Foreign Investments Gateways In Africa

By Malcolm Moller, Managing Partner – Mauritius & Seychelles, Appleby (01/01/2012)

The current decade has so far been marked by enormous changes in the distribution of wealth across the globe, driven primarily by the increased globalisation of economies and more recently by the very significant increase in oil prices which have focused huge amounts of wealth in the Middle East, Russia and parts of South America.  In addition, this decade has seen the unlocking of the latent economic powers of Chindia (China and India) and as these countries emerge onto the global stage, their relationships with the key offshore financial centres in the Indian Ocean will play a critical role as an investment gateway to Africa.

Over the past decade we have seen many investors keen to invest in projects not only in India and Asia but also in Africa through Mauritius and Seychelles. China's booming economy, which has averaged annual nine per cent growth for the last two decades, requires massive levels of energy to sustain its growth.  Although China relies on coal for most of its energy needs, it is the second-largest consumer of oil in the world behind the United States. The International Energy Agency projects China's net oil imports will jump to 13.1 million barrels per day by 2030 from 3.5 million barrels per day in 2006. China currently imports about half its oil supplies from the Middle East, and that percentage is projected to grow in coming decades.  Yet the extent of the country's energy demand has also compelled China to push into new markets, and particularly Africa.

With the development of China-Africa relations and increased exchanges between China and African countries, the scale of China-Africa trade has increased exponentially. China-Africa bilateral trade volume was only US$12.14 million in 1950, increased to US$100 million in 1960, and exceeded US$1 billion in 1980 and from January to November in 2010, China-Africa trade volume reached US$114.81 billion. It has been estimated that 85 percent of Africa's exports to China come from five oil-rich countries (Angola, Equatorial Guinea, Nigeria, the Republic of Congo, and Sudan), according to the World Bank report. But Chinese interest in Africa extends beyond oil. China now ranks as the continent's second-highest trading partner, behind the United States, and ahead of France and Britain.

While most of the focus has been on the China-Africa partnership and the overwhelming presence of China in Africa, India is slowly developing a very strong business presence in Africa. According to Anand Sharma (India’s trade minister):“Trade between India and Africa was US$45 billion in 2010-2011 and it is expected to grow beyond US$75 billion by 2015”[1]. India's booming economy, requires massive levels of energy to sustain its growth and according to Dilip Khanna, partner at Ernst & Young: “From all economic parameters, the next level of growth for India will come from the African continent, and mining for the resources India needs to sustain its economic development is very crucial to sustain its long term growth”[2].

Mining prospects in Africa present an enormous opportunity for these two countries (India and China). For example, it has been estimated that Democratic Republic of Congo has 40 per cent of the world’s cobalt reserves, South Africa has around 90 per cent of the world’s platinum and Guinea has approximately 30 per cent of the world’s bauxite reserves and some of the largest deposit of iron ore in the world.   

Mauritius and Seychelles have double taxation agreements in place with a number of African countries, which makes these two jurisdictions an attractive platform for companies that want to do business on the rest of the continent. When a foreign multinational is expanding into Africa, it often considers using an offshore holding company with a good tax treaty network with African countries, in order to help reduce withholding taxes on dividends, interest and royalties, and in some instances, gains subject to tax, in the counterparty territories. As a result, we continue to see new formations of Africa focus funds and SPVs in Mauritius and Seychelles. These include not only Indian and Chinese companies using the tried and tested platform of Mauritius and Seychelles to enter into Africa but also South African companies investing into Sub-Sahara through Mauritius and Seychelles.

The IMF’s Coordinated Portfolio Investment Survey (CPIS) collects information on the stock of cross-border holdings of equities and debt securities from 75 investor countries and territories (IMF 2010b) (Source: UNCTAD for FDI; IMF for Portfolio Investments). In 2009 the portfolio investment stock of these 75 countries in Africa was US$150 billion, consisting of 72 per cent equity securities and 28 per cent debt securities. This was also the ratio for the rest of the decade. The United States held a portfolio investment stock of US$66 billion in Africa in 2009, or 44 per cent of the total investment stock of all countries responding to the survey, followed by Luxembourg with US$19 billion and Mauritius and the United Kingdom with US$8 billion each. These figures reflect Indian Ocean’s critical role as an investment gateway to Africa.


