A proposed tax reform that would go into effect in April 2020 will bring changes for companies involved in Japanese-sourced aircraft lease transactions, known as JOL and JOLCO transactions, reports aviation industry news source Ishka Global.

The reforms will change the definition of non-deductible interest, expanding it to include interest expenses on third-party loans (e.g., debt provided by a Japanese bank), and it will reduce the cap on deductible interest paid to offshore entities from 50 percent to 20 percent. Overall, these combined changes are likely to reduce the amount of deductible interest expenses in a JOL or JOLCO transaction, meaning an increased tax bill for the lessor.

Pillsbury partner Debra Erni tells Ishka that offshore lenders are likely to be most impacted by the increased tax costs since the Japanese government introduced an exception for domestic banks that counts the costs of debt increases as a tax-deductible expense if the bank making the loan has headquarters or a branch office in Japan.

This exception, however, will not help foreign banks without a Japanese office, which Erni says has led to “some quite polarized reactions” to the measure. She tells Ishka that there is strong demand from Japanese investors for JOL and JOLCO loans and that “the victims of the new rules will ultimately be the major foreign banks without Japanese offices.”

Read Ishka’s full coverage of the tax reform measure here (subscription required).