Tax Matters | The taxation of companies in Macau – worldwide or territorial basis? (cont.)

Paulo Cordeiro de Sousa*

Our previous article about the taxable basis for the taxation of companies in the Macau territory made reference to the fact that the courts in Macau, notably the Court of Second Instance (TSI) and the Tax Administration, do not seem to share the same view regarding income considered as the taxable basis of corporate income tax (ICR) levied on companies with head offices based in Macau. Whilst the courts tend to decide that the taxable basis is worldwide income, the public attendance services of the Tax Administration seem to understand that the taxable basis is income obtained from Macanese sources only – although it appears that central services may be taking a different approach.

In mid-August 2018, the Office of the President of the Court of Final Appeal (TUI) made public that the Court had issued a new decision on the subject. The case in question was that of a company challenging Macau’s taxation of profits received from non-resident subsidiaries. Following the announcement from the TUI president’s office, which also mentioned the TSI’s recent decision, the Court clarified that there is a difference between income received by a Macanese company from non-resident subsidiaries and income received from branches abroad.

Branches are part of the company, they do not possess legal personality and therefore any income obtained by such branches shall be understood as income from the direct activity of the company. This means their income is taxable in Macau. On the contrary, subsidiaries have legal personality and are different entities, and according to the law, the profits they distribute to a Macanese shareholder shall be taxed in Macau only if the activity of the subsidiaries is connected with the activity performed in Macau by the Macanese company. The Court’s choice of the worldwide taxation principle with this slight exception (profits received from subsidiaries whose activity is completely different from the Macanese company’s activity) is clear.

In that respect, one should also note that Macau has concluded tax treaties for the avoidance of double taxation with five countries: Portugal, Belgian, Mozambique, Cape Verde and Vietnam. Those tax treaties lay down (i) the division between the two territories of the powers to tax the different kinds of income, (ii) the limitation of rates regarding certain kinds of income (dividends, interest and royalties), and (iii) methods to eliminate the double taxation, e.g. (a) income derived from real estate (such as rent and capital gains) may be taxed in the territory where the real estate is located; (b) the profits of a company may only be taxed in the territory where the company has its head office, unless the company carries on business in other territories through a permanent establishment (a branch qualifies as a permanent establishment); (c) dividends, interest and royalties may be taxed in the source territory, but only up to a certain rate – 5 percent or 10 percent for dividends, 10 percent for interest, 5 percent or 10 percent for royalties.

The tax treaties set forth that Macau shall exempt from taxation income that is taxable in other territories in accordance with their provisions. In the case of Vietnam, a Macanese company will be entitled to a tax credit in the amount of the tax paid in Vietnam regarding dividends, interest or royalties, to be deducted from the ICR payable in Macau.

The above means that, although taxation should be made in accordance with the worldwide principle, a Macanese company may benefit from certain tax exemptions provided by the law (profits received from non-resident subsidiaries with different kind of activity) and by the tax treaties established by Macau.