Structuring

Investments into
Africa: Tax and
BITs Aspects

February 2015
Structuring Investments into Africa
Tax is, of course, only one of many elements to consider when planning cross-border investments.
Indeed, tax is unlikely to be one of the main factors in deciding whether or not to make an investment in
a jurisdiction or whether or not to take on a development project. However, once a decision has been
reached to make an investment or carry out a project on economic grounds, the overall profitability of
the investment or development can be greatly affected by the structure adopted and its tax treatment.
It is important, therefore, when structuring investments into Africa to ensure that returns to investors do
not suffer unnecessary levels of tax. Tax leakage can occur at very many points in a structure on the
repatriation of profits from the underlying investment to the intermediate entity, tax at the level of the
intermediate entity itself and when profits are repatriated from the intermediate entity to the investor.
Each of these stages in an investment structure must be carefully considered to achieve the most tax
efficient structure.
Many jurisdictions will levy withholding taxes on distributed profits as well as taxing income and gains
received from abroad. These tax charges can cascade, leading to a very large overall effective tax rate if
care is not taken. For this reason, it is important for inbound investors to consider carefully the choice of
an intermediate holding company.
A particular issue in developing countries is the range and breadth of taxes and withholding taxes, which
can often be much more wide-ranging than in European countries. In particular, potential withholding
taxes on payments for services to non-residents are not unusual and these must be factored into the
chosen structure and contractual arrangements. In addition, some developing nations will levy tax on
direct or indirect disposals of assets situated in their jurisdiction.
An intermediate holding company can ensure that, through access to advantageous double tax treaties,
taxes are minimised on income received by the holding company. In addition, many of the typical holding
company jurisdictions do not levy withholding taxes on outbound payments of dividends or interest (at
least where the investment is correctly structured). Most jurisdictions have some form of anti-avoidance
provisions to prevent, for example, the artificial diversion of profits or which deny treaty benefits where
there is no material substance or presence in a jurisdiction. The OECDs Base Erosion and Profit Shifting
Action Plan together with recently adopted changes to the EU Parent-Subsidiary Directive have brought
an increased focus on such measures and recommendations arising out of the OECDs Action Plan are
likely to lead to the introduction of further anti-treaty shopping measures in the future. These issues will
need to be considered as part of the overall structure.

Bilateral investment treaties (BITs)

Perhaps equally important as a double tax treaty network, overseas investors looking for a holding
jurisdiction for their investments into Africa may look to benefit from BITs. These BITs safeguard cross-
border investments made through a holding company within the country of the relevant African BITs
partner(s) against future hostile government action. The structure chosen should ideally benefit from
favourable BITs protection as well as favourable tax treatment.

Particular jurisdictions
The following pages provide a brief overview of the potential advantages of using holding companies in
the UK, the Netherlands, Portugal, Luxembourg and Mauritius for structuring an investment into Africa. In
addition, comparison tables provide an overview of these tax regimes and their treaty networks.

1
United Kingdom
Advantages of using a UK investment structure:

No UK withholding taxes on outbound dividends

No UK capital gains tax on the sale by an investor of its interest in a UK company
Tax exemption available on the sale by a UK holding company of its interest in trading subsidiaries

Generous interest deduction rules for UK entities

No or reduced foreign withholding tax on inbound interest and royalties under double tax treaty
network
Extensive double tax treaty network

19 BITs concluded by the UK with African countries, which safeguard cross-border investments made
through the UK into the country of the relevant African BITs partner(s)

Example of a typical structure

2
The Netherlands
Advantages of using a Dutch investment structure:

No Dutch withholding tax on outbound profit distributions made by a Dutch holding company (such
as a Dutch Cooperative, being a corporate vehicle, but without a share capital), if properly structured
No Dutch capital gains tax on the sale by an investor of its interest in a Dutch holding company, if
properly structured
Dutch holding company benefits from participation exemption in respect of dividends received and
capital gains realised on the disposal of qualifying shareholdings, with no minimum holding
requirement
No Dutch withholding tax on outgoing interest and royalty payments

No or reduced foreign withholding tax on incoming dividends interest and royalties under double tax
treaty network
Extensive double tax treaty network
More than 25 BITs concluded by the Netherlands with African countries, which safeguard cross-
border investments made through a Dutch Holdco within the country of the relevant African BITs
partner(s)
Availability of advance tax rulings and advance pricing agreements

Example of a typical structure

3
Portugal1
Advantages of using a Portuguese investment structure:

No Portuguese withholding tax on outbound distributions made by a Portuguese company in respect

of qualifying shareholdings
Tax exemption for inbound dividends received by Portuguese companies from a qualifying
participation
Tax exemption for capital gains on the disposal by a Portuguese company of a qualifying participation

No or reduced rates of withholding tax on outbound interest and royalties under double tax treaty
network
No capital gains tax on the sale by an investor of its shareholding in a Portuguese company
Extensive double tax treaty network

6 BITs concluded by Portugal with African countries, which safeguard cross-border investments made
through Portugal into the country of the relevant African BITs partner(s)
Additional advantages of using a Madeira International Business Centre (MIBC) investment structure:
Low corporation tax rate (5%) on non-Portuguese sourced income, including income from services
rendered to the investment company and dividends not qualifying for the participation exemption
regime
No withholding tax on royalty, service or interest payments to non-resident entities

Example of a typical structure

1
This section prepared by Sociedade Rebelo de Sousa. Contact Paula Pereira (E paula.pereira@srslegal.pt) for more information.

