Aviation

January 2017 NOTAM: HONG KONG AVIATION LEGAL DEVELOPMENTS IN FOCUS

Kung Hei Fat Choy and Gong Xi and take measures for the maintenance of the status of Hong Kong as a centre of international Fa Cai! and regional aviation. The government is already working with the Airport Authority Hong Kong As the festive time of celebration, reunions on the remaining parts of a midfield expansion and planning for the year ahead draws to project that will be completed in 2020, the a close, we wish you, your families, and development of the Airport North Commercial businesses a prosperous Year of the Fire or District (Skycity) and strengthening inter-modal Red Rooster. (passenger and freight) connections between the As we all return to work, its worth reflecting on Hong Kong International Airport and the Pearl what awaits us in 2017 from an aviation legal River Delta region. In addition construction of perspective. the three runway system commenced last year. These are very significant long term infrastructure Hong Kong is the only jurisdiction in the world projects which have been widely reported. There whose Constitution (called the Basic Law) are however other developments which have requires the government to provide conditions received little attention.

Proud Corporate Member of ASBAA www.asbaa.org Chief Executive This is regulation through the back welcome this development but hope door. While the HKCAD is empowered that there will be consultation on what Election to do this, the public at large have not is envisaged as the devil is in the been consulted or been made aware of detail. It does also surprise us that It remains to be seen what impact it. One consequence being that there other modes of transportation have the 2017 Hong Kong Chief Executive is likely to be a disconnect between not been considered. The HKSAR is a (CE) election will have on the present the requirements and the availability small territory and could benefit from a government’s intentions for aviation. of providers of family assistance single transport accident investigation The election is scheduled on 26 March services that carriers rely upon. That’s authority. for the 5th term of the CE, the highest a potential loss of business for Hong office of the HKSAR. Our hope is that Kong. there will be less filibustering in Legco Promotion of the as the endless obstruction or delaying The revision is unlikely to have a Aircraft Leasing Business of legislative action is not in Hong significant impact on base carriers who Kong’s interests. already operate on intercontinental in Hong Kong routes, however, the revision is already It is well known that Hong Kong is Revisions to HKCAD causing concern among the smaller currently not a competitive location (AOC) 360 to provide for AOC operators including business jet for the aircraft leasing business, even and rotor-wing operators. We say that though it hosts the largest and most compliance with family the HKCAD needs to consider the important annual Aviation Finance practicalities and expense of some of Conference outside Ireland. Out of the assistance following an the obligations. The operators will also top ten global aircraft lessors, ten have accident want to ensure that their insurance a business presence in Ireland, eight in arrangements protect them from some Singapore and only two in Hong Kong. There are very few countries that have of the potential exposures. in place formal regulations setting out The top ten global aircraft lessors requirements for emergency response The establishment are GE Capital Aviation Services and family assistance and the roles (GECAS), International Lease Finance and responsibilities for governments, of an Independent Air Corporation (ILFC), AerCap, CIT air operators, airport operators and Accident Investigation Group, SMBC Aviation Capital (formerly other parties. Those countries include RBS Aviation Capital), Babcock Australia, Brazil and the United States. Board & Brown, BOC Aviation, Aviation In 2006, mainland China implemented Capital Group, AWAS and Macquarie As many of our clients are aware from the Regulation on Emergency AirFinance. The eight top global our June 2013 briefing note (Its time Response and Family Assistance aircraft lessors that have presence in for change) we have been actively Related to Civil Aircraft Accident Singapore are GECAS, ILFC, AerCap, promoting the establishment of an (CCAR-399). CIT Group, SMBC Aviation Capital, independent accident investigation Babcock & Brown, BOC Aviation and authority for all transport accidents in The Hong Kong Civil Aviation Aviation Capital Group. Two aircraft Hong Kong, in large part because of Department has recently issued a lessors, namely GECAS and BOC our experience advising clients on air revised amendment to CAD360 which Aviation, have offices in Hong Kong. accident investigations in the territory. obliges Air Operator Certificate holders However their operations are currently to include a Family Assistance Plan In CY Leung’s Policy Address on 18 not based in Hong Kong. for aircraft accident victims and their January 2017, the Chief Executive families in their Emergency Response The Government has announced a announced a number of new initiatives Plan. In guidance to operators proposal to amend the Inland Revenue including the establishment of an the revision expressly refers to the Ordinance (Cap. 112) to create a air accident investigation authority requirements of ICAO Doc 9973 and dedicated tax regime for the offshore under the Transport and Housing Doc 9998 in respect to “assistance aircraft leasing business in Hong Kong Bureau, which will be independent to aircraft accident victims and their in which: from the Civil Aviation Department, families” but stops short of stating “ensuring impartiality in aircraft 1. The tax rate on the qualifying profits whether operators have to comply with accident investigation”. We very much of qualifying aircraft lessors and all the provisions in these documents.

