Tax Matters | The importance of the Tax Treaties for the Avoidance of Double Taxation

Paulo Cordeiro de Sousa

It is openly declared by many people that Macao should play a more important role as an international platform for the investment in Portuguese- speaking countries. Xi Jinping, China’s President, has in recent times emphasized more than once that Macao should be a platform for the trade cooperation between China and the Portuguese- speaking countries. Macao may also take advantage of China’s One Belt and One Road Initiative. Available information discloses that China’s direct investment in Portuguese-speaking countries has currently exceeded US$50 billion, and that the trade between China and Portuguese-speaking countries is growing every year. In my opinion, Macao should even take a more daring approach to this subject, notably by trying to attract, as a hub, Chinese investment into Portuguese and non-Portuguese speaking countries, and foreign investment into Macao and mainland China. The Macanese tax system is, of course, of the utmost importance for that purpose. Some very important instruments that a tax system may use are the tax treaties for the avoidance of double taxation (“DTTs” – Double Tax Treaties).

The DTTs are bilateral agreements between two countries or territories that split between the two signatories the right to tax the different kinds of income that a resident of one of the countries/territories obtains in the other country/territory. Furthermore, DTTs provide for maximum limits to the tax rates regarding certain kinds of income (dividends, interest and royalties), and lay down the methods that a resident in a country/territory may use to eliminate double taxation on the income obtained from the other country/territory. Pursuant to the DTTs, generally, profits of a company may only be taxed in the country/territory where the company has its head office, unless such company carries on business in the other country/territory through a permanent establishment (notably, a branch); income derived from real estate (such as rents and capital gains) may be taxed in the territory where such real estate is located.

It is easy to understand the importance of such treaties – a resident of a country that makes an investment in another country, such as through a company incorporated in the other country, should know that if there is a DTT in force between the two countries, the dividends received from the company may only be subject to a certain maximum withholding tax rate (usually 5 or 10 percent).

Furthermore, the income received may be exempt from taxation, or the tax amount paid in the other country may be set-off or credited against the tax payable in the investor’s residency country, thus eliminating the double taxation.

In order to attract investment to Macao directly or to other countries through Macao, it is important to have a wide net of DTTs. Macao has a very small net of DTTs in force, currently only 6: Portugal (1999), China (Mainland – 2004), Mozambique (2010), Cape Verde (2011), Belgium (2011) and Vietnam (2018). This is too short for a territory that wants to play a bigger role as a platform for the investment in other countries. For example, Portugal has currently 79 DTTs in force and Brazil has 34. At least, and as a matter of urgency, the Macao SAR should make an effort to enter into DTTs with the remaining Portuguese-speaking countries: Brazil (the most important of all due to the huge amount of Chinese investment in this country), Angola (very important – one should note that Angola has finally concluded its first DTT in 2018), Guinea-Bissau, São Tomé and Príncipe and Timor-Leste. It would be a big help for Macao!