The popularity of the Seychelles IBC (tax exempt company incorporated under the International Business Companies Act 1994) and increased global profile of Seychelles as a serious offshore financial centre have paved the way for development into more value-added Seychelles financial services products, including Trusts, Limited Partnerships, Mutual Funds and the CSL (Company Special Licence).
The CSL is a Seychelles domestic company (incorporated under the Companies Act 1972), which is granted a special licence under the Companies (Special Licence) Act 2003. Unlike the IBC (which is a tax exempt entity and a non-resident for Seychelles tax purposes), the CSL is tax resident in the Seychelles, and may access Seychelles’ growing network of Double Taxation Avoidance Agreements. The CSL has substantial appeal (particularly to international groups), as a tax-efficient vehicle for permitted uses including, in particular, an investment holding company, to hold and license out intellectual property or as a services company (eg. management, consultancy, etc).
A CSL is liable to Seychelles business tax at the rate of 1.5% on its world-wide taxable income (which may be avoided in cases where the Company is accessing a Seychelles Double Taxation Avoidance Agreement – see below). A CSL is exempt from Seychelles withholding taxes on dividends, interest and royalties and from stamp duty on property transfers, share transfers and other business transactions.Tax changes in ChinaOngoing Chinese tax reforms are resulting in the phasing out of many tax concessions granted to foreign investors (such concessions included, for example, exemption from Chinese withholding taxes for Foreign Investment Enterprises). China’s recently enacted Enterprise Income Tax (‘EIT’) Law (effective from 1 January 2008) introduces a new uniform income tax regime which applies to both foreign and domestic enterprises (replacing the previous ‘dual’ regime by which Foreign Investment Enterprises (FIEs) and domestic enterprises were subject to two different sets of income tax laws). Under the EIT Law, withholding tax at the rate of 20% applies to China-sourced income derived by a non-resident enterprise without an establishment or place of business in China (although it is anticipated that many foreign investors will be eligible for a 10% Chinese withholding tax rate). While tax concessions granted to foreign business (FIEs) prior to April 2007 continue to apply for a limited period (5 years in most cases), new foreign businesses establishing in China will be subject to the rates under the EIT Law. In summary, foreign investors are now exposed to higher Chinese taxes than in past times. Additionally, China is becoming increasingly serious about tax collection (for example, Chinese tax collection was up by approximately 30% for year ended 2007). As part of China’s ongoing tax reforms and focus on increasing tax collection, there will be increased levying and enforcement of Chinese withholding taxes on outbound payments to non-residents.
Use of a Seychelles CSL, in conjunction with the Seychelles/China double taxation avoidance agreements (‘DTA’), provides significant scope to reduce Chinese withholding tax exposure. The Seychelles/China DTA caps Chinese withholding tax on dividends at 5% and 10% on interest and royalties, provided that the CSL has a permanent establishment and its effective management in Seychelles (and that the CSL is not tax resident in China). In contrast to the position under the Seychelles/China DTA, under the EIT Law Chinese companies are generally subject to 20% Chinese tax on payments to non-residents. It is anticipated that many foreign owned businesses will enjoy a concessionary 10% withholding tax rate, but which may be further reduced using a Double Taxation Avoidance Agreement. Another significant benefit under the Seychelles/China DTA is avoidance of Chinese tax on capital gains made by a CSL selling shares held by it in a Chinese Company if the CSL holds less than 25% of the issued shares in the Chinese Company and the assets of the Chinese Company do not principally consist of immovable property (real estate). This will be of particular relevance to China oriented mutual funds and private equity funds (ie. entities which intend to acquire small stakes in numerous Chinese companies). China has already indicated plans to enforce taxing of capital gains on Chinese shares disposals.A further attractive benefit under the Seychelles/China DTA is that no tax is payable in Seychelles (on Chinese-sourced income of the CSL) if Chinese withholding tax of at least 1.5% is paid on payments made by a Chinese company to a CSL. While a CSL is liable to Seychelles business tax at the rate of 1.5% on worldwide taxable income (gross income less allowable deductions), under the Seychelles/China DTA withholding tax paid in China can be credited and set-off against the 1.5% Seychelles business tax payable by the CSL to fully discharge all business tax liability in Seychelles (ie. no tax payable in Seychelles).
Comparison with the Hong Kong/China DTA
While the Hong Kong/China DTA caps Chinese withholding tax at 5% if the Hong Kong company owns 25% or more of a Chinese company, it only caps Chinese withholding tax at 10% if the Hong Kong company owns less than 25% of a Chinese company. In contrast, under the Seychelles/China DTA, irrespective of whether the CSL holds more or less than 25% shares in a Chinese company, dividends are subject to Chinese withholding tax not exceeding 5%. The Seychelles/China DTA therefore has a distinct advantage over the Hong Kong/China DTA in such cases, which will be particulary relevant to Chinese investment mutual funds and other ‘non-controlling’ investor situations.