Mauritius and Seychelles combine the traditional advantages of offshore financial centres in the Indian Ocean (no capital gains tax, no withholding tax, no capital duty on issued capital, confidentiality of company information, exchange liberalisation and free repatriation of profits and capital etc.) with the distinct advantages of being treaty based jurisdictions, with a substantial network of treaties and double taxation avoidance agreements.  There are specific advantages for setting up and administering investment vehicles in Mauritius and Seychelles for investment in Africa.

For example, capital gains tax, where imposed in Africa, are generally levied at a rate ranging from 30-35 per cent. Nevertheless, the Double Taxation Agreements (‘DTA’) in force in Mauritius or Seychelles restrict taxing rights of capital gains to the country of residence of the seller of the assets. Since there are no capital gains taxes in Mauritius or Seychelles (i) the potential tax savings for the Mauritius residence entity is significant. For example, the use of a Seychelles entity for the Seychelles/China DTA provides significant advantages of reducing Chinese tax exposure. The Seychelles/China DTA caps Chinese withholding tax on dividends at five and 10 per cent on interest and royalties, provided that the Seychelles entity has its effective management in Seychelles (and the Seychelles entity is not tax resident in China).

In contrast, while the Hong Kong/China DTA also caps Chinese withholding tax at five per cent if the Hong Kong company owns 25 per cent or more of the shares in a Chinese company, the Hong Kong/China DTA only caps Chinese withholding tax at 10 per cent if the Hong Kong company owns less than 25 per cent of a Chinese company. The Seychelles/China DTA, thus, has a distinct advantage over the Hong Kong/China DTA in such circumstances, which will be relevant to Chinese investment mutual funds and other non-controlling foreign investors; (ii) the Seychelles Indonesia DTA sets a cap of 10 per cent Indonesian withholding tax on repatriated dividends, interest and royalties (instead of usual rate of 20 per cent). Article 13(4) provides that no Indonesian capital gains tax applies on disposal of shares in Indonesian companies held by the Seychelles company (ie, gains are taxable in Seychelles, but no tax applies as there is no CGT in Seychelles). The Seychelles DTA also offers a fiscal advantage over the Singapore Indonesia DTA. The principal difference lies in the treatment of the proceeds from the sale of shares in a private Indonesian company. Under the Seychelles DTA, the gain is exempt from tax; there is no exemption under the Singapore DTA. Therefore, if a Singapore company sells the shares of a private Indonesian company, a five per cent tax is levied on the gross sales proceeds. This tax is particularly painful if the shares are being sold at a loss since the tax is levied on gross proceeds, not the gain.

Furthermore, over the past decade the Indian economy has experienced a tremendous influx of foreign capital from private equity and hedge fund investors from across the globe. Such investment funds have typically used Mauritius (and in some cases Singapore) entities to invest in India because of their highly favourable Indian tax treaties. These treaties permit capital gains to be remitted with reduce tax rate. Mauritius has been the single largest source of FDI into India in the first 10 years of the new millennium (2000-2011 Data Source: DIPP, Ministry Of Commerce & Industry).


Also, Mauritius has signed Investment Promotion and Protection Agreements (the  ‘IPPA) with 15 African member states. The IPPA with South Africa is already in force. IPPAs typically offer the following guarantees to investors from the contracting states: (a) free repatriation of investment capital and returns; (b) guarantee against expropriation; (c) most favoured nation rule with respect to the treatment of investment, compensation for losses in case of war or armed conflict or riot etc; and (d) arrangement for settlement of disputes between investors and the contracting states.

Furthermore, while these two nations are fully belonging to Africa, Mauritius and Seychelles are not continental African countries. This ideal geopolitical situation eliminates spill over effects from the potential neighbouring conflicts. Thus, much of the FDI increase in Africa has been routed through Mauritius and Seychelles domiciled investment vehicles.    

While many countries around the globe are still struggling with the global financial crisis, African economies have proved to be resilient and to provide widespread opportunities to international investors.  Offshore jurisdictions like Mauritius and Seychelles have a tremendous role to play in Africa’s growth story.  In the race for growth, it is not surprising that the demand for Africa’s natural resources has increased over the years and will continue to do so many years/decades to come.  Many investors from China and India have taken the opportunities offered by these two offshore jurisdictions such as the wide range of DTAs and IPPAs with African member states coupled with the traditional advantages of offshore financial centres.  The cooperation between Asian and African countries could lead to a new era of development.

[1] Africa –India Partnership Made in Heaven, Valerie Noury, Africa Business, Issue No, 382 January 2012.


[2] Ibid.