Where Should Founders in Africa Set Up Their Holding Company? Why Mauritius Could be The Answer...

My team at Africa Rising and I have been working with startups, scaleups, and mid-sized businesses across the African continent. We have also held several working sessions with the?Economic Development Board (EDB) of Mauritius, which has implemented a raft of policies and incentivization programs to win the hearts and businesses of founders in Africa. Africa Rising works with founders and CEOs of start-ups to access affordable legal, tax and corporate structuring expertise in Africa.

While the State of Delaware and the State of Wyoming in the US remain the gold standard for the incorporation of companies looking to attract US investment and gain exposure to the US market, Mauritius has become an increasingly attractive and inexpensive jurisdiction where start-ups can incorporate their companies and benefit from both short and long-term financial, regulatory, and socio-political benefits. In this article, we explore Mauritius as a destination in which start-ups in Africa can incorporate and provide a how-to-guide for founders and CEOs looking to take this route.

1.??The Essential Principles About This Article

i. Founders operating in Africa are beginning to think more critically about where to incorporate their holding company and what the best corporate structure would be for expansion.

ii. Although the State of Delaware remains the gold standard for founders looking to expand into the US market and attract venture capital from US-based VC funds, Mauritius has become a competitive and affordable alternative for African startups that wish to expand across Africa.

iii. Founders can mitigate and hedge against exposure to local currency fluctuations and volatile macro-economic and political conditions by setting up an investment vehicle in Mauritius through which investment capital can be deployed.

iv. Founders should be proactive when determining their corporate structure and how these play into their expansion trajectory and investment planning.

2.??The Importance of planning your corporate structure as a founder operating in Africa

Founders and CEOs are increasingly asking us to find affordable ways to: (i) decrease their currency fluctuation risk; (ii) increase their operating efficiency and mid-to-long-term profitability; (iii) establish a reliable corporate structure for expansion into the African market; and (iv) decrease government control on the inflow and outflow of funds for purposes of continental or global expansion.

Investment Vehicle Structures (IVSs) in Mauritius are common and have been used by global Development Finance Institutions (DFIs) and multinational corporations. IVSs provide small, medium, and large businesses with a supportive, safe, dependable, and reliable corporate structure from which their investment activities are conducted.?Mauritius has been ranked as one of the best places to do business in the world and is often ranked first in Africa in respect of ease of doing business. Over the past two decades, Mauritius has taken active steps toward becoming a recognised International Financial Centre (IFC).

With increasingly more cost-effective and frictionless methods of establishing a global business presence, Mauritius has become a key jurisdiction in Africa that speaks to the needs of businesswomen and men looking to set up effective structures conducive to investment flows and to scale and expand their business across Africa and the globe.

3.??How is this relevant to founders in Africa ??

According to the?African Venture Capital Association’s 2022 VC annual report, Nigeria, Egypt, South Africa, Kenya and Morocco hold the top spots when it comes to VC deal value and deal volume. However, every country listed above rank poorly in relation to ease of doing business, repatriation of dividends and other capital distributions to off-shore accounts, ease of human capital integration for start-ups, tax incentives for start-ups, legal certainty, concentration of investment pools, and political and fiscal stability. This has led many founders to determine what the best structure would be for their start-up to (i) secure investment and (ii) mitigate country-related risks.

In our view, Mauritius provides founders operating in Africa with a solution to all these issues, and the EDB of Mauritius is increasingly releasing more programmes to draw start-ups to its jurisdiction. Mauritius has also developed several incentive schemes for start-ups and scale-ups operating in Africa – think of it as the Delaware of Africa. Here is a list of items you could benefit from when incorporating in Mauritius – we like to call them the Mauritian 8:

