The Hong Kong Financial Services Development Council (FSDC) released a report calling for the government to expand its tax treaty network, particularly with countries that have growing aviation industries.

The FSDC report on aircraft leasing and financing, published July 7, made recommendations as to how Hong Kong can develop into a competitive international aircraft leasing and financing hub. It said that although the aircraft industry has been constrained in the past by certain tax issues, the recent passage of the Inland Revenue (Amendment) (No 2) Bill 2017 will allow the government to increase Hong Kong’s market share of global aircraft leasing.

This legislation set the profits tax rate for qualifying aircraft lessors and aircraft leasing managers at 8.25%, half the standard profits tax rate. It also deemed the taxable amount of profits from the leasing of aircraft to non-Hong Kong aircraft operators as 20% of the gross lease payments less deductible expenses.

The FSDC cited analysis from PwC that the new tax regime would result in a reduced effective tax rate of about three to six percent for aircraft transactions in Hong Kong, which is lower than in key competitors such as Ireland and Singapore. While this was “highly visionary and pragmatic” according to the FSDC, it highlighted that Hong Kong’s current tax treaty network is relatively limited. This means that Hong Kong businesses are more often subject to foreign withholding taxes on lease income paid by foreign airlines.

The FSDC said that to address this issue, Hong Kong should speed up double tax treaty negotiations and explore whether it could prioritize those with jurisdictions with high aircraft growth rates. It cited the United States and countries in Asia and South America as examples to prioritize.