China Into Africa: The Indian Ocean Connection – Mondaq News Alerts (registration)

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”}

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