17 March Issue No. 6

Transcription

1 Hong Kong Tax Alert 17 March Issue No. 6 Hong Kong introduces legislative bill to attract offshore aircraft leasing and aircraft leasing management businesses to Hong Kong Last Friday, the Inland Revenue (Amendment) (No. 2) Bill 2017 (the Bill) was gazetted 1. The Bill seeks to introduce a proposed dedicated tax regime offering tax incentives to qualifying aircraft lessors and qualifying aircraft leasing managers in Hong Kong. The legislative framework of the proposed regime is outlined and discussed in this alert. Clients who have any views or comments on the Bill can contact their tax professionals so that we can convey their thoughts to the Government in an appropriate manner. Legislative framework of the proposed dedicated tax regime Subject to certain anti-avoidance provisions, the proposed dedicated tax regime provides that: i. where specified conditions are satisfied, qualifying profits of qualifying aircraft lessors and qualifying aircraft leasing managers will be taxed at the concessionary tax rate of 8.25% (i.e., 50% of the current profits tax rate of 16.5%); and as compensation for the loss of depreciation allowances 2, the deemed taxable amount in respect of income derived from the leasing of aircraft to a non-hong Kong aircraft operator by a qualifying aircraft lessor will be equal to 20% of the tax base of the lessor concerned, i.e., their gross rentals less deductible expenses, but excluding tax depreciation. 1. The Bill can be downloaded from: 2. Under section 39E of the Inland Revenue Ordinance, a lessor would be denied tax depreciation allowances in respect of the cost it incurred on the acquisition of an aircraft if the aircraft is leased to an overseas aircraft operator.

2 Key terms employed in the above legislative framework are explained below. Qualifying aircraft lessor A corporation would qualify as a qualifying aircraft lessor for a year of assessment if, for that year, the corporation is (i) not itself an aircraft operator; and (ii) solely dedicated to carrying out in Hong Kong one or more of the qualifying aircraft leasing activities. Qualifying aircraft leasing manager Subject to certain safe harbor rules, a corporation would qualify as a qualifying aircraft leasing manager for a year of assessment if, for that year, the corporation is (i) not itself an aircraft operator; and (ii) solely dedicated to carrying out in Hong Kong one or more of the qualifying aircraft leasing management activities. A corporation not dedicated solely to carrying out one or more of the qualifying aircraft leasing management activities, would nonetheless qualify as a qualifying aircraft leasing manager under the following two safe harbor rules: Qualifying profits of a qualifying aircraft leasing manager Qualifying profits of a qualifying aircraft leasing manager generally refer to profits derived by the manager from performing aircraft leasing management activities for a qualifying aircraft lessor in the ordinary course of the business of the manager in Hong Kong (i.e., profits derived from such qualifying aircraft leasing management activities). A full list of what constitutes aircraft leasing management activity is shown in the Appendix to this alert. Specified conditions to satisfy In addition to the above, a qualifying aircraft lessor or a qualifying aircraft leasing manager has to satisfy the following specified conditions in order to avail themselves of the proposed dedicated tax regime: i. the central management and control of the lessor or manager concerned for the relevant year has to be exercised in Hong Kong; i. The relevant profit derived from, and assets employed in, the qualifying aircraft leasing management activities of the corporation are both not less than 75% of the total profit derived and total assets employed by the corporation. the activities that produce the qualifying profits in that year have to be either (a) carried out in Hong Kong by the lessor or manager themselves; or (b) arranged by the lessor or manager to be carried out in Hong Kong; and Where the corporation fails to qualify as a qualifying aircraft leasing manager on any one of the above two conditions, the corporation concerned may nonetheless make an application to the Commissioner requesting the Commissioner to determine it as being a qualifying aircraft leasing manager. The Commissioner may make such a determination if he is satisfied that the otherwise non-qualification of the corporation for the year in question arose not out of the ordinary course of business of the corporation. Qualifying profits of a qualifying aircraft lessor Qualifying profits of a qualifying aircraft lessor generally refer to profits derived from the leasing of an aircraft owned by the lessor in its ordinary course of business in Hong Kong to a non-hong Kong aircraft operator (i.e., profits derived from such qualifying aircraft leasing activities). A non-hong Kong aircraft operator is defined as an aircraft operator who is not chargeable to profits tax in Hong Kong. i the aforesaid activities are not carried out by a permanent establishment outside Hong Kong. Furthermore, a qualifying aircraft lessor, or a qualifying aircraft leasing manager, has to elect in writing if they wish to subject themselves to the concessionary tax treatment. Such an election, once made, is irrevocable for so long as the lessor or manager remains as a qualifying aircraft lessor or a qualifying aircraft leasing manager. Where a qualifying aircraft lessor or a qualifying aircraft leasing manager has made an election but failed to qualify as a qualifying aircraft lessor or a qualifying aircraft leasing manager for a particular year, the lessor or the manager concerned will in any case be denied the profits tax concessions for the subsequent year of assessment. Apparently, this is to discourage a qualifying aircraft lessor or a qualifying aircraft leasing manager from deliberately rendering themselves not qualifying under the proposed regime when they expect to incur losses for a given year (the value of such losses, being subject to the normal tax rate, will be higher than losses suffered under the concessionary tax regime). Ownership of an aircraft in this context includes a corporation holding the aircraft concerned as (i) a lessee under a funding lease 3 ; (ii) a bailee under a hire-purchase agreement; and (iii) a buyer under a conditional sale agreement. As regards the leasing of an aircraft, it must be (i) by way of a demised, dry lease, the term of which exceeds one year; (ii) the lessor is not responsible for ensuring the airworthiness of the aircraft; and (iii) no member of the crew of the aircraft is employed by the lessor. 3. The features of a funding lease as defined in the Bill appear to be similar to those of a finance lease. 2

