further develop its finance leasing industry to the State Council recently.