Important lift for Hong Kong’s air finance hub ambitions
An agreement to lower the mainland withholding tax for aircraft and ship leasing is a crucial first step towards realising the Hong Kong government’s ambition of making the city an international centre for financing a global aviation industry that will need US$4.6 trillion worth of planes in the next two decades.
The withholding tax on royalties paid to aircraft and ship leasing business will be capped at 5 per cent, down from 7 per cent currently, following the Hong Kong government’s amendment to its double taxation treaty with Beijing. That is lower than the 6 per cent withholding tax mainland China has with Ireland and Singapore, the global and regional aircraft leasing capitals Hong Kong is seeking to beat.
“This will be conducive to the promotion of aerospace financing business in Hong Kong, and we will continue to explore other measures,” Secretary for Financial Services and the Treasury Chan Ka-keung said at the signing of the amendment protocol.
The trillion-dollar global aircraft leasing industry is expected to account for more than a third of the demand for some 31,000 new planes by 2018. China alone is expected to need more than 6,000 planes valued at US$870 billion.
The withholding tax is a financial burden in cross-border transactions for airline lessees that typically pay rental of US$350,000 a month for a narrowbody plane. That and the corporate income tax are the two most important taxes for leasing companies where Ireland and Singapore offer attractive discounts.
“Withholding tax is not in the equation when a local lessor on the mainland leases planes to Chinese airlines – that is where they have an advantage over foreign lessors. With Hong Kong now 1 per cent lower than Ireland and Singapore, leasing companies will be immediately looking at opportunities of setting up in Hong Kong which will give them an edge,” said Dewey Yee, head of the Aerospace Finance Task Force in the Hong Kong Economic Development Commission.
Darren Bowdern, tax partner at KPMG China, said: “This is certainly a great boost to Hong Kong, but Hong Kong may need to amend its tax rules slightly to further promote offshore leasing activities.”
Ireland and Singapore have various double taxation treaties with other countries that provide for zero withholding tax.
Yee said he was very pleased to see what he called “a crucial first step”. “We need to develop an attractive tax regime. Next we will be working on lowering the corporate tax,” he said. Corporate tax for lessors currently stands at 16.5 per cent in Hong Kong, 12.5 per cent in Ireland, and 10 or 5 per cent in Singapore under an incentive scheme.