1. Stable political climate with strong monetary and fiscal policies.
2. Internationally recognised arbitration system in terms of the International Arbitration Act 2008.
3. Ease of business incorporation and compliance offering.
4. Holding of a?multi-currency account?which allows your business to hold funds in an array of stable currencies, thereby hedging against currency fluctuation risk.
5. Ease of movement of funds globally. There are no foreign exchange controls in Mauritius, thereby allowing start-ups to allocate capital to expansion projects across Africa and the World without the control and bottlenecks caused by central reserve authorities.
6. The EDB of Mauritius has established over 12 “Smart Cities” on the island, which focus on the development of innovative cities built on the principles of sustainability, entrepreneurship and integrated living. Smart Cities also offer a diversity of business locations for investments in education, health, R&D, biotechnology, fintech and proptech.
7. Start-up conducive tax regimes which allow companies to grow, create jobs and expand across Africa and the globe without being unreasonably taxed. Certain companies may even qualify for a tax holiday for up to 8 years or a decreased corporate income tax burden.
8. Finally, all the above advantages of incorporating in Mauritius will lead to increased access to venture capital and private equity flows both from within Africa and internationally.

4.??How is this relevant to Venture Funds investing or looking to invest in Africa?

Venture Capital Funds often require the capital they commit and deploy to be held in a jurisdiction that is investor friendly. Mauritius has been proactive in establishing a favourable tax and investment jurisdiction, having concluded over 45 double taxation agreements and 29 investment promotion and protection agreements. The island also has a strong legal system which draws on elements of British Common Law and French Napoleonic Code Law and ranks first in Africa in terms of the following established indices:

• World Bank Ease of Doing Business 2020 - 1st in Africa.
• World Happiness Report 2021 - 1st in Africa.
• Forbes Survey of Countries Best for Business 2019 - 1st in Africa.
• Global Competitive Index 2019 - 1st in Africa.
• Tax Efficiency Index 2021 - 1st in Africa (6th Globally).
• Global Innovative Index 2022 - 1st in Africa.
• Kayak's Remote Working 2022 - 1st in Africa.

Importantly, Mauritius has a significant number of private equity funds domiciled on the island, allowing for direct deployment of capital to startups or medium-sized companies that have a Mauritian-based investment holding company (HoldCo).

Macroeconomic factors such as monetary policy, political, social, and economic stability all create a solid foundation for investors looking to invest in Mauritius. Investors will appreciate the steps Mauritius has taken to ensure that investment capital is secure, easily repatriated and is subject to limited tax burdens. These features when viewed together, address a lot of the prevailing issues that investors experience when looking to make investments in Africa.

5.??Practical Steps: Your How-To Guide ??

There are many ways in which you can structure your business to ensure that you have a corporate vehicle in which investment capital can be advanced, held and deployed as and when your operating companies (OpCos) across Africa and the globe require it. We have set out a structure below that a start-up or mid-sized company can look at implementing with a registered financial service provider in Mauritius that we work with.

I have set out the first three steps related to setting up an investment vehicle in Mauritius below. If you would like the complete guide (Steps 1 through 6), please sign up to my Substack and request the complete guide, alternatively message me on LinkedIn, and I will send it to you at absolutely no charge… because Ubuntu ????

Step 1: Capital Flows with Discretionary Trust – Proposed Top-Down Structure

Where a founder or SME has excess capital, it would be wise to look at setting up a trust in Mauritius, as the founder’s or company’s holding entity. An African individual or company resident in an African state (Settlor) can transfer capital into a foreign discretionary trust (Trust) domiciled in Mauritius, having the founders as beneficiaries (Beneficiaries). The Trust invests the capital into a wholly owned Mauritian company with a Global Business Licence (the?GBLC). The GBLC in turn invests the capital into operating subsidiary companies based across Africa.

The Trust can be capitalised in a number of ways:

i.?????????Donation?as a method of capitalisation of the Trust:

The donation of current assets into the Trust will generally attract some form of donations tax. However, there may also be benefits that would accrue to you from an estate planning perspective because a donation made by a founder in her personal capacity would divest that person of the asset. If the Settlor making the donation is a corporate entity, ultimately natural shareholders of the corporation would benefit from no estate duty payable on the asset, as a result of the divestment of current assets into the Trust.

