A South African computer equipment manufacturer (SA Co) is planning to establish a subsidiary in China (China Sub), which will be manufacturing and providing services in China. Market research has revealed that these operations will make substantial profits within a few years. SA Co now wants to know how it can structure its investment in a tax efficient way.
As long as SA Co is able to qualify as a foreign investment enterprise under Chinese law, China Sub’s dividends to SA Co will not trigger Chinese withholding tax. However, South African corporate tax may be due when the dividends are received by SA Co.
In order to effectively minimize South African corporate tax, an intermediate special license company could be established in the Seychelles (Seychelles Co) under the Seychelles’ law. Dividends given to Seychelles Co are subject to only 1.5% tax in the Seychelles.
According to the Seychelles and South Africa treaty, there will be no further tax payable in South Africa upon redistribution of the dividends to SA Co. This means the maximum tax burden is therefore limited to just 1.5%.