Structuring Investments into Africa: Tax and BITs Aspects

Transcription

1 Structuring Investments into Africa: Tax and BITs Aspects February 2015

2 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 OECD s 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 OECD s 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 crossborder 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

3 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

4 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 crossborder 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

5 Portugal 1 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

6 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 crossborder investments within the country of the relevant African BITs partner(s) Availability of advance tax rulings Example of a typical structure 5

7 Mauritius Advantages of using a Mauritius holding company structure: No withholding taxes on dividends, interest or royalty payments No capital gains tax No CFC rules No thin cap rules No specific transfer pricing rules (though arm s 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

8 Overview of tax regimes UK Netherlands Luxembourg Mauritius Portugal Main corporate tax rate (%) Withholding tax on outbound dividends (%) 4 Withholding tax on outbound interest (%) /0 (for example, if properly structured via a Dutch Coop) 0 6 (if participation exemption applies) (if exemption for qualifying shareholdings applies) Corporate tax on dividends received (if participation exemption 13 applies) 0 (if participation exemption 14 applies) (if participation exemption 16 applies) Capital Gains tax on disposals by HoldCo (if participation exemption 18 applies) 0 (if participation 0 0 (if participation exemption applies) 19 exemption applies) Treaty network Largest network of over 110 treaties Over 90 treaties Over 70 treaties Over30 treaties Over 65 treaties IP regime 20 UK patent box regime Dutch Innovation box regime Luxembourg IP box regime Portuguese patent box regime 1 The UK Government has announced a reduction in the main rate of corporation tax to 20% from April % 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 OECD s BEPS Action Plan, it is likely that IP regimes, such as the UK s patent box, the Dutch innovation box and Luxembourg s 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

9 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

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