02 Aviation qualifying aircraft leasing managers 1. Financing for over 3200 aircraft with on 8 February. A spokesman for the will be 50% of the profits tax rate for an asset value of about HK$707 Department of Justice said, “The corporations (half of the prevailing billion. introduction of the new legislation tax rate of 16.5%) will provide certainty on the legal 2. Direct employment of around 1640 implications of making an apology by 2. The taxable amount of rentals people and about HK$2 billion in a party to a dispute in Hong Kong. derived from leasing of an aircraft staff compensation. Furthermore, Hong Kong will become to a non-Hong Kong aircraft the first jurisdiction in Asia to have operator by a qualifying aircraft 3. Profits tax paid by aircraft leasing companies of about HK$1 billion apology legislation enacted, and this lessor will be equal to 20% of the will help to further enhance Hong tax base, namely gross rentals less in Year 20 and a total of more than HK$10 billion over a 20 year period. Kong’s status as a centre for dispute deductible expenses (excluding tax resolution, especially in the context of depreciation). Apologies and mediation.” It is said that that the dedicated regime The Draft Apology Bill will incorporate anti-abuse features so Admissions of Liability – as to maintain the integrity of the profits The Apology Bill/ Under the draft Bill, an apology tax framework of the IRO, including: is defined as “an expression of Ordinance the person’s regret, sympathy or 1. Ensuring that the half-rate benevolence in connection with the In aircraft or airport incidents where concession will apply to assessable matter, and includes, an expression a party is injured or feels mistreated, profits in respect of which the that the person is sorry about the often an apology or even the utterance corresponding payments made matter… the apology also includes of a simple “sorry” to the aggrieved are not fully tax deductible in Hong any part of the expression that is an party is all it takes to diffuse the Kong for preventing revenue loss. express or implied admission of the situation before it escalates into a fully person’s fault or liability in connection 2. Requiring qualifying aircraft lessors fledged legal case. and qualifying aircraft leasing with the matter; or a statement of fact managers to be standalone Notwithstanding this, airlines and in connection with the matter”. airports alike have often been advised corporate entities to prohibit At the time of writing the current against making apologies. The loss shifting - ensuring that they recommendations are that the Apology concern being that this could amount conduct business transactions Ordinance will apply to an apology to an admission of guilt or fault that with associated parties on an arm’s made on or after the commencement would prejudice one’s interests in length basis. of the Ordinance, regardless of whether subsequent legal proceedings. Further, the matter arose before or after that 3. Requiring their central management an insurance policy covering the date or the applicable proceedings and control as well as profit incident may also be rendered void by concerning the matter began before or generating activities to be located an apology because of clauses in the after that date. The apology legislation in Hong Kong so as to ensure that policy that prohibit the admission of should apply to civil and other forms they have commercial substance in fault by the insured. Hong Kong. of non-criminal proceedings including The above position may differ in the disciplinary proceedings. Additionally, and relying on analysis future with the enactment of the The effect of the legislation is that, conducted by the Focus Group on proposed Apology Ordinance in Hong in applicable proceedings in Hong Promoting Aerospace Financing in Kong. The aim of the legislation is to Kong, an apology made by a person Hong, the Housing and Transport promote and encourage the making in connection with a matter does Bureau informed the Legislative Council of apologies in order to facilitate the not constitute an express or implied in January that if Hong Kong is able to amicable settlement of disputes by admission of the person’s fault or develop a new tax regime for offshore clarifying the legal consequences of liability in connection with the matter aircraft leasing, Hong Kong could making an apology. gradually capture up to about 18% of and must not be taken into account in aircraft leasing business in the global On 25 January the government determining fault, liability or any other aircraft leasing market in 20 years’ time. announced that it will introduce the issue in connection with the matter to It is claimed this would mean: Apology Bill to the Legislative Council the prejudice of the person.

Aviation 03 However, the decision maker of open attitude in making apologies the above position changes and such the applicable proceedings has a when a dispute occurs. A proper and a remedy could be given at the time discretion to admit a statement of fact sincere apology could go a long way that an accident or injury occurs. This contained in the apology as evidence to ensuring a complainant feels that should steer the parties towards more in the proceedings if he/she is satisfied his/her grievances are acknowledged open communications early in the that it is just and equitable to do so. and in turn he/she may be much more day in place of threats of a lawsuit or open to settle the case at an early complaints to the media. A key point to note is that the stage before the parties get tied up in a legislation expressly provides that an costly and lengthy litigation. The intended Ordinance does not apology shall not affect any insurance have extra-territorial effect. So the risk coverage that is, or would be, available In fact, an apology is one of the most remains that if say an airline makes to the person making the apology. frequently sought remedies from airline an apology and there is litigation in passengers. Currently, such a remedy another territory then the apology may Implications may be granted during a mediation still be seen as an admission in another With the introduction of the proposed or in “without prejudice” negotiation. jurisdiction. In those circumstances Apology Ordinance, clients exposed However, by this stage, substantial there might still be an adverse affect on to claims and proceedings in Hong legal costs may have already been insurance. Kong may wish to adopt a more incurred. It should not be long when KEY CONTACTS For more information, please contact:

Peter Coles Gordon Gardiner Justin Sun Partner, Hong Kong Partner, Hong Kong Partner, Hong Kong T: +852 3983 7711 T: +852 3983 7710 T: +852 3983 7713 E: [email protected] E: [email protected] E: [email protected]

Harriet Fung Vivien Wong Associate, Hong Kong Associate, Hong Kong T: +852 3983 7788 T: +852 3983 7759 E: [email protected] E: [email protected] Lawyers for international commerce hfw.com

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