Chinese companies, particularly state owned enterprises (SOEs), are now predominantly structuring their Africa investments through Mauritius, Malcolm Moller, managing partner for Mauritius & Seychelles with the offshore legal services provider Appleby, told PaRR.
"Structuring their investments through offshore structures...minimise[s] the risk of investment failures...[and provides] tax savings through the use...of double tax agreements (DTAs)," Moller said.
Mauritius has more than 35 DTAs with other nations and historically has been a popular offshore hub for investment into India.
In the past, Chinese companies had invested directly in African countries but are increasingly using offshore jurisdictions such as Mauritius, Moller added.
"This old strategy of Chinese SOEs going directly to the relevant investment recipient country offers short-term rewards (no setting up cost), but could be a disaster in the long term, i.e., how do you get the investment return out without the burden of local taxes such as capital gains, stamp duty, withholding taxes etc," Moller said.
In addition to Chinese companies, EU and US companies are also using Mauritius for African investments, with Nigeria, Ghana and Mozambique being the most popular jurisdictions, Moller said. Mining and infrastructure were the two biggest sectors involved, he said.
Among other reasons, companies choose Mauritius is because it has investment protection agreements with many African countries, Moller said, which means the relevant government will not take over the assets without compensation for the Mauritian entity.
It is better to structure investments through a country with an investment treaty to ward off the risk of expropriation, especially when investing in small developing countries where there could be political risks involved or changes in government policies, according to Sumant Nayak, chief legal officer of the Indian infrastructure giant GMR Group.
And structuring a deal via Mauritius certainly helps when it comes to any disputes, according to Nishith Desai, founder of the India-based law firm Nishith Desai Associates.
Moller cited Mauritius's history of effectively enforcing such agreements with India though he admitted these agreements have not been tested directly in an African context.
But such agreements do provide extra pressure that can be used when considering an international arbitration, Moller added, citing a dispute with a Mauritius-based entity after a number of recent coups in Madagascar. That dispute was eventually settled without a full-scale legal dispute.
Currently, off-shore M&A activity in Africa is generally the domain of "big boy" strategic long-term investors, Moller said, citing Rio Tinto's acquisition of the Riversdale in Mozambique as the kind of billion-dollar plus deal most likely to be made, adding that were some other infrastructure deals in the pipeline.
Moller added that there were no major regulatory changes in the recent year affecting Africa bound M&A.
This article originally appeared on March 18, 2013 in Policy and Regulatory Report (PaRR).
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