Hong Kong given level playing field after government cuts tax rate on aircraft leasing companies
With the recent decision by the Hong Kong government to cut the tax rate on aircraft leasing companies, analysts and industry insiders believe the city has an opportunity to be less reliant on property and tourism when it comes to financial transactions.
In June the government announced it would reduce the effective tax rate on aircraft leasing companies to less than 10 per cent from over 30 per cent.
“The tax cut is significant for Hong Kong’s aircraft leasing business and it will make the [the city] more attractive I believe,” said Clarence Leung, a tax partner at PwC. He noted that the previously high tax rate was a big hurdle for aircraft lessors when entering into cross border aircraft leasing transactions.
The estimated effective tax rate for Hong Kong was 33 per cent, which compares with traditional aircraft leasing centres Ireland and Singapore with only 12.5 per cent and 5-10 per cent respectively.
“Coupled with the limited tax treaty network, [there was] no such business in Hong Kong,” Leung added. “However, the tax reduction will put Hong Kong on more equal footing with other financial leasing centres like Ireland and Singapore.”
Corrine Png, chief executive of Crucial Perspective, a Singapore-based research firm, agreed that the tax cut was long overdue and a significant milestone for Hong Kong’s aircraft financing market.
“Its existing tax regime was uncompetitive compared to Ireland and Singapore,” she said.
“A growing aircraft leasing business will help broaden and deepen the spectrum of financial services in Hong Kong. It will also create more jobs and support the development of Hong Kong’s aviation sector.”
Hong Kong, geographically close to the huge mainland China market, has some inherent advantages when it comes to developing a leasing business, including a strong banking infrastructure, a mature legal system and a long track record in transportation services.
With similar culture and language, Hong Kong-based aircraft lessors tend to have a deeper and better understanding of the greater China aviation market.
Asia is the biggest global buyer of aircraft, with China alone accounting for 36 per cent of the Asian aviation market, according to data from Crucial Perspective. This means there will be huge demand for aircraft financing when new planes are delivered in coming years, either via debt or leasing finance.
Forecasts from research firm Vision Gain suggest that the global share of leased aircraft is expected to rise from the current 32 per cent to around 40 per cent by 2020, and by 2032 leasing finance is expected to account for half of all aircraft deliveries.
“Apart from Japan Airlines and Singapore Airlines which have a net cash position, all the other Asian airlines will need to rely on a substantial amount of debt or lease financing for their aircraft fleet expansion,” said Png. “The rise of more low cost carriers in North Asia is likely to boost aircraft leasing demand as well because start-up airlines tend to rely on lease financing as they lack the capital to buy many aircraft outright.”
However, as a newcomer to the aircraft leasing business Hong Kong will face difficulties and it will take some time for the city to catch up with rivals.
“Hong Kong generally has a higher cost of doing business such as salaries, office rental and a limited pool of experienced staff in the aircraft leasing industry who are well-versed in the aircraft rental, sale and purchase, financing, and maintenance aspects,” said Png.
China Aircraft Leasing Group (CALC) also said there was a shortage of such talent in China and Hong Kong but the Hong Kong-listed lessor welcomed the Hong Kong government’s decision regarding the tax reduction.
“Aircraft leasing could be a powerful driver of Hong Kong’s economy and put the city’s standing at the same starting line [as its rivals] in the aircraft leasing business,” said Mike Poon, CALC chief executive, who added that he believes Hong Kong is too financially reliant on its property market.