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Case study 1: Intermediate group holding company

Updated time: Jul 28, 2018 , 12:25 (UTC+08:00)

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 previously, 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 if, amongst other things, 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 is 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 licence company) under Seychelles law. The dividends received by this company are only subject to 1.5% tax in the Seychelles.

Due to a special provision in the treaty between the Seychelles and South Africa, no further tax is payable in South Africa upon redistribution of the dividends, if any, to the parent. 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.