Seychelles/China Double Taxation Avoidance (DTA) Agreement
Originally signed in 1999 and since extended, the Seychelles China agreement for the avoidance of double taxation on residents of each respective country has stood the test of time and is becoming an incredibly popular vehicle for inward investment into China. Coupled with the tax resident Seychelles CSL which pays only 1.5% income tax on its worldwide income (which is usually reduced to 0% after allowances for foreign tax paid) the Seychelles China DTA offers one of the best inward investment options to China in the world.
Seychelles is also beginning to receive a great deal of interest from China residents looking to invest abroad. There are significant advantages to routing investments through Seychelles from China and many opportunities presented by the new Seychelles Hedge Funds and Mutual Funds Act 2008.
Capital Gains Withholding Tax
The Seychelles-China DTA specifies 0% withholding at source for alienation of shares representing participation of less than 25% and other than those associated with immovable property and assets which hold primarily immovable property in the portfolio (especially important with the new Seychelles Mutual and Hedge Fund Act 2008). The recent China Enterprise Income Tax Law, which went into effect January 1, 2008, no longer prescribes for 0% withholding on these capital gains for residents of non-treaty countries (BVI, etc.). All IBCs and other such non-resident companies holding assets in the PRC from which they will derive profits from capital gains are now taxed at the normal rates of 20% (but most likely qualify for 10% withholding).
Dividend Withholding Tax
The Seychelles China DTA prescribes for dividend withholding of only 5% at source. While this same rate is also specified in the treaties with Singapore and Hong Kong, the rate increases to 10% if the company in one of those jurisdictions holds 25% or more in the China company.
Interest Withholding Tax
Seychelles companies are subjected to a low 10% withholding rate at source in China. While Hong Kong offers a lower treaty rate of 7%, other costs as described in the country comparisons below may still make Seychelles CSL the better choice for those looking to establish a holding company through which to provide capital to a China PRC company.
Royalties Withholding Tax
Seychelles companies are subjected to a low 10% withholding rate on royalties. Hong Kong offers lower treaty rates of 7% on royalties and in special circumstances, Singapore can offer as low as 6% (down from the normal 10%); however, other costs and the total scope of operations may still make the Seychelles CSL a better choice for those looking to hold IP rights.
Mutual and Hedge Funds (Best in the world)
The new Seychelles Mutual and Hedge Fund Act 2008 provides the framework for a variety of fund formations and efficient approval. Combined with the generous provisions allowing for foreign administration, foreign auditors, etc.;the superior Seychelles-China tax treaty; available fund vehicles such as the low 1.5% tax CSL, IBC, LP, Unit Trust and PCC; and Seychelles possibly presents the best overall package in the world for hedge funds and mutual funds focused on China.
Jurisdiction Comparisons
Hong Kong
Hong Kong, as a Special Administrative Region of the People's Republic of China, has long been a popular staging ground for inward investment into China. While this will continue, there are very important nuances to Hong Kong which must be considered.
Dividends - While the headline dividend withholding rate is also 5%, this increases to 10% if the Hong Kong company holds less than 25% of the PRC company. This is especially significant where a private equity fund or similar investment structure is established in Hong Kong to fund multiple companies at rates less than 25% in each.
Capital Gains - 0% as with Seychelles; like Seychelles, it is specified that taxes will be due on capital gains from any sales if the Hong Kong company has held 25% or more of the shares in the PRC either directly or indirectly at any time during the previous 12 months.
Interest - treaty rate of 7% is the best in the world
Royalties - treaty rate of 7% is the best in the world; Singapore can be 6% in certain cases
Income taxes - in order to achieve the lower prescribed treaty rates, operations must be significantly outside of China. This measure is designed to eliminate the practice of "round tripping" where Chinese companies establish a Hong Kong company but effectively still run everything from China. The Hong Kong Inland Revenue Department is making a strong push to collect Hong Kong income taxes on these businesses and other businesses operating from Hong Kong, accessing treaties, and attempting to report that "management and control" are outside of Hong Kong. The current statutory corporate tax rate is 16.5% in Hong Kong vs. 1.5% for the CSL company in Seychelles.
Even in cases where management and control can be shown to be outside of Hong Kong (and obviously not in China), this could still result in a worse overall tax liability for the parent company holding the entire structure.
Example: A company establishes a Hong Kong company to hold shares in one or more PRC companies through which they intend to collect dividends and pass along to the parent company. One of two scenarios must occur:
- Management and control in Hong Hong - Effective operations and control are in the Hong Kong company allowing the profits to accumulate in the Hong Kong company free from domestic taxes until repatriation to the parent company. In this case, the Hong Kong Inland Revenue Department may have a case that taxes of 16.5% are due on at least part of the income from operations of the Hong Kong company.
- Management and control outside of Hong Kong - The Hong Kong company is just an intermediary holding company. Dividends are passed through the Hong Kong company to the parent company meaning that effective management and control is actually being conducted by this parent company. Dividends may be taxed in the the country where management and control of the Hong Kong company is being provided for the current year.
Singapore
The Singapore-China DTA is also solid but not as good as Seychelles regarding income taxes and dividends.
Dividends - Singapore has the same treaty of provisions as Hong Kong which is inferior to Seychelles.
Capital gains - 0% as with Seychelles; like Seychelles, it is specified that taxes will be due on capital gains from any sales if the Singapore company has held 25% or more of the shares in the PRC either directly or indirectly at any time during the past 12 months.
Interest - same as Seychelles taxed at 10% with special provisions for banks
Royalties - same as Seychelles taxed at 10% with some special provisions which may reduce it to 6% for some.
Income taxes - statutory rate of 18% for the Singapore company vs. 1.5% for Seychelles.
Mauritius
Dividends - same treaty provisions as Seychelles
Capital Gains - 0% as with Seychelles; like Seychelles, it is specified that taxes will be due on capital gains from any sales if the Mauritius company has held 25% or more of the shares in the PRC either directly or indirectly at any time during the past 12 months.
Interest - same treaty provisions as Seychelles
Royalties - same treaty provisions as Seychelles
Income Tax - statutory rate of 15% (3% after 80% automatic deduction for deemed foreign tax paid). This is still higher than the 1.5% for the Seychelles CSL.
Mutual and Hedge Funds - Mauritius does not have separate mutual and hedge fund legislation. Instead it is derived from the Securities Act 2005 where "Collective Investment Schemes" are outlined. While it is possible to have one or more components (administration, NAV, etc.) of a collective investment scheme outside of Mauritius, it is generally understood that this is heavily preferred to be in Mauritius.
Seychelles also offers many more vehicles for hedge funds or mutual funds. In Mauritius, all funds must be registered as GBC1 companies (similar to the CSL in Seychelles). Seychelles offers a unit trust, limited partnership, IBC and Protected Cell Company (PCC) in addition as fund vehicles.
Conclusion: Mauritius and Seychelles offer similar options; however, the Seychelles CSL enjoys slightly better tax treatment than the Mauritius GBC1 and the mutual/hedge fund legislation is more modern and flexible in Seychelles. Formation and ongoing administration of GBCL1 companies and mutual/hedge funds are generally more expensive in Mauritius than for the CSL and mutual/hedge funds in Seychelles.