Taxation of companies in Macau – worldwide or territorial basis?

Paulo Cordeiro de Sousa*

Business and entrepreneurial income in Macau is taxed under the “Imposto Complementar de Rendimentos” (ICR) and the ICR tax is applied to profits obtained by individuals and legal persons from their commercial and industrial activities.

The usual question which arises when dealing with a company is the identification of income subject to taxation. Should it be the income obtained worldwide or should taxation be limited to income derived from Macanese sources? Article 2 of the ICR Regulations (approved by Law No. 21/78/M) sets forth that ICR “is levied on the overall income, defined under Article 3, obtained in the Territory by individuals or legal persons, wherever may their residency or headquarters be.” One may immediately notice the two inconsistent expressions appearing in the same sentence (especially if taking the definition of Article 3 into account): “overall income” and “obtained in the Territory” (Macau). If taxable income, as defined by the law, refers to the income obtained in the Territory then it should not encompass the overall income that an entity may obtain from any sources abroad; but if the law refers to overall income, then taxable income will not be limited to that obtained solely in the Territory. Following this inconsistency, some argue that taxation of entrepreneurial income in Macau is territorial, meaning that only the income obtained from Macanese sources is subject to ICR and therefore any income obtained abroad should be tax-exempt in Macau. On the contrary, others argue that entities in Macau are subject to taxation on their worldwide income.

However, the ICR Regulations form a set of rules that should be considered – and interpreted – wholly, thus one should not look at one of its provisions separately. In fact, Article 3(2) sets forth that “the overall income of the legal persons is the annual net profits resulting from their industrial or commercial activity, which shall be assessed under the terms of these Regulations”. This provision does not limit net profits to those obtained only from Macanese sources. Also, Article 4(2) indicates that profits are determined in accordance with the duly organised accounting system – and, again, does not mention that companies should have a dual accounting system, or that they should have one designated accounting system for income derived from Macanese sources only. Additionally, Article 19(1) sets forth that the taxable income is the balance of the profit and loss account, consisting of the difference between all income and gains, irrespective of their origin, and all costs and losses of the financial year – it is very clear: irrespective of their origin! Last but not least, one should note that when presenting their tax returns, taxpayers are not legally required to provide documentation segregating their income obtained from sources in Macau and abroad.

The courts in Macau have already addressed this issue. Whilst in some cases the Administrative Court (first instance court) decided that the tax system in Macau had a territorial basis, the Court of Second Instance (TSI), to which the Tax Administration appealed to, has consistently ruled to the contrary, i.e. that taxation in Macau under the ICR Regulations is a worldwide income tax. The Administrative Supreme Court in Portugal, acting as the Supreme Court regarding administrative matters in Macau before the handover, shared the TSI view. So, the position of the TSI is very clear: according to the law, Macau taxes companies on a worldwide income basis. Despite there being no official position from the Tax Administration, when directly questioned the public attendance services have, however, expressed their view that only income obtained in Macau should be declared in tax returns. An official clarification of this issue is advisable.

*Lawyer, expert in Tax Law