?ii.????????Loan as a method of capitalisation of the Trust:

The Settlor can lend amounts in tranches to the Trust, which the Trust would have to repay on agreed terms. The advance of the loan and repayment thereof would not have any adverse tax consequences. The loan must be at arm's length with interest being charged, as it is likely to be advanced between?connected persons, where one is a resident and the other a non-resident. As a general rule, any interest earned on the loan between the Trust and the resident entity may attract corporate income tax or personal income tax, depending on whether the person is a natural person or a corporation.

iii.???????Exchange Control in respect of capital flow to the Trust

Capital may only be exported within the confines of the laws present in your respective African country. Generally, there is a discretionary allowance afforded to individuals and companies in each financial year. Anything above a discretionary allowance would require a special application to be made to your relevant reserve bank or exchange control authority.

Further, if a company seeks to expatriate capital, it would generally only be able to do so within the confines of a direct foreign investment allowance. This means that they would need to take up equity or securities directly in a foreign company. If shares were issued by the GBCL and an advance was made from a resident to a non-resident for such shares, this would be seen as a foreign direct investment.

Steps 2 & 3: Capital Allocation to Operating Companies in Operating in Africa

i.?????????Capital flows from the Trust to the GBLC

Should the Trust use its capital to subscribe for shares in GBLC, there generally would not be any adverse taxes triggered. The Trust should simply establish a base/tax cost of the shares in GBLC. The Trust will also be able to lend funds to the GBLC as and when required by the GBLC - this could be done on a capital call structure between the Trust and the GBLC.

ii.????????Capital flows from the GBLC to African Operating Companies

Where a non-resident such as a Mauritian GBLC subscribes for shares in another African company’s shares (Subsidiary), being an OpCo, there generally will not be any adverse taxes triggered. The GBLC will simply establish a base cost in the shares of the relevant Subsidiary OpCo. For exchange control purposes the share certificates issued to GBLC by the relevant OpCo would generally have to be endorsed as “non-resident” by an authorised dealer or person appointed by the reserve bank or exchange control authority.

The GBLC may also be able to advance loans as and when required by the OpCos, however, such loans must charge an arm's length interest rate. One would also have to determine whether there would be any withholding tax on interest payable by the OpCo and whether a treaty exists between Mauritius and the relevant African country to reduce this withholding tax, if it is in fact applicable.

?iii.??????Exchange Control in respect of capital flows to Operating Companies from the GBLC

For exchange control purposes, any inward loans to resident operating companies would generally have to be approved by, and placed on record with, a relevant authorised person answerable to the reserve bank or exchange control authorities. A company would also have to establish whether there is any interest cap on inward loans and whether the interest cap is determined by whether the loan is denominated in the local African country’s currency or in Mauritian rupees for example.

I have set out the first three steps related to setting up an investment vehicle in Mauritius above.

If you would like the complete guide (Steps 1 through 6), please sign up to my Substack and request the complete guide, alternatively message me on LinkedIn, and I will send it to you at absolutely no charge ????.

6.??On the horizon: Anticipating Future Developments

The Bank of Mauritius recently issued the National Payment System Regulations which will make it easier for the payment, clearing, and settling of payments in Mauritius and abroad. Mauritius has seen significant growth in its professional sector with approved fiduciary management companies providing efficient and cost-effective management services for your businesses in Mauritius. The Mauritian government has also implemented the “Africa Innovation Initiative”, looking to establish itself as Africa's leading destination from which to administer investment and treasury operations for expansion in Africa.

Mauritius has also begun to work with property developers to establish "Smart Cities" across the island providing modern spaces to work and live. Co-working spaces like Workshop 17 ensure you have a strong platform from which to generate a network and work optimally. So, if you are a start-up operating in Africa looking to grow beyond your local market, there’s no time like the present to get your structure and plans in order.

7.??Ready to Dive Deeper, Let’s Get in Touch ????

Venture Funds?- If you would like to work with me and develop an investment strategy to enter the African market you can reach me via my links below.

StartUps & ScaleUps?- If you would like to work with me in building your venture in Africa or globally, and getting your business investment ready, please contact me via my links below.

-??????Connect on LinkedIn?here.

-??????Connect on Medium?here.

-??????Connect on Substack?here.