3 Other provisions of the Bill Sums to be excluded as qualifying profits under certain conditions Where a payment is tax deductible to anyone in Hong Kong, the receipt in the hands of the qualifying aircraft lessor or qualifying aircraft leasing manager will generally be excluded from the pool of qualifying profits (i.e., such payments would be taxed at the normal rate of 16.5% instead of the concessionary rate of 8.25%). The exclusion however does not apply where the amount is received by a qualifying aircraft leasing manager from a qualifying aircraft lessor, where the relevant services are carried out by the manager for the lessor concerned. This exclusion is to cater for the situation where a qualifying aircraft lessor would need to claim tax deductions in Hong Kong in respect of payments for services rendered to it by a qualifying aircraft leasing manager. Furthermore, granting the concessionary tax rate to the qualifying aircraft leasing manager in the circumstances would not create any perceived tax leakage. This is because the concessionary rate under the proposed dedicated tax regime would apply to both the payer and the recipient of such payments, i.e., there would be no asymmetrical tax treatment in Hong Kong as far as the payer and recipient were concerned. Other restrictive or anti-avoidance provisions Relevant provisions of the Bill which will deny a qualifying aircraft lessor the concessionary tax treatment under the proposed regime include the following conditions: i. the lessor has not incurred capital expenditure on the provision of the aircraft concerned; i iv. a connected person of the lessor have been granted tax depreciation allowances in Hong Kong in respect of the aircraft concerned; capital allowances are granted to a connected person of the lessor, whether in Hong Kong or in a territory outside Hong Kong for the year of assessment in question in respect of the capital expenditure on the provision of the aircraft concerned; or an aircraft which is leased by the lessor to a non- Hong Kong aircraft operator is in turn sub-leased directly or indirectly to an aircraft operator who is chargeable to tax in Hong Kong, where the Commissioner considers that the main purpose, or one of the main purposes, of the arrangement is for the avoidance of tax in Hong Kong. Aircraft held for three years and above are to be treated as capital assets The Bill contains a provision specifying that an aircraft owned by a qualifying aircraft lessor is to be treated as a capital asset of the lessor, for the purpose of profits tax in Hong Kong, if the lessor (i) has used the aircraft for carrying out a qualifying aircraft leasing activity for a continuous period of not less than three years immediately before the lessor disposes of the aircraft; and (ii) the half-rate concessionary treatment applies in respect of the leasing of the aircraft for all relevant years of assessment. Therefore, given that Hong Kong does not tax capital gains, a qualifying aircraft lessor satisfying the above conditions would not be liable to Hong Kong profits tax in respect of gains derived from the disposal of an aircraft. It appears that the above only serves as a safe harbor rule for capital gains claims. Depending on the facts and merits of a case, lessors who do not satisfy the safe harbor rule may still be able to claim the relevant gains as being capital in nature based on the general rules. New deeming provision on certain aircraft business profits Apparently, for the avoidance of doubt, the Bill proposes to add a new deeming section in the form of 15(1)(n) to the Inland Revenue Ordinance (IRO). Under this deeming provision, gains or profits (other than those arising from the sale of capital assets) received by or accrued to a corporation from its aircraft leasing business or aircraft leasing management business in Hong Kong, would be deemed profits chargeable to tax in Hong Kong, notwithstanding that the aircraft concerned is used outside Hong Kong. It appears that even without the proposed deeming provision, such profits would nonetheless continue to be Hong Kong sourced profits based on the operations test. Effective dates The proposed concessionary tax treatment for qualifying profits of a qualifying aircraft lessor and a qualifying aircraft leasing manager will apply to sums payable, received or accrued on or after 1 April The proposed deeming provision for the relevant gains or profits of an aircraft leasing business and aircraft leasing management business in Hong Kong will only apply to sums received or accrued on or after the date on which the Bill is enacted into law. 3