4
Luxembourg
Advantages of using a Luxembourg structure:

Luxembourg holding company benefits from participation exemption in respect of dividends received
and capital gains realised on the disposal of qualifying shareholdings
No capital gains tax on disposal of the Luxembourg holding company provided minimum interest and
holding period requirements are met
Generally no Luxembourg withholding tax on interest and royalties
No or reduced foreign withholding tax on incoming interest and royalties under double tax treaty
network
Extensive double tax treaty network

More than 10 BITs concluded by Luxembourg/Belgium with African countries, which safeguard cross-
border investments within the country of the relevant African BITs partner(s)
Availability of advance tax rulings

Example of a typical structure

5
Mauritius
Advantages of using a Mauritius holding company structure:

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No capital gains tax

No CFC rules
No thin cap rules
No specific transfer pricing rules (though arms length provision rules do apply to some transactions
between related parties)
Generous deemed foreign tax credit of 80%
Double tax treaty network, particularly in Asia and Africa

Example of a typical structure

6
Overview of tax regimes

UK Netherlands Luxembourg Mauritius Portugal

1 2 3
Main corporate 21 25 29.22 15 21
tax rate (%)
5 6 7 8
Withholding tax 0 15 /0 (for example, 0 (if participation 0 0 (if exemption for
on outbound if properly exemption applies) qualifying shareholdings
4
dividends (%) structured via a applies)
Dutch Coop)
9 10 11
Withholding tax 20 0 0 0 25
on outbound
interest (%)
15
Corporate tax 0 0 (if participation 0 (if participation 0 0 (if participation
13 14 16
on dividends exemption exemption applies) exemption applies)
12
received applies)
17
Capital Gains tax 0 0 (if participation 0 (if participation 0 0 (if participation
18 19
on disposals by exemption exemption applies) exemption applies)
HoldCo applies)

Treaty network Largest Over 90 treaties Over 70 treaties Over30 Over 65 treaties
network of treaties
over 110
treaties
20
IP regime UK patent Dutch Innovation Luxembourg IP box Portuguese patent box
box regime box regime regime regime

1
The UK Government has announced a reduction in the main rate of corporation tax to 20% from April 2015.
2
20% on the first EUR 200,000 of taxable profits.
3
Entities with a Global Business Licence (1) in Mauritius can claim an 80% foreign tax credit, reducing the overall tax rate in
Mauritius on overseas profits to 3%. Entities with a Global Business Licence (2) are exempt from tax, but do not qualify for DTTs.
4
Dividend paid by a company in one Member State to a recipient in another Member State would generally be exempt from
withholding taxes under the EU Parent-Subsidiary Directive.
5
Normal rate of 15% may be reduced or eliminated under appropriate DTT.
6
15% if participation exemption does not apply, but may be reduced by relevant double tax treaties.
7
For entities with a Global Business Licence (1) in Mauritius.
8
25% if exemption does not apply.
9
Normal rate of 20% may be reduced or eliminated under appropriate DTT or EU Interest and Royalties Directive.
10
For entities with a Global Business Licence (1) in Mauritius.
11
May be reduced or eliminated under appropriate DTT or the EU Interest and Royalties Directive. Also, 0% if paid by an MIBC
holding company.
12
Dividend, interest and IP royalty income derived by a Member State from other Member States would generally be exempt
from tax under the EU Parent-Subsidiary Directive or the EU Interest and Royalties Directive.
13
Generally requires a 5% shareholding.
14
Generally requires a 10% shareholding or an acquisition price of EUR 1.2m for dividends and an uninterrupted holding period of
at least 12 months.
15
For entities with a Global Business Licence (1) in Mauritius.
16
Generally requires a 5% shareholding. Rate is 23% if participation exemption does not apply (or 5% if received by an MIBC
holding company).
17
Where disposal of a trading company or trading group and provided that the substantial shareholding exemption applies.
18
Generally requires a 5% shareholding.
19
Generally requires a 10% shareholding or an acquisition price of EUR 6m for capital gains and an uninterrupted holding period
of at least 12 months.
20
Following the OECDs BEPS Action Plan, it is likely that IP regimes, such as the UKs patent box, the Dutch innovation box and
Luxembourgs IP box regime, will need to be substantially modified to apply only to income generated through qualifying R&D
carried out in the relevant jurisdiction.

7
Treaties with African Nations

Mauritius Tax treaties with African nations BITs with African nations
Netherlands No DT Treaties with 10 African nations BITs with over 25 African nations
UK Yes DT Treaties with 18 African nations BITs with 19 African nations
Portugal Yes DT Treaties with 9 African nations BITS with 6 African nations
Luxembourg Yes DT Treaties with 3 African nations BITs with over 10 African nations
Mauritius DT Treaties with 14 African nations BIT with South Africa

8
Simmons & Simmons
Simmons & Simmons has been operating in Africa for over 20 years and has acted on matters involving at
least 48 of the 54 African nations. We advise on a huge variety of projects in Africa, including mining and
natural resources, energy and infrastructure projects. Our experience in Africa, combined with our
practices in the Far East, Middle East and Europe, allows us to offer clients an in-depth understanding of
their local business and needs.

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Partner
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