Hong Kong to become a centre for aerospace leasing and finance

Dino D'Amore
By Dino D'Amore July 28, 2014 11:51

Hong Kong to become a centre for aerospace leasing and finance

Whilst all eyes were on the Farnborough Airshow culminating with the horrific Malaysian Airlines tragedy, a little known task force in Hong Kong, under the Economic Development Commission’s Transport Working Group, has been quietly chiseling out an exacting blueprint for Hong Kong future competitiveness in the global aerospace financing sector.

The Commission was formed early January 2013 and chaired by Hong Kong’s Chief Executive (CE), Mr. CY Leung.  The CE emphasised its importance by announce the Commission’s formation in his inaugural Policy Address.

“The establishment of the Commission and its Working Groups reflects the Administration’s determination to continue to make the best use of Hong Kong’s existing edges and also explore new advantages and develop new strengths. We are looking forward to the wise counsel of the Commission for drawing up an overall industry policy with a view to creating jobs and improving people’s livelihoods.”

Essentially, the Commission provides visionary direction and advice to the Government on the overall strategy and policy to broaden Hong Kong’s economic base … enhance Hong Kong’s economic growth and development; and, in particular, to explore and identify growth sectors or clusters of sectors which present opportunities for Hong Kong’s further economic growth, and recommend possible policy and other support for these industries.

Dewey Yee, a member of the Commission’s Working Group on Transportation and heads the Aerospace Finance Focus Group, is diligently developing very specific, in-depth and wide reaching policy measures that are purposely aimed at building Hong Kong into a global aerospace finance hub, as a means to keep its competitive edge as a world financial centre.

Dewey is no stranger to aircraft leasing and aviation finance.  Having started his career with Guinness Peat Aviation (GPA) in the mid-1980s, he was personally hired by the legendary Tony Ryan and tasked with opening the China aircraft leasing market.

It was very early days indeed, especially when the carriers operated exclusively under the domain of the CAAC (Civil Aviation Administration of China) and the skies were full of deteriorating Russian Antonov, Tupolev and Ilyushin planes!  It took him three arduous years before he signed the first China deal and it was blue skies since.

Fast forward almost thirty years and China is the fastest growing aerospace market in the world, across all sectors from private planes to advanced drones to manufacturing domestic versions of regional jets and large aircraft.

Dewey has a simple proposition: “Hong Kong’s integrated financial infrastructure is widely accepted by the global international financial and investment community.  Hong Kong is already the gateway to China and to preserve and further boost its rank and achieve greater international acknowledgment and acceptability, the creation of a novel Premier Aerospace Finance Centre is the vital way forward.”

His appointment was unexpected.  It was a late evening call that he thought was a prank, the night before the CE’s policy speech.  For Dewey, this is a unique honour and distinct privilege to play a small role for the future of Hong Kong.  He gets no pay and little recognition, but devours the responsibility to influence a specific industrial sector that creates immediate benefits both from increasing GDP and employment for Hong Kong.  “The overall impact of the economic multiplier effect is significant.  More importantly, it creates new revenue streams for the government’s tax coffers” says Dewey.

At the Commission he is relentless.  He has made it his personal mission to design and implement the necessary government policies and measures enabling Hong Kong to capitalise and capture a significant global share of the aerospace financing, leasing and capital market investments.

More importantly he now has the backing of CY Leung to make it happen.

For now the specifics of the changes proposed by Dewey and his small team are understandably proprietary but they are focused on making Hong Kong an attractive base for aircraft leasing companies. In the same vein as Ireland, Singapore and Malta, the basis for attracting aircraft lessors is the tax environment. Hong Kong currently has a corporate tax rate of 16.5% but Dewey states that tax enhancements are currently “under advisement”. Ireland’s headline corporation tax rate of 12.5% on trading profits with a deduction for expenses attracts lessors in droves as does its eight-year tax depreciation regime. Although Singapore has a headline corporate tax rate of 17%, under its Aircraft Leasing Scheme incentive, the applicable rate on qualifying income can drop to 10% or even 5% (For more detail on aircraft leasing in Ireland, Singapore and Malta, please review “No friends like old friends” in Airline Economics March/April 2013, Issue 13, pp 42-47). Although it has not been revealed how Hong Kong tax regime will change, it seems logical for any amendments to the existing tax regime to follow the same path as Singapore for the treatment of corporation tax for aircraft leasing companies.

Withholding Tax is also a concern for lessors, which relates directly to particular countries comprehensive Double Taxation Agreements (DTA) – a bilateral agreement between two countries to avoid double taxation that may arise as a result of the application of their respective domestic tax laws.  Ireland has over 70 treaties, Singapore over 70 and Hong Kong over 30.  An example of the importance and its relevance is straightforward.  Say an aircraft is leased from Ireland to China, the withholding tax DTA rate is 6%.  However, if the same aircraft is leased from Hong Kong to China, the DTA rate is 7%.  This represents a 1% leakage, a significant amount, in real dollars and not attractive for lessors seeking to maximise profitability. This is why the Hong Kong Development Commission is also working on reducing this figure as far as possible.