4 Commentary The requirement under the proposed dedicated tax regime that a lessor must lease their aircraft to a non- Hong Kong aircraft operator if the lessor is to qualify as a qualifying aircraft lessor appears to be restrictive. For the purpose of this requirement, a non-hong Kong aircraft operator is defined as an aircraft operator who is not chargeable to profits tax in Hong Kong. As such, a lessor who wishes to fall within the proposed regime will have to ensure that a lessee, normally a foreign airline enterprise, has no aircraft flying to Hong Kong to uplift passengers and goods etc. This restriction would apply not only to aircraft leased from the lessor, but to other aircraft utilized by the enterprise. This is the case because, except where relief under a treaty or an air services income agreement applies, such a foreign airline enterprise would probably be chargeable to profits tax in Hong Kong as a non-resident aircraft operator under section 23D of the IRO, whenever any one of its fleet of aircraft flies to Hong Kong. Generally, under the relevant provisions of a comprehensive avoidance of double taxation agreement (CDTA) or an air services income agreement (ASA) entered into between Hong Kong and a foreign jurisdiction, international traffic income of a resident of the jurisdiction concerned derived from Hong Kong would be exempted from taxation in Hong Kong. As such, lessors may have to further check whether their lessees are resident of a jurisdiction that has entered into a CDTA or an ASA with Hong Kong and the terms of the relevant provisions of the CDTA or ASA concerned. Nonetheless, it is likely that there will be some major jurisdictions that have not yet concluded a CDTA or an ASA with Hong Kong. In this regard, there are views suggesting that a lessor s eligibility for the concessionary tax treatment under the proposed regime need not necessarily be linked with the lessee being a person not chargeable to tax in Hong Kong (and therefore claiming no tax deduction in Hong Kong for the payment involved). Proponents of such views consider that any perceived revenue leakage or tax foregone could simply be regarded as a cost of implementing the tax incentives offered under the proposed regime. We hope the Bill could be suitably amended so as to relax the above restriction. Clients who have any views or comments on the Bill can contact their tax professionals so that we can convey their thoughts to the Government in an appropriate manner. Appendix Aircraft leasing management activity in relation to a corporation, means any of the following activities: a) managing another corporation that is a relevant qualifying aircraft lessor; b) establishment or administration of a special purpose entity for the purpose of owning an aircraft by that entity; c) providing finance in obtaining the ownership of an aircraft by a special purpose entity wholly or partly owned by the corporation or its associated corporation; d) providing a guarantee in respect of a financial or performance obligation as regards the aircraft leasing business of a special purpose entity wholly or partly owned by the corporation or its associated corporation, or granting security in respect of that business; e) managing leases; f) arranging for the procurement or leasing of aircraft; g) arranging for the operation, maintenance, repair, insurance, storage, scrapping or modification of aircraft; h) arranging for the evaluation, appraisal, provision or inspection of aircraft, airline facilities or maintenance facilities for aircraft; i) arranging for the assessment of the aviation and aircraft market conditions; j) marketing of leases that are operating leases; k) providing finance in obtaining the ownership of an aircraft by an airline enterprise from another corporation that is a relevant qualifying aircraft lessor; l) providing a residual value guarantee or contingent purchase arrangement; m) providing services in relation to an aircraft leasing activity for or to another corporation that is a relevant qualifying aircraft lessor. 4

5 EY Contacts Financial Services Hong Kong office Ian McNeill Managing, Tax, Asia-Pacific Principal tax contact, Ernst & Young Tax Services Limited Florence Chan Business Tax Services Paul Ho Sunny Liu Executive Director International Tax Services James Badenach Jacqueline Bennett John Praides Adam Williams Transfer Pricing Services Justin Kyte Transaction tax Rohit Narula Indirect tax Liza Drew EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Services Limited. All Rights Reserved. APAC No ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/china Follow us on WeChat Scan the QR code and stay up to date with the latest EY news.