Asia Pacific is gaining prominence in global aviation. Here’s what three major hubs – Hong Kong, Labuan and Singapore can offer to lessors.
Amid the gloomy economic outlook on the collapse of oil prices, the global aviation industry is bucking the trend. Over the next two decades, world passenger traffic is expected to grow 4.8% annually. Boeing is forecasting more than 39,600 new aircraft valued at US$5.9trillion will be required to meet growing demand. Airbus is also forecasting the growth in passenger traffic to be at an average annual rate of 4.5%, with passengers to more than double from today’s 2.9 billion to 6.7 billion in 2032.
Total air traffic for the Asia Pacific region is predicted to grow at an average of 6%. By 2035, passenger traffic throughout Asia will constitute 48.7% of global passenger air traffic, and an estimated 15,130 aircrafts valued at US$2.35 trillion will be needed to meet this demand. As a result, the number of aircraft in Asia will triple from 6,350 in 2015 to 16,970 by 2035. This represents approximately 38% of all new aircrafts being delivered to airlines that will be based in the region. By 2035, Asia will lead the world in air traffic overtaking Europe and North America.
In order to meet this rapidly growing demand for aircraft, there will be a significant need for aircraft leasing, financing and investment. Among the various types of aircraft financing, lease financing has grown substantially over the years. Currently approximately 35% of the global air fleet are financed with leases, compared to less than 1% 40 years ago.
Such an increase in aircraft demand and reliance on lease financing has presented an attractive opportunity for many aircraft lessors to consider using aerospace and leasing hubs in Asia Pacific.
Let’s take a look at the three hubs of Hong Kong, Singapore and Labuan.
Hong Kong holds the prominent position of international financial, trading and transportation centre, with a well-developed legal system. With its unique relationship with China, Hong Kong is well positioned for aircraft leasing companies to set up operations.
Currently a Hong Kong-based aircraft lessor is generally taxed on any lease rentals derived from the lease of aircraft entered into. The lessor is not entitled to claim tax depreciation on the cost of the aircraft, if it is leased to non-Hong Kong-based airlines. Therefore the Hong Kong lessor is taxed on its gross rentals rather than profits arising from the leasing transaction at a rate of 16.5%, which is deemed to be unattractive.
However, Circular No. 108 (Opinions on Accelerating the Development of the Aircraft Leasing Industry issued by the State Council of the People’s Republic of China in 2013) provides specific policy measures to promote the development of the Chinese aircraft market. It is expected that the government will revise the tax rules and create conditions more conducive to the development of aircraft leasing, financing and investment businesses in Hong Kong.
Singapore has grown as a global transportation centre and a leading international maritime centre, largely due to the general features of the tax system, extensive double tax treaties with more than 75 countries, as well as the targeted tax incentives such as the Aircraft leasing Scheme (ALS).
Under the ALS incentive, an approved aircraft leasing company may be granted a concessionary tax rate of 5% or 10% on qualifying income (headline rate is 17%) and an automatic withholding tax exemption for interest and qualifying payment on loans obtained before March 31, 2017 to finance the purchase of aircraft or aircraft engine. Furthermore, depreciation of aircraft can be made over any number of years from of 5 to 20 years.
However, as the ALS is a concessionary scheme up to 31 March 2017, it will be interesting to see whether the scheme will be extended or further enhancement will be made.
Labuan, a mid-shore jurisdiction in Malaysia that was established as an international business and financial centre in 1990, has gained popularity as a leasing jurisdiction for both maritime and aviation sectors.
Labuan offers a tax rate of 3% or a flat rate of RM$20,000 (approximately US$5,000) on the leasing company’s net audited profit. The jurisdiction is also riding on Malaysia’s double tax agreements (DTA) with 73 countries, except for certain countries which have specifically excluded Labuan from the Malaysia DTA.
Labuan requires all leasing companies to be licensed with Labuan Financial Service Authority (FSA).
To capture this lucrative aviation leasing business, each jurisdiction has been keen to make reforms and changes in taxation, and create conducive environments to attract global lessors to their shores to set up operations. Stay tuned for developments in the near future and to see how the competition will pan out.
Need more information?
TMF Group has extensive experience in the provision of corporate services to SPVs used for the structuring of lease-in, lease-out (LILO) aviation transactions, securitisations and other forms of asset finance. We manage hundreds of aircraft leases in SPVs around the world, working with a wide range of aircraft lessors, including both new entrants and established players.
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