Due to establishment of territorial taxation of business activity in Seychelles in January 2019 the need for guidance to some legislative rulings, such as official interpretation of term “Seychelles sourced income”, has arisen. In August 2019 the document named Guidance Notes on Income Sourced in and from Seychelles (the Guidance) has been adopted.
The principle of territorial taxation of International Business Companies (IBC) in Seychelles provides that such companies which generate income sourced in Seychelles must pay business tax for this income. The income sourced outside of Seychelles is not subject to taxation.
Seychelles apply the following progressive scale of business tax rates (applicable also to IBC companies):
- 25% for the first 1 000 000 rupees (73 000 USD);
- 33% for the amount exceeding 1 000 000 rupees (73 000 USD).
Legislative definition of Seychelles sourced income is provided by Section 5(1) of the current version of Business Tax Act 2009 (BTA): “An amount derived by a resident person in carrying on business is derived from sources in Seychelles if derived from activities conducted, goods situated or rights used in Seychelles, regardless of the residence of the parties participating in the transactions and regardless of the place where the agreements are executed.”
In addition to this, the definition of Seychelles sourced income includes “An amount derived by a non-resident person in carrying on a business is derived from sources in Seychelles to the extent that it is attributable to a business carried on through a permanent establishment of the person in Seychelles” (section 5(2) of BTA). In its turn, permanent establishment is deemed to be “a fixed place of business through which the business of the person is wholly or partly carried on and, without limiting the generality of the foregoing, includes —
- a place of management, branch, office (other than a liaison officer), factory, warehouse, or workshop of the person;
- a mine, oil or gas well, quarry, or other place of extraction of natural resources of the person;
- a building site, or a construction, assembly or installation project of the person, or supervisory activities conducted by the person in connection with such site or project, but only if the site, project or activities continue for more than ninety days;
- the furnishing of services by the person, including consultancy services, through employees or other personnel engaged by the person for such purpose, but only if activities of that nature continue for the same or a connected project for a period or periods aggregating more than ninety days within any twelve-month period;
- an agent of the person (other than an agent of independent status), if the agent has and habitually exercises an authority to conclude contracts on behalf of the person, or habitually maintains a stock of goods or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the person;
- any substantial equipment used by the person, but does not include a place of business maintained by the person solely for the purposes of purchasing goods or merchandise.”
If the jurisdiction in which foreign company is registered has concluded Double Tax Avoidance Agreement (DTAA) with Seychelles, the DTAA norms defining permanent establishment must be applicable (not the ones of Seychelles national legislation).
If a remittance of amounts formed from both Seychelles and foreign sourced income takes place, the tax base must be calculated as established by Section 5(4)(b) of ВТА as follows:
(Seychelles sourced income / total income) x amount of remittance = remittance subject to tax.
- If a company derives both income sourced in Seychelles and income sourced outside Seychelles, only the amounts of Seychelles sourced income are taxable.
- Provided that Seychelles legislation allow deductibility of costs for purposes of business tax base determination, only the expense for the Seychelles sourced income is deductible being duly documented.
- The Guidance provides several examples of activities conducted in Seychelles:
- Sale of goods manufactured in Seychelles (including export) if manufacture consists of procurement of raw materials, the employment of labour, the design of products and the use of machinery and plant.
In such case the income derived from Seychelles manufactured goods’ sale is deemed to be sourced in Seychelles, even if such goods are sold abroad and paid by non-resident. Despite the payment made from foreign jurisdiction, the generation of income is a direct consequence of manufacturing activity in the territory of Seychelles.
- Provision of services in or from Seychelles, irrespective of the nationality, domicile or residence of the customer and of the place where the contract is concluded.
In addition to this, the income is deemed to be sourced in Seychelles if resident person paying business tax provides technical services outside the territory of Seychelles to another Seychelles resident person paying business tax and such technical services are used by the customer to obtain Seychelles sourced income.
- The Guidance provides the following examples in relation to use of property and rights for generating of income in Seychelles:
- Income of company “A” which rents out property located in Seychelles to company “B” (even being a non-resident company), as well as consideration for the right to take minerals or living or non-living resources from land and sea in Seychelles, are fully taxable in Seychelles;
- Income of company “A” which licenses rights to company “B”, and they are used by company “B” to generate Seychelles sourced income, is fully taxable in Seychelles.
- Payment of dividends by resident company or by permanent establishment of non-resident company which derives Seychelles sourced income is taxable in Seychelles.
- If a resident company or permanent establishment of non-resident company in Seychelles derives only foreign sourced income, then payment of dividends by it is not subject to taxation.
- In case described in paragraph 1 the standard withholding tax rate of 15% or other rate established by DTAA of Seychelles and jurisdiction of tax residency of the recipient of dividends must be applicable.
- If an entity makes a payment of dividends out of both Seychelles sourced income and foreign sourced income while distributing its profits, the tax base must be calculated in accordance with Section 5(4)(b) of the BTA (Seychelles sourced income / total income) x the amount of dividends = dividends subject to tax.
ExampleIn 2018 Seychelles company earned total income in the amount of 1 000 000 USD that was paid for the provision of services. The sum of 500 000 USD was paid for provision of services outside the territory of Seychelles, the rest sum of 500 000 USD was paid for provision of services in Seychelles. Company decides to pay dividends in the amount of 100 000 USD to its sole non-resident shareholder.
Withholding tax base is (500 000 / 1 000 000) х 100 000 = 50 000 USD. The amount of withholding tax to pe paid is (50 000 х 15%) = 7 500 USD.
- Interest income derived by Seychelles resident company being a non-financial institution from a loan to another resident company being a non-financial institution in Seychelles, is subject to taxation if the loan is used in the territory of Seychelles.
- Interest income derived by non-resident or permanent establishment of non-resident in Seychelles from a loan to Seychelles resident company is subject to withholding tax.
- Interest income derived by Seychelles resident company from a loan to non-resident or foreign permanent establishment of Seychelles company is not subject to taxation if the loan is used outside of Seychelles.
- If the payment of interest takes place out of both Seychelles sourced income and foreign sourced income, the tax base must be calculated in accordance with Section 5(4)(b) of the BTA.
Thus, receipts of interest and payment of interest will only be subject to business tax in Seychelles if loan is used in Seychelles and interest is paid out of Seychelles sourced income.
- Royalty income of any person from rights used in Seychelles is deemed to be Seychelles sourced income and is subject to taxation.
- Royalty income of resident or permanent establishment of non-resident from rights used in Seychelles is subject to business tax.
- Royalty income of non-resident from rights used in Seychelles is subject to withholding tax of 15%.
- If the payment of royalties takes place out of both Seychelles sourced income and foreign sourced income, the tax base must be calculated in accordance with Section 5(4)(b) of the BTA.
As a result, if the rights are not used in the territory of Seychelles, royalties paid or received by any person (resident or non-resident) are not subject to taxation.
The Guidance establishes a general rule applicable to various cases where identification of source of income is required for purposes of consequent detection of tax liability. It arises if three conditions are satisfied simultaneously:
- The person must carry on a trade, profession or business in Seychelles;
- The income to be charged must be from such trade, profession or business carried on by the person in Seychelles;
- The income must be income arising in or derived from Seychelles.
Unlike the first and the second condition, the third one is to be assessed in each case with emphasis on the nature of the income and the transactions giving rise to it. It is recommended to analyze each operation separately, primarily answering questions what the taxpayer has done to earn the income and where he has done it.
Nevertheless, the Guidance stipulates that the abovementioned conditions are general principle of identification of source of income for territorial taxation of business activity and its practical application depends on actual circumstances of carrying on such business activity, so that it is not mandatory and does not compel taxpayer to make some certain decision.