Published August 2015
In recent years, Africa has established itself globally as a key investment opportunity. While much of the world economy has been struggling, Africa has been diversifying and growing its economy, with at least a third of the fifty-four (54) African countries projecting an annual GDP growth of over 5% for 2016, compared to the global world average of 3.7%.
Historically, the currencies of African countries have been heavily correlated with commodity prices. Previously, a fall in the price of minerals, oil and other commodities would have, not unexpectedly, resulted in severe consequences to the African market. However, as Africa focuses on diversifying its revenue sources to non-resource sectors, including real estate, telecommunications, tourism, finance and transportation, it reduces its dependency on commodity cycles, thus developing a more stable, sustainable, and therefore investable, economy.
Africa’s efforts to regenerate its economy have not gone unnoticed; current and emerging economic “superpowers” have expressed serious interest in investing in the continent, resulting in a strong rate of foreign direct investment (“FDI”) into Africa. As illustrated in the annual report on foreign direct investment released in June 2015 by the United Nations Conference on Trade and Development, net inflows of FDI fell by 16% globally in 2014, FDI flows into Africa remained stable at $54 billion, with FDI flows into sub-Saharan Africa actually rising 5% despite challenges such as Ebola, regional conflicts and falling commodity prices. Moreover, Africa has seen cross-border mergers and acquisition sales increase from just $130 million in 2013 to $2.4 billion in 2014. Of course, it should be noted that the investment flow is not entirely one-sided. There is also a significant rise in the number of African investors who are interested in investing into other countries, with outward investment hitting $11.4 billion.
Despite the positive outlook for Africa’s growth, interest in the continent is not met without caution by investors. The perceived obstacles for investors are many, with the most prominent ones being political and social instability, and a variation of banking, financial and legal systems across the fifty-four countries.
Channeling Africa via the UAE
Foreign companies seeking to undertake business in Africa have therefore always been on the look-out for strategic and low-risk channels of access into the continent. Given the UAE’s geographic proximity to Africa and its FDI source countries, its advanced banking and legal systems, and its established network of Double Tax Treaties (“DTTs”) with several African countries, not to mention the numerous tax incentives it has to offer, the UAE is well-positioned as a favourable cross-border platform for investment into Africa.
Among the Gulf countries, the UAE is the highest FDI contributor into Africa, ranking as the fourth source country worldwide by FDI projects in 2014. It therefore has the knowledge and experience necessary to secure confidence from investors who want to enter the African market but are unsure on how to do so. Moreover, with a strong transport and logistics infrastructure, combined with its geographic positioning between the East and the West, the UAE is a natural base for expansion into Africa. Additionally, the UAE has played a major role in facilitating travel around the content of Africa by expanding its passenger and cargo services, a service which is not available even from African airlines.
As such, the UAE is growing in popularity as a base for multinational companies entering the African market. The concept is not new to global brands already present in Africa, with entities such as Nestlé and the Bank of China (among others) maintaining their African offices in the UAE.
Moreover, the presence of free zones in the UAE is a significant factor lending to the UAE being a natural gateway into Africa. For instance, the Jebel Ali Free Zone (JAFZA), the world’s largest free zone, contains the Jebel Ali port, arguably the most important channel between Africa and the world. Companies can open logistics facilities in JAFZA to and from which it can quickly ship products to Africa, without currency restrictions, import or re-export duties, or corporate tax.
UAE Free Zones also facilitate quick and efficient offshore company formation, which investors may wish to consider for protection of foreign investments and tax efficiency. It may be of interest to investors to domicile their funds in the UAE and route them to Africa, as opposed to investing directly into the continent. Unlike many African countries, the UAE is currently a tax neutral country with no taxes on income, dividends or capital gains. Moreover, companies established in free zones can be 100% foreign-owned.
The UAE is also building a substantial network of treaties and DTTs with Africa, from which companies can benefit once they are considered tax residents in the UAE. DTTs provide the additional benefit of reduced taxation in the respective signatory country for companies that set up their management or investment holding companies in the UAE. While DTTs are structured differently from country to country, the general notion is that, under such treaties, profits generated from shares, dividends, interest, royalties and fees are taxable only in one country, either the country of tax residence or the country where the gain arises. Currently, the UAE has DTTs with at least eleven (11) African countries, including Mauritius.
Strategic Corporate and Tax Structuring
Given that Mauritius has an even wider network of tax and trade treaties with other African countries, it is entirely possible to therefore structure a company that benefits from multiple levels of tax efficiency, firstly via the UAE-Mauritius DTT by way of an ultimate holding company in the UAE, followed by the formation of sub-holding companies in Mauritius. Such a tiered system is ideal for many reasons; firstly, whereas Mauritius has a low residence tax rate, a UAE company established in a free zone, currently has none; and secondly, whereas almost all African nations impose a withholding tax ranging between 10 and 20 % on dividends paid to non-residents, Mauritius tax treaties limit the withholding tax on dividends to between 0% and 10%. Although this is but one example of the tax benefit that companies can derive from a carefully planned corporate structure, it aptly demonstrates the potential for considerable savings by a company investing into Africa. Ultimately, of course, consideration would have to be given to the nuances of local tax legislation in different African jurisdictions, including provisions relating to thin capitalization, see-through capital gains tax, and transfer pricing.
The above is simply an overview as to the benefits of investing into Africa via the UAE. With a stable political and legal framework and a developed trading and logistics infrastructure, combined with tax benefits and geographical proximity to Africa’s source FDI countries, the UAE is well-positioned to be a natural springboard for African growth.
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