An added bonus is that Hong Kong does not impose VAT, nor sales tax, or capital gains tax. The maximum salary tax is 20% and the maximum profit tax is 16.5%.

Currently however even though China has adopted the Cape Town Convention on International Interests in Mobile Equipment (Cape Town Convention), Hong Kong has not.  “Part of our work will be to push for ratification [of Cape Town],” says Dewey.

Although aircraft lessors stand to benefit the most from locating their business in Hong Kong under the proposed new tax regime, Dewey’s aim is not simply to transform Hong Kong into an aircraft leasing centre. “The overall intent is to create an aerospace financial hub,” he says. “This includes leasing, which is the biggest draw for funding since the aircraft are so expensive, but because Hong Kong is a global financial centre, aerospace firms based here will be able to utilise other aspects of the industry, the capital markets and private equity markets for example, which can immediately feed into this system. This is the beauty of setting Hong Kong up as an aerospace leasing and financing centre. This is what I have been promoting all along.”

Hong Kong is an established and powerful global financial centre that rivals New York and London for preeminence. In March 2014, Hong Kong ranked third behind New York and London in the most recent Global Financial Centres Index – the twice-yearly ranking of financial centres by z/ Z/Yen Group. Although Singapore was ranked fourth and has an existing tax-friendly environment for aircraft leasing, Dewey argues that it’s financial sector doesn’t have the capacity or size that Hong Kong has and its capital markets are much quieter. Even in Ireland – arguably the world centre for aircraft leasing – lessors continue to do most of their financing in London.

Another significant advantage Hong Kong has is certainty under a sound “Rule of Law” legal system, economic freedom, a mature development financial market and infrastructure, as well as its wide international connections, covering Europe and America in addition to Asia. Additionally, Hong Kong is predominately English speaking and now, being part of China, it can act as a doorway for aerospace companies into the fastest growing aerospace market in the world.

Dewey opines that many industry players would “prefer to live in Hong Kong than Singapore or Ireland” because of its proximity to China, which is one of the largest aerospace markets in the world.

By focusing on the broader needs of the entire aerospace community, Dewey admits that though the aerospace lessors will benefit initially, much of his work will focus on how far reaching the changes will need to be to accommodate the entire range of companies in the aerospace industry. He wants to make it easier for companies based in Hong Kong to invest in leasing and other aerospace companies. Such an example includes ensuring aerospace companies that wish to list on the Hong Kong Stock Exchange are able to comply with the regulations and demands of the Exchange’s listing committee. Dewey intends to educate bodies like the exchange and government departments in how the aircraft leasing business operates.

“Part of what we are going to do is heavily educate people and making them understand the special structures and consequences of leasing companies,” says Dewey. “The government needs to understand the business completely to enable them to know how to accommodate the different parts of the industry.”

Making legislative changes in such a secure legal environment like Hong Kong takes time but Dewey and his small team have made a significant headway in a very short amount of time.

“We are focusing on creating a conducive tax environment and we have some clever plans afoot to address the corporate tax rate and the double tax treaties, which are working through the bureaucracy,” says Dewey. “Following the approval of the Chief Executive of our proposals, we are currently re-presenting our findings and the paper to the various government departments, bringing everyone into the loop to allow an open and clear vetting process. This is almost like starting over but it will not be a problem, because we have anticipated all of the questions or have heard them before so it will be a lot easier to get people on side…it’s all about teamwork and giving everyone the chance to play a part in the development of Hong Kong’s global role in aerospace finance.”

Dewey has been pushing for a timeframe for changes to come in, this remains as yet undefined although he expects to complete the internal government briefing sessions soon and, once finished, “the government will come up with a major plan forward, with a bit of good fortune hopefully before the Chief Executive’s next policy speech in January 2015.”

Although his plans are being kept somewhat proprietary for now, the proposed changes will benefits all aerospace companies, and specifically aircraft and engine lessors. Dewey hopes to encourage a groundswell of support from the industry that will help to push the government harder to enact such changes. For now aircraft leasing companies have been reluctant to comment publically on the work being done in Hong Kong, mainly because the proposals are not yet concrete but also because they will not wish to risk harming relationships with government bodies in other leasing friendly environments, particularly the Singapore Economic Development Board, where many companies have a presence.

Airline Economics will continue to focus on the work being done by the Hong Kong Development Commission in the next issue of Airline Economics – to comment on these proposed changes please contact us or Dewey Yee in Hong Kong (dewey.yee@gmail.com).

Dino D'Amore
By Dino D'Amore July 28, 2014 11:51