Hong Kong has proposed to reduce corporate tax rates and offer special taxation rules on foreign rental income, in a push to attract more aircraft lessors to the city-state.

A briefing paper to Hong Kong’s legislative council panel on economic development dated 23 January sets out proposals to halve corporate tax rates to “qualifying aircraft lessors”, reducing it to 8.6%.

The paper also proposes that the taxable amount of rental income derived from aircraft leased outside of Hong Kong be “equal to 20% of the tax base i.e. gross rentals less deductible expenses”.

Lessors would be required to have “central management and control as well as profit generating activities” located in Hong Kong to qualify for the proposed scheme. They would also have to be standalone entities, with any related party transactions conducted at arms’ length.

Analysis conducted by Hong Kong's Economic Development Commission claims that the measures should allow Hong Kong to capture up to 18% of the global leasing market over 20 years. That would see it finance over 3,200 aircraft with an asset value of HK$707 billion ($91 billion), and a total tax income over the same period of more than HK$10 billion.

Changes to the relevant laws to enact the scheme are expected to be put to Hong Kong’s legislature by April.

The proposal however does not include any tax depreciation allowances on aircraft leased outside of Hong Kong, which has been seen as a major impediment to growing the industry.

EY says in a comment paper that the lack of depreciation allowances still puts Hong Kong at somewhat of a disadvantage against Ireland and Singapore. The proposal's inclusion of an “effective deemed deduction” feature could however benefit lessors down the track.

“This feature coupled with the fact that there is no capital gains tax in Hong Kong in respect of the disposal of aircraft, further enhances the attractiveness of the proposal,” it adds.

In a bulletin, KPMG said that the deemed profit concession was a “simple solution" to what has been a big problem.

“At face value, these proposals should make the Hong Kong tax regime competitive globally, especially if foreign tax credits are allowed for withholding taxes paid outside Hong Kong by lessees,” it adds.

Source: Cirium Dashboard