Annual growth in these countries is of the order of 7.5-8.5%. In Singapore, tax is presently levied at 27%, though the Government aims to reduce this to 25% if possible. The country taxes on a territorial basis: this lays great emphasis on the concept of “source”. Section 44 (the equivalent of Section 108 in Malaysia) has previously inhibited the use of Singapore as a base for holding companies: tax-paid income may be distributed without further tax, but distribution of income not taxed because not remitted (or because covered by a tax credit) occasioned a tax charge under Section 44. Over a period of time, starting in 1990, the law has been amended to remove this disadvantage as regards dividends paid out of remitted income covered by tax credit. If the credit is for less than 27%, Singapore tax must be paid on the difference. Moreover, no relief from Section 44 is available for capital gains which may be distributed as dividends.
Receipt and remittance are not the same: “Receive” means “to take possession of”; remittance requires transfer. Income paid into a foreign account is “received” at that point – after that the income moves merely as money: if it is to retain its tax-free status, it is best if it is not transferred (or remitted) to a Singapore account until after the source has ceased. This gives a double protection.
Tax administration has been improved, but records still need to be retained for 7 years. There are some 40 different kinds of tax incentive. The Government is concerned about the amount of personal debt occasioned by the rising cost of real property and motor cars. A 3% VAT has yielded much more than expected; a 1% drop in the income tax rate may perhaps be a result.
Malaysia is seeing significant changes. The standard rate of tax has gone down from 32% to 30% and the withholding tax on interest, royalties and technical fees has also been reduced. The Malaysian tax authorities consider the ambit of the tax on technical fees to be very wide.
Foreign income of companies will be (with some exceptions) exempt from tax from 1995, but section 108 has not yet been amended so as to enable foreign income to be distributed as dividends by a resident company without a tax charge. When this amendment is made, Malaysia may be considered as a location for a holding company – though there is still the question of distribution of capital gains, which the amendment may also address.
Tax incentives exist for construction companies, for infrastructure activities and other business. The rules governing Operational Headquarter Companies and exchange controls have been liberalised as have the foreign exchange controls affecting non-residents.
In 1993 Indonesian tax law underwent substantial changes. The law runs to only 36 articles so the explanatory decrees are awaited with interest. Income tax is now levied at a top rate of 30%. There is an additional withholding tax of 20% on distributions, which brings the rate up to 44% on distributed corporate profits. The 20% is not charged on profits which are re-invested in Indonesia. A branch constituting a permanent establishment in Indonesia is taxed as a separate entity and may be deemed to make part of the profits of the head office. A “permanent establishment” in Indonesia should be evaluated with this attribution rule in mind.
Withholding tax rules have been simplified, but there is still some uncertainty as to what capital gain income arises in Indonesia. Depreciation methods have been clarified; either straight line or declining balance methods may be elected. It is still difficult to get any kind of refund from the Indonesian tax department.
The treaty with India was made in 1981. It has recently been “discovered”. In 1992 Mauritius introduced the offshore company, able to access the Indian treaty, but paying tax at 0%.
The treaty reduces the Indian withholding tax on dividends and eliminates the Indian tax on capital gains. Mauritius presents the most attractive route into India.
India is a high-tax-paying jurisdiction. Non-residents are liable to tax on capital gains on Indian assets. Domestic companies pay an effective rate of 46%; foreign companies pay 55%. A company is resident in India if it is incorporated in India or managed and controlled there. The concept of “source” in India is widely defined – a “business connection” with India may suffice. Foreign investors must register: this affords the tax authorities information from which assessments may be made. Short-term gains (less than 3 years) are taxed as income, long-term at a lower rate.
Article 4 of the Treaty has the usual “resident” definition. The Mauritius offshore company qualifies. Section 59F of the Income Tax Act affords an offshore company the option of paying tax. The Mauritius Offshore Business Authority provides guidelines for establishing that an offshore company is resident.
There has been no Indian objection to the 0% rate, but some investment funds have elected to pay some tax – e.g. at 16%, on the footing credit will be given for 15% Indian withholding tax on outgoing dividends. Some offshore funds have moved their residence to Mauritius, but others have incorporated Mauritian subsidiaries.
The United Arab Emirates has entered into a treaty with India. It provides a similar exemption from Indian capital gains tax, but the U.A.E. limits the degree of foreign ownership in a local company. This treaty may nevertheless be used by non-resident Indians actually resident in e.g. Dubai. The Hungarian-Indian treaty has a capital gains tax article and may be used by the “offshore” company in Hungary; this alternative to Mauritius does not appear to have been used.
The Mauritius treaty may also be used for direct investment into India: the dividend withholding tax is reduced to 5%.
The Mauritius limited life company is transparent for US tax; this enables the US parent to “pool” the underlying dividend flow from India.
The société civile has not been popular as an offshore vehicle, but it could be used and would qualify for the benefit of the Indian treaty.
The interest article (Article 11) provides opportunity for lending out of Mauritius. Article 12 deals with royalties: the withholding tax is still 15%, but it may be that technical service fees qualify as business profits. Article 23 permits deemed Indian tax to be utilized as a tax credit in Mauritius.
