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Hong Kong Issues Departmental Interpretation and Practice Notes on Tax Concession for Aircraft Leasing

The Hong Kong Inland Revenue Department has Departmental Interpretation and Practice Notes (DIPN) No. 54 on taxation of aircraft leasing activities. DIPN No. 54 covers the tax concession for qualifying aircraft lessors introduced by the 2017 Amendment (No. 3) Ordinance, which includes that a qualifying aircraft lessor is entitled to have its qualifying profits from an aircraft leasing business charged at one-half of the corporate profits tax rate for a year of assessment if an irrevocable election is made and in the year of assessment:

  • The central management and control of the corporation is exercised in Hong Kong (the central management and control requirement);
  • The activities that produce its qualifying profits in that year are carried out in Hong Kong by the corporation; or arranged by the corporation to be carried out in Hong Kong (the substantial activity requirement); and
  • Those activities are not carried out by a permanent establishment outside Hong Kong (the attribution to Hong Kong requirement).

A corporation is a qualifying aircraft lessor for a year of assessment if, in the basis period for that year of assessment:

  • It is not an aircraft operator;
  • It has carried out in Hong Kong one or more qualifying aircraft leasing activities; and
  • It has not carried out in Hong Kong any activity other than a qualifying aircraft leasing activity.  

When a qualifying aircraft lessor makes the election for the profits tax rate concession, the depreciation allowance will be denied in respect of the capital expenditure incurred on the provision of the aircraft concerned for the year in which the half rate concession applies. To compensate for the loss of depreciation allowance, a 20% tax base concession is provided, which includes that the net lease payments to be included in the assessable profits is equal to 20% of the tax base (i.e., gross lease payments less deductible expenses, excluding tax depreciation).

Click the following link for DIPN No. 54 for additional information, including several examples.

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