A new Chinese tax on aircraft operating leases is emerging as a potential threat to leasing companies hoping to profit from expectations that China's airline industry will grow at a faster-than-average rate over the next 20 years.
The new withholding tax was quietly introduced by the Chinese Government, effective from 1 September, and it imposes a tax of between 6% and 10% on all new operating lease payments.
The rate varies depending on China's tax treaty with a country in which a lessor is based and in the case of the USA it stands at 7%. "This withholding tax will have a significant adverse impact on operating leases in China," one Chinese airline source says.
"If the tax stays I think you will not see so many operating leases from the airlines. They will prefer to buy the aircraft and have finance leases."
Airlines in the country are known to be lobbying for the new tax to be withdrawn, among them Shanghai-based China Eastern Airlines, which is listed on the Hong Kong, New York and Shanghai stock exchanges.
Industry sources say the carrier has "suspended" a plan to lease four Airbus A340-600s from International Lease Finance (ILFC) as a result of the tax, although the airline intends to revive it if possible.
The carrier and ILFC are both working their contacts in the Chinese Government to have the tax revoked, although China Eastern has already expanded a letter of intent with Airbus covering direct purchases of the type in the event that lobbying efforts fail.
It had originally planned to purchase four A340-500s directly from Airbus and take options on three larger -600s alongside the ILFC lease, but is now planning to purchase five A340s directly from Airbus and take options on another three, the sources say.
While the new withholding tax also officially applies to finance leases, it is only on interest payments and not on the principal.
The new tax also only applies to new lease agreements, while old operating lease agreements already approved by the Civil Aviation Administration of China - regardless of whether aircraft have been delivered - will be "grandfathered".
Airbus and Boeing both predict that China's air traffic will grow much faster than the world average of 5% over the next 20 years.
Airbus forecasts 7.5% growth in terms of revenue passenger kilometres in its latest market forecast, adding that China's carriers will need close to 1,600 aircraft through to 2018 in the category above 85 seats.
Source: Airline Business
