Protocol to the Mainland of China – Macau Double Tax Agreement Becomes Effective

All ratification processes have been completed on both sides and the Protocol of Double Tax Agreement (“DTA”) between the Mainland of China and Macau came into effect with respect to the taxes of assessment beginning on or after January 1 2011. This issue outlines the key issues to be aware of.

Withholding Tax Rates Reduced

One of the main features of the protocol is lower withholding taxes on dividend, interest and royalty payments.

Dividend Interest Royalties
PRC/Macau (Prior to the Protocol) 10% 0%/7%/10% 10%
PRC/Macau (After the Protocol) 5%/10% 0%/7% 7%
PRC/Hong Kong 5%/10% 0%/7% 7%

l   Withholding tax rate for dividends received by a Macau resident from the Mainland were cut from 10% to 5% for Macau businesses holding at least 25% of the capital of the Mainland enterprise (except for partnership).

l   The 0% withholding tax rate applies to the interest received by the Macau SAR Government or recognized institutions. Withholding tax for interest received by a Macau resident from the Mainland fell from 10% to 7% in any other cases.

l   Withholding tax for royalties received by Macau resident from the Mainland also fell from 10% to 7%.

Capital Gains

Capital gains derived from the transfer of shares in a mainland company will be exempted from tax, provided that the shares so transferred are less than 25% of the entire shareholding of the mainland company which is not an immovable property holding company.

But this provision brings a 12-month look-back period to the Macau holding company. It only allows the exemption provided that the Macau investor owns directly or indirectly less than 25% shareholding in the mainland company at any time during the 12-month period preceding the share transfer.

In addition, the new pact also covers the determination of a service permanent establishment and the interpretation of immovable property holding company, etc.

Obviously, the Protocol scores over the limitations of China’s treaty with other countries and brings the Mainland of China – Macau DTA in line with that between the Mainland of China – Hong Kong. This will provide added incentives for international investors to enter the Mainland market through Macau, or for Macau companies to do business in the Mainland.

However, it must be noted that the anti- avoidance measures which swept the tax regimes across the world, have not spared China as well. In case of corporate structures solely formed to exploit the tax treaty benefits, China underpins the right of assessing such issues as treaty residency status, beneficial ownership, treaty abuse for the availability of the treaty benefits. It is important for treaty residents to observe the trend in granting treaty benefits for dividends, interest and royalties for their future Chinese investment planning.

The link to assess the full content of the Protocol: