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Best setup to avoid European withholding tax? Anything better than Malta?

JustAnotherNomad

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Oct 18, 2019
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I am planning to scale my business over the next couple of years. Which means I would have to hire employees in one or more European countries.
I would be able to shift profits to other entities (e.g. the local companies would only be reselling services provided by another entity), but some profit would likely have to remain in the local entities, which usually would have high CIT rates.
I would like to have flexibility for my personal tax residence when I eventually stop nomading and settle down. And maybe I would want to sell the company in the future, so avoiding CGT would be important.

I have thought about simply using a Malta company - 5% tax, no withholding tax, no capital gains tax. I could hire some people in Malta for proper substance. Simple setup, probably easy sailing if you can prove substance.
Parent-subsidiary directive with all European countries.
But maybe there is something better?

Sure, you can use an Estonian company with a branch in e.g. Switzerland (around 10% CIT) and avoid the Swiss WHT. Or even use a Swiss subsidiary.
But then if you sell the Swiss entity, the profits are taxable in Estonia (=not possible to get out without paying Estonian CIT).
Also, 10% (Switzerland) is still more than 5% (Malta).

Is there a better option? I would like to be able to set up local companies in different countries for better trust. Many clients may not want to work with a company they wouldn't know how to sue if something goes wrong, etc.
Or I could just eat up the WHT, assuming that local profits would be quite low anyway, since most of the profits would have been shifted to a more tax-efficient entity...

I would be OK with paying some tax if that means that the structure can be simple, so it would be raising fewer red flags with the tax authorities.
 
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I would be able to shift profits to other entities (e.g. the local companies would only be reselling services provided by another entity)

I don't see how you would be able to shift profits, this scenario doesn't seems like a licensing deal but more like a sales commission deal.

Is there a better option?

A potentially 0% option could be a Cyprus company resident not domiciled in Malta + Gibraltar holding.

No tax is payable on foreign income which is not received in Malta and any offshore income received by the Gibraltar company (beside royalties) is tax exempt.
 
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I don't see how you would be able to shift profits, this scenario doesn't seems like a licensing deal but more like a sales commission deal.

Exactly. The local companies in high-tax countries would be reselling the services of the low-tax company for a 5-10% commission. There would be local salaries, which would further reduce the profits. Already discussed with tax lawyers, shouldn't be an issue if proper transfer pricing documentation is prepared.

A potentially 0% option could be a Cyprus company resident not domiciled in Malta + Gibraltar holding.

I doubt this would work. The company has to be resident in Malta, so it would need substance in Malta.
How would its income not arise in Malta then? I don't know much about Malta, but typically these rules mean that you need to have a PE somewhere else, so then the tax would be payable there.
Sure, I could probably use a CY company and make it resident in Malta and then have the staff in some 0-tax country. But that would even work with other EU countries, provided that they have signed a tax treaty with the 0-tax jurisdiction, which would provide for a tax exemption for the foreign PE.
Also, which company would be owning the high-tax subsidiaries? The CY company? CY and Malta are already huge red flags for the tax authorities in high-tax countries. It increases the risk of an audit a lot.
I think it would then probably still be better to just use a Maltese operating company with proper substance in a fiscal unit with a holding company in Malta, so I pay 5% and they leave me alone.

But I don't know - maybe there is something better? Maybe using Singapore or Hong Kong?
I would ideally like to avoid becoming tax resident in an EU country, I feel the rules are just getting stricter and stricter.
 
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I could probably use a CY company and make it resident in Malta and then have the staff in some 0-tax country.

That's the idea, and the staff doesn't have to be in some 0-tax country because 0-tax countries are expensive so you'll need to pay high salaries.

Look into Balkans instead, in Serbia for example you'll find talented, hard working people that speaks fluent ENG.

Hire them through an EOR like NativeTeams which only costs you $79 a month to avoid creating any PE in the the countries you want to hire.

But that would even work with other EU countries, provided that they have signed a tax treaty with the 0-tax jurisdiction, which would provide for a tax exemption for the foreign PE.

Well, from the top of my head the only 0%-tax jurisdictions with some DTT is Bahrain and Bermuda.

Creating substance there i suppose it will cost you a lot but hey, you could do that.

Having said that i agree that CY and MT image is rather shady but since you will be operating through local subsidiaries, the local customer will pay the local company, which in turn will pay you.


A SG resident non domiciled in Malta should work also.

I would ideally like to avoid becoming tax resident in an EU country

That's why i suggested Gibraltar holding.

With that holding you can be employed by your company and receive dividends tax free because the company received foreign profits so no tax both at company level and at personal level.

You only need 100 days to be tax resident in GIB.

I know, it's far easier to pay 5% in Malta and be left alone but you need to spend 183 days in Malta to become tax resident and good luck resisting there for more than 30 days.

GIB soon will become part of Shengen so no border controls + 1hr drive to Marbella.

You'll be basically living tax free in EU while not being in EU.
 
I know, it's far easier to pay 5% in Malta and be left alone but you need to spend 183 days in Malta to become tax resident and good luck resisting there for more than 30 days.

GIB soon will become part of Shengen so no border controls + 1hr drive to Marbella.
Malta is in Schengen, so I don't see why would you need to spend 183 days in Malta and not just live in another Schengen country without getting residency.

Please be very careful in Malta and dealing with Maltese.
Once they trap you it's very difficult to leave.

It's better to pay a few percentage points more than have to deal with those people.
Sure Malta is not perfect, but what traps are you talking about?
 
Look into Balkans instead, in Serbia for example you'll find talented, hard working people that speaks fluent ENG.

Hire them through an EOR like NativeTeams which only costs you $79 a month to avoid creating any PE in the the countries you want to hire.

First of all, hiring employees through an EOR doesn't mean you can avoid a PE. Not in tax-aggressive countries anyway.
But in the Balkans, I guess it would probably work.

But that's not the point - I don't know, but I can't imagine the rules work the way you're saying. "Income arising in Malta" - I would be extremely surprised if the definition is what you believe it is. SG etc. have similar wordings, heck, even France.
It's basically just the same rules you would have under a tax treaty: If the company has a branch elsewhere, then the profits of this branch aren't taxed as income of the "main" company, but exempted from taxation there. Because they assume you're already paying tax somewhere else. And you usually would.

Anyway, even if it actually was the way you think (which I doubt - but again, I don't know, you could be right) - with your EOR idea, the profits would definitely arise in Malta. Because the company is tax resident in Malta and the company doesn't have operations outside of Malta. You are hiring another company (the EOR) to do some work for you.
It's like having an e-commerce business in, whatever, Italy, and you order custom-made products from a supplier in China. Sure, you may not have a PE in China, but the profits arise in Italy, because that's where your business is.
For the profits to actually arise in China, you would basically need some sort of branch/PE, which then again would be taxable locally.
All this "arises outside of Malta" clause does is say "even if there isn't a tax treaty, we understand you're already paying tax somewhere else for this, so we won't tax you again".
I absolutely cannot imagine it would mean anything else. But I would be happy to be proven wrong.


Having said that i agree that CY and MT image is rather shady but since you will be operating through local subsidiaries, the local customer will pay the local company, which in turn will pay you.

Yes, exactly, they wouldn't be facing the customer. They would just be accumulating profits and solve as a vehicle to avoid the withholding tax.

That's why i suggested Gibraltar holding.

With that holding you can be employed by your company and receive dividends tax free because the company received foreign profits so no tax both at company level and at personal level.

I could do that with Estonia as well? The only downside with Estonia is that you would have to pay tax on capital gains in the holding company, once distributed.

I know, it's far easier to pay 5% in Malta and be left alone but you need to spend 183 days in Malta to become tax resident and good luck resisting there for more than 30 days.

I absolutely wouldn't move to Malta. What I'm looking for is a solution that would allow me to live anywhere.
Maybe I would be living in Southeast Asia, maybe I would be living in Europe making use of some lump sum rules, maybe I would be living in the Carribean, or in Dubai... I want to have freedom to move where I want. In all of those places, I should be able to receive dividends from a foreign company without paying tax.
Heck, I could even move to a high-tax country for some time and just live off savings.
I'm still living a nomadic lifestyle at the moment, but in five or ten years' time, I might want to settle down. So I'd like to start building on something that would allow for as much flexibility as possible.

Please be very careful in Malta and dealing with Maltese.
Once they trap you it's very difficult to leave.

It's better to pay a few percentage points more than have to deal with those people.

Thank you for that. What's the issue there?
What would you recommend instead? I can't imagine Cyprus would be very different. Switzerland has similar corporate tax rates, but then you potentially have to deal with 35% WHT.
 
Is there a better option? I would like to be able to set up local companies in different countries for better trust. Many clients may not want to work with a company they wouldn't know how to sue if something goes wrong, etc.
In which local countries you want to set up for better trust?
 
"Income arising in Malta"

Malta is a common law country so "income arising in Malta" is defined by reference to the location of the activities that give rise to the profits.

If work is performed outside Malta is not arising in Malta (if you obviusly don't sell to Maletese businesses).

You can hire on a contractor basis so you are basically paying a freelancer.

You can even be creative with this by interposing a third party business like Fiverr so you can show invoices to prove work is done outside of Malta.

But I would be happy to be proven wrong.

I'm sure hiring freelancers that act as your employee and / or paying people through a third party site will definitely work.

I could do that with Estonia as well? The only downside with Estonia is that you would have to pay tax on capital gains in the holding company, once distributed.

You could but as you said capital gains are taxed.

I want to have freedom to move where I want

Well, GIB is one of the best possibile options right now because look at the trend: UK non dom is gone, NHR is gone, Thailand tax free remittance is gone, Malaysia tax free remittance is going away soon.

There are less and less options where your income isn't taxed.

And the remaning options are temporary and / or inconvenient.
 
Because you are tax resident if you spend 183 days in Malta and you can't cheat on an island.

If otherwise you don't fear any other country to claim your tax residency then it doesn't matter.
Do you really think they keep a track of all passengers flying in and out of Malta? It's Schengen. You only need to show your ID when you board a plain. I flew in and out of Malta a couple of times recently, no checks whatsoever.
 
Malta is a common law country so "income arising in Malta" is defined by reference to the location of the activities that give rise to the profits.

Then how is it different from ordering supplies from China? The profit is generated by choosing suppliers in a smart way. So it is the decision that generates the profit. Nothing else would make sense to me.
But it would be interesting to check this - maybe someone knows a good Maltese law firm that can clarify this?

Well, GIB is one of the best possibile options right now

You mean for personal tax residence? Gibraltar doesn't have a lot of tax treaties. For example, there is no treaty with Switzerland, so 35% WHT would apply.

Thailand tax free remittance is gone, Malaysia tax free remittance is going away soon.

I don't have an expensive lifestyle, so I wouldn't have to remit a lot of money.
I don't think those countries would introduce taxation of non-remitted foreign income anytime soon and they have a strong treaty network.
The bigger risk with those countries would be them becoming stricter about PE's - I've heard that at least Malaysia is going in that direction. But that's why I want to have proper substance for the company.

Cyprus and Malta don't necessarily tax such income either (even if I can't really imagine living there at the moment). There's also Monaco and Spain's Beckham Law.
And there are lump sum tax schemes in several European countries (Switzerland, Italy, Greece, probably others) where you pay some tax, but are left alone otherwise.
There are still many options.

Do you really think they keep a track of all passengers flying in and out of Malta? It's Schengen. You only need to show your ID when you board a plain. I flew in and out of Malta a couple of times recently, no checks whatsoever.

That's not the risk. Malta doesn't care.
It's the other country that would simply claim you're tax resident, then it would be on you to prove otherwise.
But I've heard you can get a personal tax residency certificate from Malta quite easily by claiming it as your center of vital interests, even if you spend less than 183 days there.
But anyway, this isn't very relevant, as I probably wouldn't want to live there anyway.

In which local countries you want to set up for better trust?

I haven't decided that yet, I'm looking for a solution that would give me a lot of options. That's why I think an EU country (or Switzerland) could be interesting, as they have extremely strong treaty networks.
 
But maybe there is something better?
Since you were concerned about withholding taxes, perhaps you overlooked the (silent) partnership structure. At times, this can even be leveraged to achieve zero taxation, with jurisdictions such as Estonia. It seems that a silent partnership structure could be suitable for your specific case to build trust.
  • A silent partner is a company that is a stakeholder in another company and is without visibility. The other company conducts business. The rights and duties of a silent partner are limited exclusively to the internal relationship.
  • The silent partner contributes to the company in the form of capital, in-kind contribution, or service. As consideration, he or she shares in the profits and participates in the losses, but only to the extent of the contribution made or agreement. Disbursements to silent partners qualify as operating expenses for the company and are tax deductible.
  • Silent partners have the right to review the annual financial statements. In the event of insolvency, their legal position is one of a creditor.
  • In a typical silent partnership, the silent partners participate in the assets or management of the company under contractual arrangements.

This way, even jurisdictions such as Austria could be used to build trust and face the local market with relatively low effective tax if structured correctly.

Example:
An Austrian company has a silent partner (a company from a low-tax jurisdiction) who contributed the right to utilise a certain patent, a know-how, a software or any other intangible. For being entitled to utilise these rights the Austrian company entitles the low-tax company, by virtue of a silent partnership contract, to participate in its profits for 80%. In other words, 80% of the profit before taxes realised by the Austrian company has to be paid to the low-tax company (silent partner). The profit share of the silent partner is a fully tax-deductible business expense for the Austrian company (the principal). Additionally, Austria doesn’t levy any withholding tax when the silent partner is from the UAE, Hong Kong, Singapore, Malaysia, etc. One can conclude that the total effective tax burden of an Austrian silent partnership could be only 5%, since 80% of the profit before taxes flows to a low or zero tax jurisdiction, and an Austrian corporate income tax of 25% is due on the remaining 20% of the profit.
 
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Cyprus and Malta don't necessarily tax such income either (even if I can't really imagine living there at the moment). There's also Monaco and Spain's Beckham Law.
And there are lump sum tax schemes in several European countries (Switzerland, Italy, Greece, probably others) where you pay some tax, but are left alone otherwise.
There are still many options.
Bulgaria is not as advanced as many other western countries, so living there may not be for everyone, but its tax system is fair (Bulgarian taxes are one of the lowest in the EU). Life there is fairly cheap and also since April you can travel within Schengen by air without ID checks.
 
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Then how is it different from ordering supplies from China?

Ordering supplies isn't a profits generating activity.

Yes, choosing wisely a supplier could have an impact on margins but isn't an activity that generates profits per se.

The profit generating activities are marketing, sales and probably the rendering of the service in your case.

Since your partners are paid on a sales commission basis logic dictates that the marketing and sales part are performed by the partner, otherwise why would you be paying them?

This leaves you only with the burden of demonstrating that the service isn't performed in Malta by showing foreign invoices.

maybe someone knows a good Maltese law firm that can clarify this?

Maybe @CyprusLawyer101 knows somebody

You mean for personal tax residence?

Yes

Gibraltar doesn't have a lot of tax treaties.

Why does this matter to you? The GIB company wouldn't be the parent of all the subsidiaries, it would be the Maltese non resident company.

I don't think those countries would introduce taxation of non-remitted foreign income anytime soon


LOL this literally just came out today.

Malaysia will start taxing FSI from Jan 1st 2026.

There are still many options.

If you want to pay taxes there are all the options you want.

An Austrian company has a silent partner (a company from a low-tax jurisdiction) who contributed the right to utilise a certain patent, a know-how, a software or any other intangible. For being entitled to utilise these rights the Austrian company entitles the low-tax company, by virtue of a silent partnership contract, to participate in its profits for 80%. In other words, 80% of the profit before taxes realised by the Austrian company has to be paid to the low-tax company (silent partner)

This is actually a good idea, in his case he could license marketing materials to his subsidiaries to futher lower their taxation.

BTW @Don do you know if those percentages are accepted by tax agencies?
 
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Since you were concerned about withholding taxes, perhaps you overlooked the (silent) partnership structure.

I haven't looked much into them, I know several high-tax countries have such structures and that, for example, some law firms or real estate agencies, use them to pay their employees in a tax-efficient way.
But I guess such payments would still be subject to transfer pricing rules/GAAR? You can't just contribute $1 for 99% of the profits?
Then how is this fundamentally different from just a commission deal where the local company just resells service provided by another company for a sales commission?
Also how would this help in case of an exit?

Bulgaria is not as advanced as many other western countries, so living there may not be for everyone,

I really don't know why you're bringing this up. I didn't ask about recommendations for personal tax residency.

This leaves you only with the burden of demonstrating that the service isn't performed in Malta by showing foreign invoices.

I will try to get clarification on this from a Maltese law firm.

The GIB company wouldn't be the parent of all the subsidiaries, it would be the Maltese non resident company.

Didn't you write I should use a GIB holding company? If you're suggesting I just move to Gibraltar (which I don't want to do), what would the GIB company be needed for?

LOL this literally just came out today.

It still only applies if you spend 180+ days in Thailand. I'll also believe it when I see it. Enforcement in Southeast Asia is very weak.

Malaysia will start taxing FSI from Jan 1st 2026.

From 2027, as far as I could see. But even then, I'm sure there will be ways to avoid this, such as spending fewer than 180 days per year in Malaysia.

If you want to pay taxes there are all the options you want.

Not sure what this is supposed to mean. There are still lots of rules to follow under the lump sum schemes. You would usually need to have proper substance in the foreign country.
I obviously want to pay as little tax as possible. But if I can pay, say, 5% of tax, but have a simple setup that can scale well even with local, highly-skilled employees in different European countries, and I can use tax exemptions that require income to have been "subject to tax" somewhere else, then that's not a bad solution to me.
I would definitely prefer that over some dodgy structure where you always have to worry it wouldn't withstand an audit, or where you're stuck with less skilled workers in less developed countries. 95% of $30M is more than 100% of $1M.

This is actually a good idea, in his case he could license marketing materials to his subsidiaries to futher lower their taxation.

There's no way this would be compliant with transfer pricing rules, unless you're some huge international corporation maybe.
 
Didn't you write I should use a GIB holding company? If you're suggesting I just move to Gibraltar (which I don't want to do), what would the GIB company be needed for?

I initially got the impression that you were looking to establish tax residency around the EU zone so i suggested the Maltese resident not domiciled company as the parent of all the EU subisidiaries and the GIB holding as the final holding where to funnel all the Maltese profits tax free.

Since you don't want to stay there then the GIB holding isn't needed.

There's no way this would be compliant with transfer pricing rules

If the licensing deal is at arm's lenght, then why not?

Training materials, operating manuals, sales scripts and so on are all valuable know how that you could give partners.

I can use tax exemptions that require income to have been "subject to tax" somewhere else

Ok so that's the why you don't want to use the Maltese not resident company.

Without being subject to tax, HK for example wouldn't exempt foreing sourced income.

But if I can pay, say, 5% of tax, but have a simple setup that can scale well even with local, highly-skilled employees in different European countries,
I would definitely prefer that over some dodgy structure where you always have to worry it wouldn't withstand an audit, or where you're stuck with less skilled workers in less developed countries.

I really don't understand that point, with both Maltese resident domiciled and not domiciled companies you said you will be hiring employess outside of Malta.

You don't have to hire workers in less developed countries if you don't want to.

If you want to hire in Germany you'll face PE problems with both structures.
 
BTW @Don do you know if those percentages are accepted by tax agencies?
Theres plenty of room for structuring it in such way that desired percentages could be acceptable.
Whats more, arguably the risk would be mostly on the managing (operating) entitiy with no assets.
Transfer pricing yes its a risk, but in such a case you could possibly structure the entities as independent (e.g., why not agree to pay someone 1% for effectively payment processing, and helping to build trust)
 
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I initially got the impression that you were looking to establish tax residency around the EU zone so i suggested the Maltese resident not domiciled company as the parent of all the EU subisidiaries and the GIB holding as the final holding where to funnel all the Maltese profits tax free.

Well, I might. I just want to have flexibility for my personal tax residency. I don't want to have to change the company structure just because I want to move to a different country.
If I want to live in Spain, then I want to be able to do so. I could keep the Spanish taxes low by living off savings or loan repayments from my company etc. (which shouldn't be subject to tax).

If the licensing deal is at arm's lenght, then why not?

But transfer pricing isn't the issue. I am already planning to shift profits from the e.g. French entity to a Maltese entity. I could use a sales commission deal for that.

Let's say I have a company in France. Google says the CIT rate in France is 25%.
The French entity sells services to French clients for €4M (just making up some numbers that make calculations simple).
It retains a 10% commission for this, so it pays the Maltese entity €3.6M and retains €400k.
It pays for office rent in France, pays French employees, ads for the French market etc. - these costs amount to €300k.
The remaining profit is €100k, on which it pays 25% CIT - €25k. €75k after-tax profits remain, which can be distributed to the Maltese parent company without WHT under the PSD.

The Maltese parent company receives €3.6M, from which it pays office rent, salaries, subcontractors - basically the full operating expenses for the business. Let's say that these business expenses amount to €1.1M, so €2.5M in profits remain. It then pays 5% tax on those profits, which is €125k. After-tax profits are €2.375M, which can be distributed without WHT.
The Maltese parent company also received €75k in dividends from the French subsidiary, which can also be distributed without WHT.
So in total, the company could pay €2.45M to its shareholder(s).

Total revenue: €4M
Total expenses: €300k + €1.1M = €1.4M
Pre-tax profit: €2.6M
Post-tax profit: €2.45M
Total tax: €150k
Total tax rate: €150k / €2.6M = 5.8%

Doesn't seem like a bad deal for me?
Since Malta doesn't levy any WHT, I could live anywhere. If I suddenly get a lot of clients in Spain, I could set up an entity in Spain in the same way as in France and repeat the process.
Very clean, easy to understand, nothing dodgy.

Sure, 5.8% isn't 0%, but it's a structure that doesn't raise a lot of red flags with proper substance.
But I'm still open to other suggestions.

I don't see the profit shifting from the French to the Maltese company as the issue. Surely there are different ways to do this than with a commission deal.
And 10% was just a random number for simple calculations - it might even be possible to go lower.
But if we replace Malta with something else - how would I avoid the WHT on the €75k?
And, even more importantly, how would I be able to live wherever I want and avoid WHT on the €2.45M?

Yes, it would also work with Estonia instead of Malta.
But then if I want to sell the company, in order to avoid CGT, I'd have to be based in a country with no CGT and sell the whole structure, including the Estonian parent company.
If a buyer wants to buy only the French entity, the profits would be taxable for the Estonian parent company. So that would be less flexible than Malta.

The reputation of Malta and Cyprus isn't great, so it might raise some red flags with the French tax office. But with proper substance, I'm quite optimistic this should work, as long as I don't live in France myself at least.

Ok so that's the why you don't want to use the Maltese not resident company.

No, not really. I would be happy to pay 0% in taxes. I'm just not convinced it would work, especially if you don't want to use Serbian freelancers.

If you want to hire in Germany you'll face PE problems with both structures.

That's the crucial point - I want to be able to hire in Germany, France, Spain, wherever. I want to hire where the clients and the talents are, I want to have local employees for the target markets. You can't do business with Spanish clients with Serbian freelancers who only speak English with an accent. You need native Spanish speakers, clients may want to meet them in an office in Spain, etc.

Theres plenty of room for structuring it in such way that desired percentages could be acceptable.

Again, I'm not worried about the transfer pricing, I'm interested in a structure that is flexible and can keep the WHT low.

Hope it was a bit clearer now.
 
Let's say I have a company in France.
I want to be able to hire in France.

I know this was an example but if you already have a subsidiary company in the place where you want to hire why don't you hire directly through the subsidiary?

Hope it was a bit clearer now.

Malta will give you the flexibility you are looking for, the biggest problem you'll probably face would be the bank account opening for the Maltese company and the somewhat shady reputation.

I'd say a Swiss company would be best since it partcipates in the parent-Subsidiary directive, it has prestige and banking options.

The big downside is that there are only a handful of options to get dividends out of Switzerland tax free.
 
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