Taxation of Aircraft Leasing Activities

A:

Yes.  The qualifying aircraft lessor can claim for deduction of capital expenditure on an aircraft acquired before the year of assessment 2023/24 if the lessor elects to have its assessable profits to be computed on an actual basis.  However, a notional allowance for the years of assessment for which only 20% of the tax base, i.e. gross lease payments less deductible expenses (excluding depreciation allowance), in respect of the aircraft is assessed (“the 20% tax base concession”) will be excluded from the amount of capital expenditure to be allowed for deduction. 

A:

No.  The 20% tax base concession only applies to the lease payments of an operating lease in respect of an aircraft acquired before the year of assessment 2023/24 and used by the aircraft lessor in carrying out qualifying leasing activities before the year of assessment 2023/24.

A:

If the connected person has been granted capital allowance in respect of the aircraft for a year of assessment in a non-Hong Kong jurisdiction, the qualifying aircraft lessor will not be entitled to the 20% tax base concession.  However, if the aircraft is disposed of by the connected person and the consideration for disposal is subject to tax in the non-Hong Kong jurisdiction at an amount not less than the amount of capital allowance granted to the connected person for that year of assessment, the qualifying aircraft lessor would be entitled to the 20% tax base concession.  The 20% tax base concession would apply even if the total amount subject to tax in the non-Hong Kong jurisdiction for that year of assessment is less than the total capital allowance granted to the connected person in respect of the aircraft for all relevant years of assessment.  In other words, whether the 20% tax base concession applies will be determined on a year by year basis. 

A:

If balancing allowance has been granted to a connected person for a year of assessment, the 20% tax base concession would not apply for that year of assessment. Under the enhanced regime, if a relevant person has been granted capital allowances in respect of the capital expenditure on provision of the aircraft for a year of assessment, the 20% tax base concession would be denied for that year of assessment unless the amount being granted has been clawed back. Whether or not the aircraft is sold to the aircraft lessor in Hong Kong at a price below the capital expenditure incurred by the connected person is not relevant.

A:

If part of the loan is used to pay for other costs not related to the acquisition of an aircraft, interest expenses would be allowed on an apportionment basis and interest expenses attributable to that part of the loan used for financing the acquisition cost of the aircraft would be allowed for deduction, provided that the other relevant conditions are met.

A:

Interest expense incurred on a subsequent loan obtained to wholly or exclusively refinance the outstanding balance of the previous loan which was obtained for financing the provision of an aircraft would be allowed for deduction, provided that the other conditions are met.  If the lender of the subsequent loan is an associate of the aircraft lessor, the “subject to tax” condition and “beneficial ownership” test would apply.

A:

The “subject to tax” condition requires that the interest accrued to the lender is subject to income tax in a jurisdiction outside Hong Kong at a rate not less than the reference rate (i.e. the Hong Kong profits tax rate applied to the borrower) if the lender is an associate of the qualifying aircraft lessor and is located outside Hong Kong.  It also requires that the non-Hong Kong income tax has been actually paid.  

A:

The “beneficial ownership” test requires that the lender’s right to use and enjoy the interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of an arm’s length transaction.  In other words, it requires that the lender is the “beneficial owner” of the interest.  It follows that a conduit company which has very narrow powers that render it, in relation to the interest concerned, a mere fiduciary or administrator acting on account of other interested parties would not be considered as the beneficial owner of the interest.  

A:

In determining whether the threshold requirements are met, the Commissioner of Inland Revenue (“the Commissioner”) will consider whether the actual number of full-time employees and amount of operating expenditure are adequate having regard to the facts and circumstances of individual cases.  In any event, an aircraft lessor needs to employ not less than 1 full-time employee and incur not less than $2,000,000 per year and an aircraft leasing manager needs to employ not less than 2 full-time employees and incur not less than $1,000,000 per year.

A:

There is no definition of “full-time employee” under the Inland Revenue Ordinance (“IRO”) and thus the term should be construed in accordance with its ordinary meaning.  The Department considers that a director can have a dual capacity.  If a director possesses the required qualification and carries out the core income generating activities (“CIGAs”) in Hong Kong, the director can be counted as a full-time employee.  However, if the director is based outside Hong Kong, the director cannot be counted as a qualified full-time employee as the director does not carry out the CIGAs in Hong Kong.

A:

If an employee serves multiple aircraft lessors or other non-aircraft leasing group companies, the Department would allow the splitting of the employee by reference to the amount of time spent by the employee in the carrying out of the CIGAs for each aircraft lessor for the purpose of counting the number of full-time employees as long as there is no double counting.

A:

If an aircraft lessor or aircraft leasing manager wishes to obtain certainty on the applicable tax treatments, it may consider applying for an advance ruling under section 88A of and Schedule 10 to the IRO.  The Commissioner would be prepared to make a ruling on the compliance of the threshold requirements under the preferential tax regime for aircraft lessors or aircraft leasing managers, provided that all the required information has been furnished in support of the ruling application.

A:

Under section 14H of the IRO, a qualifying aircraft lessor for a year of assessment must not be an aircraft operator.  An “aircraft operator” is defined under section 14G(1) of the IRO to mean a person carrying on an aircraft operation business.  In respect of sections 23C and 23D of the IRO, these sections are not applicable unless the owner carries on a business as an aircraft operator.

Whether or not a corporation is an aircraft operator is a question of fact.  All the relevant facts and circumstances should be considered.  An aircraft registered in Hong Kong cannot fly for the purpose of public transport unless the operator holds an Aircraft Operator’s Certificate (“AOC”) granted by the Director-General of Civil Aviation.  A person holding an AOC or a similar permit granted by any non-Hong Kong jurisdiction is, prima facie, an aircraft operator.  By the same token, in the absence of an AOC or similar permit, it appears likely that the person is not an aircraft operator.

A wet lease is typically a short-term lease for seasonal needs including the aircraft, crew, maintenance and insurance during the period of the lease.  If the aircraft owner has no control over where and when the aircraft flies during the contractual period and is not a holder of AOC or similar permit, the aircraft owner is likely not an aircraft operator.