Singapore's reputation as the natural home for aircraft lessors and financiers in Asia is facing a new challenge from Hong Kong's ambition to become an air finance hub in its own right. Following years of consultation with the air finance industry, last July the Chinese territory's administration enacted a series of incentives and concessions aimed at attracting more aircraft lessors and managers to set up shop in Hong Kong.
Key among the concessions are a 50% reduction in the corporate tax rates for qualifying companies, to 8.25%. In addition, there is a "tax base concession", which levies a 20% tax on gross rental receipts, minus a generous list of deductible expenses. Frank Chan, Hong Kong's secretary of transport and housing, told attendees at an industry conference in November 2017 that, "as a result, the effective tax rate for aircraft leasing activities in Hong Kong will be down to about 4%".
However, companies accepting the reduction in corporate tax will not be eligible for depreciation deductions on aircraft. There is also a waiver on tax for aircraft held for three years or longer. The Special Administrative Region has also been firm that lessors cannot claim the concessions through a "flag of convenience" style of operations – to qualify, lessors must demonstrate that a large amount of the management is based in Hong Kong, and that decisions will be made there.
The requirement that lessors be rooted in Hong Kong to enjoy its tax incentives aligns with expectations of local economic benefits. In a briefing note to the country's legislature in early 2017, it was estimated that the incentives would generate 1,640 jobs over the next 20 years, with Hong Kong growing to capture around 18% of the global aircraft leasing industry – representing 3,200 aircraft. Speaking after the passing of the leasing legislation in July, China Aircraft Leasing (CALC) chief executive Mike Poon said the package would allow Hong Kong to "emulate and catch up with Singapore and other aircraft leasing hubs".
CALC has been an early adopter of the incentives, and delivered an aircraft through a local platform in 2017. It was followed closely by Chinese lessor ICBC Leasing, which completed its first transaction through its Hong Kong platform in December – a Boeing 787-9 leased to Korean Air.
The view of many in Hong Kong is that attracting lessors to set up shop there is a natural extension of its already strong presence in the global aviation market, its well-developed financial infrastructure and strong reputation with investors. Chan said in November: "Leveraging the ample liquidity in our banking system, dynamic debt and capital markets, as well as a large pool of investor capital, Hong Kong is probably the best marketplace for an aircraft leasing business."
Even before the passing of the package, some aircraft leasing companies have already pushed to tap that deep pool of capital. CALC listed on the Hong Kong Stock Exchange in 2014, becoming the first Asian lessor to trade publicly. Since then, BOC Aviation and CDB Leasing have also listed in Hong Kong.
Those IPOs aside, Hong Kong-based conglomerates such as Cheung Kong, NWS Holdings and Chow Tai Fook Enterprises have become important investors in the aircraft leasing market.
While Hong Kong aims to join the ranks of Singapore and Dublin as key destinations for aircraft finance, a major part of its pitch is its close connection to the largest aviation market in the world – China. "Our proximity to the mainland of China, and strong business ties with mainland counterparts constitute an added advantage," Chan said.
Over the next 20 years, Chinese carriers are forecast to require more than 6,000 new aircraft to meet the strong growth in passenger demand. Of those, a large proportion are expected to be financed through leasing mechanisms – and Hong Kong is seeking to play a major part in that.
Aside from the corporate tax incentives, the ace up Hong Kong's sleeve in the China market is its double-taxation treaty with the mainland, under which lease rentals between the two countries are subject to only a 5% withholding tax rate. "As far as I know, it is among the lowest of all aircraft leasing hubs," said Chan. In a briefing note to clients following the passing of the incentive package in July, KPMG said: "Hong Kong's advantages of its proximity to the PRC [People's Republic of China] and its 'best in class' tax treaty with the PRC make it a natural place for offshore leasing of aircraft to PRC airlines."
But Hong Kong faces some established competition when it comes to servicing the Chinese leasing market, most notably from the mainland's free-trade zones in Tianjin, Shenzhen and Shanghai. A number of Chinese carriers gain value-added tax credits for taking aircraft leased via the zones, and have made it a requirement of recent requests for proposals.
As a result, some global lessors that have already established operations in the zones, most notably Tianjin, do not see a need to also establish a platform in Hong Kong to serve the Chinese market. For other leasing companies that have not yet ventured into the free-trade zones, there is some comfort that Hong Kong's legal system bears more similarities to those in the West, with a "conviction to the rule of law and our commitment to ensuring a level playing field", said Chan.
As well as being the gateway into China, Hong Kong is also positioning itself as a place for mainland lessors to base their offshore operations. This is expected to be a strong source of growth as Chinese lessors look to expand away from their crowded home market, with the encouragement of Beijing's "Go Global" and “One Belt, One Road" policies. Under those policies, Beijing is pushing Chinese businesses to expand globally, taking advantage of the country's growing diplomatic ties with countries along the historic Silk Road.
SINGAPORE STAYS STRONG
Hong Kong's arrival on the world stage of aircraft finance could shift the centre of gravity for lessors in Asia away from Singapore, which to date has been the natural home of most lessors in the region. GECAS, AerCap and Nordic Aviation Capital are among those that have a major presence in Singapore, alongside the likes of BOC Aviation, Avation and even AirAsia's leasing unit, Asia Aviation Capital.
Singapore, like Hong Kong, offers concessional corporate tax rates to lessors, in the 5-10% range and determined on a case-by-case basis. It also allows lessors to claim capital allowances from between five and 20 years on aircraft and engines, while unutilised losses and capital allowances can be carried forward indefinitely – providing a further tax shield.
Tan Kong Hwee, executive director transport engineering at Singapore's Economic Development Board, tells FlightGlobal that the island also benefits from its long-held reputation as a wider aviation destination.
He says: "Singapore, being a hub for aviation as well as aerospace, has a network of companies and people that complements the professional services sector. For example, lessors who require technical aircraft talent would find it in Singapore."
So far, there has been little suggestion that companies established in Singapore could look to move to Hong Kong in order to take advantage of the support being offered there. Instead, it appears more likely that some could use a subsidiary in Hong Kong to tap new transactions involving Chinese airlines and take advantage of the lower withholding tax.
For new lessors looking to play in the Asian market, there now appears to be a buyer's market when it comes to choosing a home base. Tan says it is not surprising that other Asian nations have stepped up incentives to attract aviation financiers, but Singapore maintains a flexible approach that should give it an edge over the new competition.
"We will continue to monitor the needs of the sector and calibrate our regime to remain competitive as Asia's major hub in aircraft leasing," he adds.
Source: Cirium Dashboard