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Tax Perspectives

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Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.

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Summer 2004
Volume 4, Number 1

The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting on the information herein.

Macau Offshore Company Regime

By Grace Chow, CA, TEP
Cadesky and Associates LLP (Toronto)

The Caribbean, the Mediterranean, and the Indian Ocean all have something in common. They each have a multitude of jurisdictions where one can establish either a tax-exempt company, or a company that pays tax at relatively nominal tax rates. But the South China Seas do not. One generally had to go quite far afield, to places like Labuan in Malaysia, or Samoa, before finding such jurisdictions, at least until recently.

Until 1999, Macau was a tiny Portuguese colony, located where the Pearl River meets the sea, about one hour by high-speed ferry from Hong Kong. It was known more for its casinos than its business environment. But that is changing.

In a surprise move, the government of Macau announced an offshore company regime, shortly after China took back its sovereignty. The Chinese government must have realized that the prime target of the Macau offshore company regime would be investment within China itself. So why allow it, beyond the obvious reasons of promoting business and employment in Macau - nobody knows. But under the overall custody of the Chinese government, such bodies as the OECD and the European Union are unlikely to have a long enough reach to be of influence. OECD conducted a review of the offshore regimes over the last 6 years and has put pressure on tax havens. China, with its tax system full of exemptions for foreign business, was never accused of promoting harmful tax competition, and Macau is not on any black lists.

A Macau offshore company is an entity, which is licensed by the Macau government to carry on business within Macau, but may derive income only from sources outside of Macau. For example, a Macau offshore company may buy and sell goods from an office based in Macau, purchasing them in China, and selling them worldwide, provided it does not sell the goods in Macau itself. While it is common for the Macau company to be a Macau incorporated entity, it can also be a branch of a foreign corporation or a limited liability company.

Once approved, the entity is not subject to any taxes in Macau, and may freely repatriate its earnings without withholding taxes or foreign currency control restrictions. As such, it represents an ideal vehicle by which to administer a business in China.

Consider, for example, the following structure. A factory is established in China, to produce goods on behalf of a Macau offshore company. The Chinese manufacturer operates as a contract manufacturer on a cost plus basis, earning a modest, but reasonable, profit. The Macau company earns the greater part of the profit, on which no tax is paid.

Similarly, the Macau company could be used as a base for importing goods into China, or for licensing manufacturing activities in China.

In order to obtain approval to operate, the Macau offshore company must maintain an independent office of a reasonable size in Macau, employ at least one local person, and submit a business plan for approval. Of particular concern is whether the business will benefit Macau, in terms of economic development.

The Macau offshore company is certain to challenge the leading jurisdictions in the region, being Hong Kong and Singapore, whose tax rates are 17-1/2% and 20% respectively. A nil tax rate is an offer that some people will not be able to refuse.

Further information on Macau offshore companies is available through our website or upon request.

Through our associate, Thomas Lee and Partners, in Hong Kong, we can provide all necessary services to establish a Macau entity.