Australia and New Zealand have withholding taxes on dividends, interest and royalties; Australia imposes capital gains tax on some non-resident disposals.
“Royalty” is widely defined (especially widely in Australia) and subject to 30% withholding tax in Australia and 15% in New Zealand. Treaties reduce the rate to 20%, 15% or 10% in Australia and to 10% in New Zealand. A “foreign trust” in New Zealand (with no New Zealand settlor) is not taxed on foreign income. Treaty protection in Australia depends upon the trustee being treated as a person who is resident in New Zealand for the purposes of its tax and within the definition “resident of New Zealand” on the basis that trust income is determined as if the trustee were a resident individual. It also depends upon the proposition that a trustee beneficially owns a royalty if the trustee is subject to tax with respect to it meaning no more than that royalties are taken into the tax calculation at the trustee rather than the beneficiary level – this tax on royalties from Australia may be avoided if the payment is not a “royalty”; but service agreements and cost-sharing arrangements will be closely scrutinised by the tax authorities.
On dividends non-residents suffer 30% withholding tax. This may be reduced by treaty to 15%. For investment in listed securities, a joint venture may offer a local resident the benefit of the franked dividend, on terms favourable to the non-resident.
Interest suffers 10% in Australia and 15% in New Zealand. There are exemptions in Australia for certain “public” loans. Australia has thin capitalisation and transfer pricing rules.
There is no capital gains tax in New Zealand. Australia treats capital gains as ordinary income. Only a few treaties effectively exempt capital gains, but disposals of revenue assets are exempted by the business profits article, as in Thiel’s case.
Singapore, with its territorial basis of tax, may be used as a base for investment into Australia. The Netherlands and Denmark are used for direct investment. Germany is also used.
The United States and Canada have large public debts to service and complex tax systems: taxes are consequently high, especially for foreign business. The Chinese central government is also in need of tax, though local authorities in some areas are anxious to keep taxes down.
In China there are five kinds of business tax. The main tax is levied at 33%. But various exemptions, tax holidays and reduced rates are available, and in practice the amount of tax is often negotiable. Treaties are not significantly used. Levying and collection of tax are not always predictable.
Hong Kong companies are often used for investment in China. They have disadvantages. The Hong Kong Revenue may claim that some profits arise in Hong Kong and are therefore taxable. Its shares are subject to stamp duty and estate duty. The law has no provision for redomiciliation. And a Hong Kong company may no longer be a “foreign enterprise” after 1997.
BVI companies are being used for investment into China. Malta may be an interesting option: it is no more expensive and it does have a treaty with China. Cyprus may be another option.
There is some – if limited- scope for minimising tax in China by using loan capital and transfer pricing.
Investment into Canada requires consideration of minimising tax on corporate profits and on distributions. A company suffers tax on both. But a trust which distributes suffers only one layer of tax. A corporate trustee may be incorporated for the purpose. The settlor should be resident outside Canada. The existence of the trust does not require to be disclosed. A distribution to another trust resident in a treaty partner country may limit withholding tax on trust distribution: Barbados, Labuan in Malaysia and Malta are candidates.
For interest, Labuan, the Netherlands, Barbados, Cyprus and Malta may be used. Other routes may be explored.
For investment in the United States, tax minimisation becomes more and more difficult. Malta now presents interesting opportunities. The effective result of use of a Malta company is that US withholding tax on dividends is 5% and no tax is payable in Malta.
Proposals in the U.S. Budget will, if enacted, prevent non-resident aliens using grantor trusts and introduce a Canadian-type exit tax.
Vietnam has 70m inhabitants, natural resources and the Confucian work ethic. Economic growth rates are high. Private sector investment is now encouraged and opportunities for foreign investment now exist. Vietnam is not yet a place for passive investment. There are some tax treaties, but they are not yet being implemented.
The Law on Foreign Investment provides for four forms of foreign investment. The Joint Venture Company (“JVC”) requires a minimum foreign equity participation of 30%. There is in practice a maximum of 85%. The Business Cooperation Contract (“BCC”) is a contractual relationship which is not a legal entity. The Wholly Foreign Owned Enterprise (“WFOE”) is generally in high technology or export-orientated products. The Build, Operate and Transfer Project (“BOT”) is used for infrastructure projects.
Under the Foreign Investment Law, the top rate of tax is 25%. Investment in a local company – even when it is allowed – is less fiscally attractive. Approval from the State Committee for Cooperation of Investment (“SCCI”) for the investment is always required. A 70/30 debt equity ratio is generally the maximum. Even a 30% equity interest gives the holder an effective veto over management decisions. Consent is required for a transfer of a foreign interest; this requirement may be circumvented by the use e.g. of a B.V.I. company to make the investment. The local investor may have some buy-out right in respect of “important economic establishments”. The Law permits profits to be converted into foreign currency and remitted abroad.
