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Company Case Studies |
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Telco Ltd., a company
incorporated and managed in South Africa and engaged in telecommunication
services, is going to invest in China. Its Chinese operations will
be both manufacturing and providing services. Telco intends to penetrate
the Chinese market for telecommunication, and according to some market
research carried out before, the operations will be highly profitable
within a couple of years.
How to structure Telco's investment in a tax effective manner?
Suggested solution:
Dividends paid by the Chinese subsidiary to the South African parent
will not trigger Chinese withholding tax if the South African investor
qualifies as a "foreign investment enterprise" under Chinese law.
This is the case, among others, if the Chinese company is wholly foreign-owned.
Upon receipt of the dividends by the parent in South Africa, additional
South African corporate tax may be due.
The channelling of the dividends to a group holding company, and subsequently
to the South African investor in such a way that South African tax
due on the dividend received, could be an interesting solution.
This could be achieved by structuring the investment through a Seychelles
group holding company established as a CSL (special license company)
under Seychelles law. The dividends received by this company are only
subject to 1.5% tax in the Seychelles.
Due to special provision in the treaty between the Seychelles and
South Africa, no further tax is payable in South Africa upon redistribution
of the dividends to the parent, if any. Therefore, the maximum tax
burden is limited to 1.5%.
If this would be preferred, the dividends received in the Seychelles
can, of course, also be accumulated in the Seychelles.
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