東京からGIFTシティへ：JOLCO、インドに行き着く

In the dynamic world of aviation leasing, airlines constantly seek innovative structures to facilitate fleet expansion and optimize capital efficiency while minimizing risk. This characteristic is ever more pertinent in the Indian context with the massive expansion of the aircraft order book. Japan Operating Leases (“JOL”) and their variant with a Call Option (“JOLCO”) have long been celebrated for blending Japanese equity investment with flexible lease terms: under a JOL, a Japanese investor takes an equity stake in an aircraft-owning special purpose vehicle (“SPV”), which then leases the aircraft to an airline; a JOLCO adds a ‘call’ feature allowing the lessee to purchase the aircraft at the end of the lease term.

JOLs and JOLCOs are renowned for the low lease rates they offer to lessees. The primary reason these structures can offer lower lease rentals than a standard operating lease is the tax treatment received by the Japanese investors and SPV in Japan. First, the SPV’s interest payments on the debt used to buy the aircraft are fully deductible against its taxable income, creating an interest‐deductibility shield. Second, Japan’s accelerated depreciation rules, allow the SPV to write off a larger portion of the aircraft’s cost in a more expedited manner. Together, these “tax shields” traditionally reduced the SPV’s after‐tax cost of capital.

Traditionally JOLs and JOLCOs between India and Japan have been limited, mainly due to withholding and other taxes imposed in light of the India – Japan Double Tax Avoidance Treaty. Interestingly however, the erstwhile Indian Airlines and Air India (when it was government owned) carried out Operating Leases with Call Option with Japanese Leveraged Lessors as part of their fleet financing strategy back in the mid-1990’s for about 12 Airbus A320 (e.g. VT-ESJ, VT-ESK, and VT-ESL) and some Boeing aircraft.

With the emergence of Gujarat International Finance Tec-City (“GIFT City”) which is India’s first International Financial Services Centre (“IFSC”), JOLCOs are now being looked at again. GIFT City is aimed at bringing transparent regulatory oversight, tax efficiencies, and streamlined documentation to cross-border aviation finance. The rule-making power for GIFT City resides with the International Financial Services Centres Authority (“IFSCA”), established under the International Financial Services Centres Authority Act, 2019. Leasing entities can be set up, inter-alia, as companies, LLPs or trusts. The leasing framework in GIFT City distinguishes between financial leasing companies and operating leasing companies. As per the Framework for Aircraft Lease in GIFT City the capital requirement for an operating lease company (classified as “non-core activity”) is USD 200,000 or its equivalent in freely convertible foreign currency, and for a finance lease company (classified as a “core activity”) a minimum fund of USD 3 million or its equivalent in freely convertible foreign currency. In addition to these, there are several other specific requirements that must be met to establish a company in GIFT City. However, and most importantly, GIFT City removes the requirement of having a favourable (inter-alia from a withholding tax perspective) double tax treaty between India and the country to which funds are being remitted to (in this case, let us assume remittances are being made to Japan).

By leveraging the tax incentives offered by both Japan and GIFT City, structuring a JOLCO transaction through GIFT City can open up a large pool of money available in Japan and at the same time be highly lucrative.

On a closer analysis, the structure would require two entities or special-purpose vehicles (SPVs): one SPV incorporated in Japan to own the aircraft, and another entity established within GIFT City (approved and doing business as an aircraft lessor). Japanese investors would inject equity into the Japanese SPV via a tokumei kumiai arrangement, enabling that SPV to acquire the aircraft. Under the JOLCO, the Japanese SPV would then lease the aircraft to the GIFT City entity, which in turn would sub-lease it to an AOC-holder airline.

Possible structure:

The key advantages of doing JOLCO via GIFT City include:

• Withholding-tax exemption: Interest payments from an IFSC unit to non-resident are completely tax-free in India under Section 80LA of the Income Tax Act and related IFSCA regulations. Unlike the standard 10 percent withholding under the India- Japan DTAA, lease rentals flow to the Japanese SPV in full, reducing the financing cost passed on to the airline.
• Reserve Bank of India-ECB relief: Since an IFSC unit operates outside India’s Domestic Tariff Area and under the IFSCA’s bespoke regulatory framework, JOLCO leases via GIFT City would not be treated as External Commercial Borrowings. That would mean that the ECB Policy / Framework and other regulatory requirements of the RBI would be inapplicable.
• Stamp-duty exemption: Instruments executed by or on behalf of or in favour of an IFSC unit including SPV-formation documents, lease agreements, aircraft acquisition agreements and security documentation are entirely exempt from state-imposed stamp duty and registration fees under Gujarat’s SEZ legislation for a period of 10 years from the year 2020. This exemption eliminates an additional layer of upfront transaction costs, thereby further enhancing the cost-effectiveness of JOLCO transactions structured through GIFT City.

Although JOLCO structures through GIFT City offer compelling benefits, industry experts have identified a few drawbacks. Chief among the considerations is the measured pace of India’s judicial system: ongoing court backlogs and a multi-tiered appeals process can contribute to delays in dispute resolution, which may, at times, affect the timely enforceability of lease covenants and security interests. Additionally, the volume and dynamic nature of regulatory requirements including periodic corporate filings, foreign-exchange clearances, and sector-specific approvals under the IFSCA may sometimes lengthen transaction timelines, increase legal and administrative costs and require specialized advisory support. Collectively, these jurisdictional complexities may introduce hesitation for prospective investors or airlines considering onshoring their JOLCO transactions through GIFT City. It must however be noted that the IFSCA has been proactive in listening to the demands of the industry and acting on the same to rectify any roadblocks.

In conclusion, while the JOLCO model via GIFT City promises compelling tax efficiencies, withholding-tax relief, and stamp-duty exemptions, certain structural ambiguities persist. The most notable question is the establishment of the GIFT City entity: Will the GIFT City entity be set up by the Japanese investors themselves, or by the Indian counter party? (for example, InterGlobe Aviation Financial Services, IndiGo’s GIFT City unit and AI Fleet Services IFSC Ltd, Air India’s GIFT City unit). Ultimately, while it is clear that the balance of advantages including reduced lease rates and significant tax shields tend to favour the airline lessee, it is important to note that the lessor / financier also gains noteworthy benefits from the arrangement.