With flourishing China-Africa relations, Chinese outbound foreign direct investment in Africa is expected to soar. Against this backdrop, the Indian Ocean Islands of Mauritius and the Seychelles are fast positioning themselves as investment gateways into Africa.
China's economic presence in Africa has increased exponentially over the last decade. Initially fuelled by China's rapidly growing energy demand and the pressing need to secure new energy sources, Chinese interest in Africa now extends beyond oil.
As the second-fastest growing region in the world, with an estimated collective GDP expected to reach US$2.6 trillion by 2020, the time to invest in Africa is now. Chinese investors, bullish on the compelling business and investment opportunities the continent has to offer, are already tapping into Africa's raw potential. China currently ranks as Africa's largest trading partner. As at the end of 2011, China's cumulative Foreign Direct Investment (FDI) in Africa, exceeded US$14.7 billion, up 60% from 20091. Over 2,000 Chinese enterprises do business in nearly 50 African countries, covering a wide range of areas such as mining, financing, manufacturing, construction, tourism and agriculture.2 Experts say Chinese companies see Africa as an excellent market for their low-cost consumer goods, as well as a burgeoning economic opportunity as more African countries privatise their industries and open their economies to foreign investment.
Investment Gateways into Africa
A significant amount of FDI in Africa is currently routed through Mauritius and the Seychelles. The use of vehicles formed in offshore jurisdictions is almost customary in many transactions involving Chinese investments, whether inbound or outbound. A typical structure used by Chinese investors investing into Africa would involve the setting up of a Mauritius or Seychelles vehicle, held by a Chinese investor with the Mauritius or Seychelles vehicle investing into Africa.
As offshore jurisdictions of sound repute boasting stable economies, favourable tax regimes and good tax treaty networks with African countries, Mauritius and the Seychelles possess all the attributes necessary for Chinese investors to efficiently structure their investments into and from Africa.
The Islands' membership with all major African regional organisations provides investors preferential access to markets in the African region. Mauritius and the Seychelles are also signatories to all the major African conventions. Mauritius, in particular, is currently ranked first out of 53 countries in Africa on the Mo Ibrahim Index of African Governance, the Fraser Institute's Economic Freedom Index, as well as first in Africa, in the World Bank's Ease, Doing Business Index for the fourth year running.
Risk-Mitigating and Fiscally Effective Jurisdictions
Mauritius and the Seychelles are risk-mitigating and fiscally effective jurisdictions for the structuring, administration and effective management of Africa related investments. They combine the traditional advantages of leading International Financial Centres (IFCs) (low taxes, no capital gains tax, no withholding tax, no exchange control, no duty on issued capital, confidentiality of company information, exchange liberalisation and free repatriation of dividends, profits and capital, etc.) with the distinct advantage of being treaty-based jurisdictions with an unparalled network of Double Taxation Avoidance Agreements (DTAAs), Investment Promotion and Protection Agreements (IPPAs) and other treaties with a number of African countries.
DTAAs and IPPAs with African Countries
Mauritius has, to date, concluded 14 DTAAs with Botswana, Lesotho, Madagascar, Mozambique, Namibia, Rwanda, Senegal, Seychelles, South Africa, Swaziland, Tunisia, Uganda, Zimbabwe and Zambia; signed five DTAAs with Congo, Egypt, Ghana, Kenya and Nigeria, (awaiting ratification); finalised a DTAA with Gabon (awaiting signature); and is currently negotiating further DTAAs with Algeria, Burkina Faso, Malawi, Tanzania and Yemen. The Seychelles, on the other hand, has so far concluded DTAAs with Botswana, Mauritius, South Africa and Zambia; and signed DTAAs with Ethiopia, Lesotho, Malawi and Zimbabwe (awaiting ratification).
There is also growing interest among investors in the non-tax advantages Mauritius has to offer, in particular, access to a wide range of IPPAs Mauritius has with a number of African countries. Mauritius has, so far, signed IPPAs with 18 African states. The IPPAs with Burundi, Madagascar, Mozambique, Senegal and South Africa are already in force, while the remaining 13 IPPAs with Benin, Botswana, Cameroon, Comoros, Ghana, Guinea Republic, Mauritania, Republic of Congo, Rwanda, Swaziland, Chad, Zimbabwe and Kenya are awaiting ratification. IPPAs generally guarantee the free repatriation of investment capital and returns, guarantee against expropriation, a most favoured nation rule with respect to the treatment of investment, compensation for losses in case of war, armed conflict or riot, and provisions for settlement of disputes between investors and the contracting states.
Mauritius and the Seychelles are especially committed to consolidating their market position as the preferred investment routes into Africa and will continue to focus on widening Mauritius and the Seychelles' DTAAs, IPPAs and other treaties with African states, and strengthening their bilateral ties with African states and other countries of the Indian Ocean region.
Flourishing Political and Economic Relations
In addition to their Africa strategy, Mauritius and the Seychelles have, over the years, built a number of important building blocks with China for mutually beneficial political and economic relations with the mainland, drawing on their longstanding historical, cultural and economic ties with China.
Both Mauritius and the Seychelles have signed DTAAs with China, increasing their appeal to Chinese investors. Chinese tax exposure is significantly reduced under the DTAAs through use of a Mauritian and/or Seychelles tax-resident entity as the DTAAs limits Chinese withholding tax on dividends, interest and royalties, provided that the entity is managed and controlled in Mauritius and/or Seychelles (and the entity is not tax resident in China). Mauritius has additionally signed an IPPA with China.
Trade and investment between these states are flourishing. FDI from Mauritius to China increased from US$119,000 in 1994 to US$1.5 billion in 2008. Mauritian FDI accounted for 1.62% of China's total FDI inflows in 2008.3 This increase has driven Mauritius into the ranks of the top ten largest sources of FDI into China. Strong indicators show that capital inflow from China to Mauritius and the Seychelles is on the rise and Mauritius and the Seychelles will continue to benefit from Chinese FDI as China uses Mauritius and the Seychelles as investment platforms to enter the African market.
The Indian Ocean Islands' aggressive marketing strategy to position themselves as investment gateways into eastern and southern Africa has also started to pay off with Chinese investors showing a keen interest to use Mauritius and the Seychelles as the preferred investment gateways into Africa, given the clear fiscal advantages demonstrated by such jurisdictions.
Mauritius and the Seychelles will continue to benefit from Chinese FDI as goodwill and trade between China and the Indian Ocean Islands continue to grow and Mauritius and Seychelles become China's preferred partners for investment into Africa.
Footnotes
1 Source: China's Minister of Commerce, Chen Deming, in mid-2012
2 Source: China's ambassador to South Africa, Tian Xuejun, in his address on China-Africa Relations in mid-2012
3 Vinaye D. Ancharaz and Baboo M. Nowbutsing (2010) "Impact of China – Africa Investment Relations: An in-depth case study of Mauritius"
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
