In this article, we shall analyze the process of adopting a Mauritius company as a holding vehicle. The China-Mauritius tax treaty offers some tax benefits in structuring a tax efficient holding structure for PRC investment.

(a)Repatriation of profits

Dividends payable by a PRC foreign investment enterprise ("FIE") to its Mauritius holding company will be exempt temporarily from withholding tax under the Foreign Enterprise Income Tax ("FEIT") Law.

The China-Mauritius tax treaty limits the withholding tax rate on dividends paid out of the PRC at 5 per cent. This would be an advantage in case the current withholding tax exemption on dividends is withdrawn in the future.

Dividends received by the Mauritius holding company will be taxable in Mauritius at 15 per cent. However, credit in respect of the withholding tax as well as underlying income tax paid in the PRC will be available to set off against the 15 per cent Mauritius tax payable on dividends. Where evidence of such taxes paid in the PRC is not available, there will be a deemed tax credit of 80 per cent on the Mauritius tax. In that case, the effective Mauritius tax on dividends is 3 per cent, i.e. (100 per cent - 80 per cent) x 15 per cent.

The China-Mauritius tax treaty also provides tax sparing so that a full underlying tax credit is given in Mauritius in respect of profits derived during a tax holiday in the PRC on which no or reduced PRC tax has been paid. Furthermore, Mauritius is not included in the list of unco-operative jurisdictions, which avoids the risk of any defensive measures from the member countries of the Organisation for Economic Co-operation and Development.

(b)Disposal of equity interests

The Mauritius holding company should obtain the approval of the relevant Ministry of Commerce ("MOFCOM") for the disposal of equity interests in the FIE. In addition, such disposal must be registered with the State Administration for Industry and Commerce ("SAIC").

The capital gains arisen from the disposal of the equity interests in the FIE by the Mauritius holding company in the PRC will trigger a withholding tax at 10 per cent on the capital gains in the PRC.

The transferor and the transferee of a transfer of equity interests in the FIE are each liable for stamp duty on the sales proceeds as stated in the transfer agreement at a rate of 0.05 per cent.

Under the China-Mauritius tax treaty, capital gains derived by a Mauritius holding company from the direct disposal of equity interests in the FIE are exempt from withholding tax in the PRC, unless the property of the FIE consists directly or indirectly principally of immovable property situated in the PRC. If the assets of the FIE consist principally of real estate located in the PRC, the withholding tax exemption on gains arising from the disposal of equity interests in the FIE would not apply. In that case, the Mauritius holding company would be subject to withholding tax at 10 per cent on capital gains arising from the disposal of equity interests in the FIE.

There is no capital gains tax in Mauritius. Hence, any capital gains arising from the disposal of equity interests in the FIE would not be subject to any tax in Mauritius.

The equity interests in a wholly foreign-owned enterprise can also be disposed of indirectly by selling the shares of the Mauritius holding company. Such indirect disposal does not require approval from the local MOFCOM and registration with the SAIC.

Such disposal will not trigger any capital gains tax or share transfer duty in Mauritius.

The article only represents the author's opinion

(China Daily 12/19/2005 page4)