China’s economic presence in Africa has increased exponentially in the past decade, fuelled by the country’s rapidly growing energy demand and the pressing need to secure new energy sources. As one of the world’s fastest growing economies, with growth rates averaging 10% over the past three decades, China requires massive levels of natural resources to sustain its expansion.
Although China relies primarily on coal to meet its energy needs, it is now the world’s second largest consumer of oil behind the US, according to the International Energy Agency. The extent of the country’s energy demand has compelled China to push into new markets, in particular oil-rich Africa, in search of new energy sources. China currently imports one-third of its oil supplies from Africa, with roughly 85% of Africa's exports to China coming from the oil-rich countries of Angola, Equatorial Guinea, Nigeria, the Democratic Republic of Congo and Sudan, according to the World Bank.
Chinese interest in Africa, however, extends beyond oil. The region is the second fastest growing in the world and its collective GDP is expected to reach $2600bn by 2020. The time to invest in Africa’s emerging markets is now.
China currently ranks as Africa’s largest trading partner. As of the end of 2011, China's cumulative FDI in Africa exceeded $14.7bn, up 60% from 2009. And that number is only set to rise, as relations flourish between China and Africa.
Against this backdrop, Mauritius is rapidly positioning itself as a conduit for investment into Africa. Strategically located in the Indian Ocean, midway between Africa and Asia, Mauritius has the potential to become the preferred platform for FDI between China and Africa.
When a foreign investor, operator or fund player expands into Africa, it often considers using an offshore jurisdiction with a sound reputation, favourable tax regime and a good tax treaty network with African countries. This is done to help a business efficiently structure its investments into Africa, and help reduce withholding taxes on dividends, interest and royalties, and in some countries, gains subject to tax.
Mauritius, as a stable parliamentary democracy with strong institutions and a diverse economy, offers investors a secure commercial and political environment for onward investment into Africa. Its membership with all major African regional organisations provides investors with preferential access to markets across Africa. Mauritius is also a signatory to all the major African conventions.
Mauritius is a low-cost, legally tax-efficient jurisdiction, with a uniform tax rate of 15% for individuals and businesses alike. Taxes incurred by Mauritian residents on their foreign source income may be credited against any income tax payable in Mauritius in respect of that income (upon submission of written evidence of the actual foreign tax suffered and subject to certain restrictions).
Capital gains across African countries are taxed at rates as high as 35%, while most impose withholding taxes on dividends, interests and royalties at rates varying between 10% and 20%. The double taxation avoidance agreements (DTAAs) in place with African countries generally limit, reduce or eliminate such capital gains or withholding taxes. There are no capital gains or withholding taxes in Mauritius.
As a jurisdiction of choice for the setting up of holding companies, Mauritius offers a comprehensive range of offshore investment structures, ranging from companies, funds, trusts and partnerships, for investment into Africa.
The most popular structure remains the setting up of global business companies holding either a category one or category two global business licence (GBL1 or GBL2). GBL2 companies are tax-exempt companies and are mainly used for the passive holding and management of private assets or as special-purpose vehicles. GBL1 companies are tax-incentive companies that benefit from a full spectrum of fiscal incentives under the current regime, including tax-sparing credits that reduce the effective tax rate on foreign source income from 15% to 3%; access to Mauritius’s network of DTAAs; and dividends, interest and royalties paid by GBL1 companies to non-residents are exempt from withholding taxes.
As the primary purpose of setting up holding companies is to invest in Africa, GBL1 companies are more common as such companies are tax resident in Mauritius and have access to its network of DTAAs. However, the substantive requirements for setting up a GBL1 company under the current regime have been criticised as burdensome. To qualify as a GBL1 company, a company must:
- be centrally managed and controlled from Mauritius;
- have at least two resident directors in Mauritius who shall always be of appropriate calibre and shall exercise independence of mind and judgement;
- maintain its principal bank account in Mauritius;
- keep all of its accounting records at its registered office in Mauritius;
- prepare its statutory financial statements and have them audited in Mauritius;
- provide for meetings of directors to include at least two directors from Mauritius; and
- in respect of relevant DTAAs, apply for tax residency certificate(s) annually from the Mauritius Revenue Authority.
Proof of residency
With tax authorities becoming wary of offshore jurisdictions, it is increasingly important for investors to give substance to their holding companies in Mauritius, as tax authorities may otherwise apply substance-over-form principles to deny the benefits of a structure. To be eligible for relief under the DTAAs, a holding company must, as a rule, demonstrate that it is a resident of a contracting country under such DTAAs. From a legal perspective, this is generally assessed by determining where an entity’s central management and control is being exercised. However, with respect to African countries and China, this depends on an entity’s place of effective management. It is therefore crucial for entities to ensure that their residency in any contracting country is not challenged. In that regard, recent trends show that many Chinese investors are currently setting up operations in Mauritius for investment into Africa.
The Mauritian government will, as announced in its 2012 budget, continue to focus on widening Mauritius’s DTAAs and investment promotion protection agreements (IPPAs) with African countries while strengthening its bilateral ties with African countries and others in the Indian Ocean region, thus leveraging the opportunities and growth Africa has to offer. The government is especially committed to consolidating Mauritius’s market position as the preferred investment route into Africa.
In addition to its Africa strategy, Mauritius has built a number of important relationships with China for mutually beneficial political and economic relations with the mainland, drawing on its long-standing historical, cultural and economic ties with China.
Mauritius has signed both a DTAA and an IPPA with China, increasing Mauritius’s appeal for Chinese investors. Chinese tax exposure is significantly reduced under the China/Mauritius DTAA through use of a Mauritius tax-resident entity as the DTAA limits Chinese withholding tax on dividends at 5% and withholding tax on interest and royalties at 10%, provided that the Mauritius entity is managed and controlled in Mauritius (and the Mauritius entity is not a tax resident in China).
Trade and investment between the two countries is flourishing. FDI from Mauritius to China increased from $119,000 in 1994 to $1.5bn in 2008. Mauritian FDI accounted for 1.62% of China’s total FDI inflows in 2008. This increase has driven Mauritius into the ranks of the top 10 largest sources of FDI into China.
Strong indicators show that capital inflow from China to Mauritius is on the rise and Mauritius will continue to benefit from Chinese FDI as China uses Mauritius as a platform to enter the African market. Mauritius’s aggressive marketing strategy to position itself as the gateway into eastern and southern Africa has also started to pay off.
The mission of the Board of Investment of Mauritius in Hong Kong, Shanghai and Beijing earlier this year indicated a “keen interest of Chinese financial institutions” to use Mauritius as the preferred investment gateway into Africa, given the clear fiscal advantages demonstrated by the jurisdiction. Mauritius will continue to benefit from Chinese FDI as goodwill and trade between China and Mauritius continue to grow and Mauritius becomes China’s preferred partner for investment into Africa.
Malcolm Moller is managing partner and Anjana Ramburuth is a senior associate at the Mauritius office of Appleby, an offshore law firm.
 Council on Foreign Relations (2009) China, Africa, and Oil
 Wonacott, Peter (2011) In Africa, US Watches China's Rise, Wall Street Journal online, accessed September 2, 2011