Vietnam has numerous taxes. The standard income tax rate is 25% for foreign investment enterprises. It can be less. A 100% refund is available of tax paid on profits reinvested. The turnover tax (which ranges from 0-40%) is levied on gross turnover – other rates are applicable in specific cases. Additionally, there is a 5-10% profit remittance tax. There are also customs duties. Personal income tax rates go up to 50%, but expatriates pay tax only on local income. Other taxes include a Contractor Tax at 4-8%, a Real Estate Tax, Land Use Fee (a “rent” for land, which is owned by the State), tax on royalty income, natural resource taxes, etc. Tax planning is the order of the day in view of Vietnam’s complex and inconsistently applied tax laws.
The geographic situation of the country is favourable to its development as a business centre. English is spoken in the international business community. There is a new constitution, and the politics of the country are now very stable. Economic growth over the last few years has been spectacular.
Foreign investment in Thailand is regulated by the Alien Business Law of 1972. Some businesses (in Category A) are prohibited to foreigners and others (Category B) are prohibited unless specially licensed, but others (Category C) are generally permitted, though again subject to the grant of a licence. Some exceptions to these restrictions are provided by the Treaty with the United States and some relaxations are offered by the Investment Promotion Act of 1977. Discussions are in progress for the revision of the restrictions contained in the Alien Business Law.
The Bank of Thailand is playing a leading role in encouraging the development of Bangkok as a business centre. The Government established the Export-Import Bank to support Thai exports. New banking licences are in prospect and new cheque clearing and fund transfer systems are in progress. The Government is also encouraging infrastructure developments.
Thailand levies taxes on individual and corporate incomes. Foreign companies are taxed on their profits arising in Thailand and withholding taxes are charged on fees and dividends payable to non-resident persons. VAT has been introduced and tax treaties entered into with several countries. New Economic Zones have been established and motorways are planned, with a view to decentralising business activity. The National Development Plan 1997-2001 will focus on human resources, quality of life and the environment.
There are now 15 member states of the European Union. The Netherlands is well-known as a base for holding companies. Losses may now be carried forward indefinitely and the treatment of foreign branch profits is more favourable than formerly.
The parent-subsidiary directive is part of the fiscal harmonisation of the E.U. A directive is implemented by legislation in each member state. This directive aims to abolish withholding tax on subsidiary-parent dividends. The parent must hold at least 25% of the capital of the subsidiary for a period of one year. France, Italy and Spain have anti-abuse provisions in their legislation; the Netherlands does not.
Dutch corporation tax is 40% on the first DFl. 100,000 and 35% on the remainder. The tax is not charged on dividends from a subsidiary or on capital gains from a disposal of its shares. The parent must generally hold at least 5% of the subsidiary. The subsidiary must be subject to tax (at whatever rate) on its profits. The holding must not be stock, nor a mere portfolio investment. Since 1st January, 5% of withholding tax on incoming dividends can be set off against liability for tax on outgoing dividends.
The Dutch system of tax rulings gives a higher degree of certainty. Standard rulings are available – e.g. a 1/4% or 1/8% “spread” on interest or a 7-8% spread on royalties between related parties. A “cost-plus” ruling is also obtainable: 5% is usual; the figure is negotiable.
Dividends from a Dutch company may be taken out via a Netherlands Antilles holding company. This structure is known as the “Dutch Sandwich”. The Netherlands levies a 7.5% withholding tax (against which the new credit for tax on underlying income is available) and the Antilles 2.4-3%. But a better deal may be negotiated. When a company opts for the 5.5% corporate income tax in the Netherlands Antilles, the withholding tax in the Netherlands is reduced to 5%. The Antilles authorities give rulings under which deduction may be taken for up to 85% of the income of the Antilles companies (to be negotiated with the Antilles authorities).
The so-called “Turbo” company is a company which changes hands with previous losses on its balance sheet. The price is 2-6% of the loss. It cannot be used to shelter the profits of a new enterprise, but it can be used to distribute these profits tax free by way of repayment of the old loan or by reduction of share capital. Interest on the old loan may be used to reduce the corporation tax on the profits of the new enterprise, provided the activities of the company have been stopped earlier.
The Sarabreek decision permits interest to be deducted abroad as well as in the Netherlands on a foreign real estate investment. Only pre-86 “fiscal unity” companies can be used. Purchase price about DFl. 125,000.
The Board of Investment exists to encourage and approve inward investment in Sri Lanka. A number of investment protection agreements have been entered into with foreign countries. Exchange control and other rules have been eased to enable inward investments to be made.
Chapter 8 of the Companies Act enables a company incorporated in Sri Lanka or elsewhere to register as an offshore company. Offshore banks are permitted and are exempt from a number of local restrictions. Offshore shipping companies are also permitted.
The residence of a company is determined by a management and control test. A company is also resident in Sri Lanka if it has its registered office there. A company must be resident in Sri Lanka to take advantage of the tax treaties to which Sri Lanka is party. Non-residents are liable to tax on business done in Sri Lanka, but the usual exemption is afforded to business profits by treaties – in the absence of a permanent establishment.