Indirect Asset Transfers Taxation in French-speaking Africa

KEY POINTS

Over the past decade, regulations on the taxation of indirect asset transfers abroad have become widespread.

The criteria for triggering these taxes are varied, complex, and sometimes imprecise, creating legal uncertainty for international investors.

Tax treaties may oppose these measures.

Others publications

An indirect transfer of assets abroad corresponds to a transfer (sale, contribution, etc.) abroad between foreign entities, of corporate rights (shares, units, etc.) in an entity that directly or indirectly holds assets located in another country. As no transfer of ownership of the "underlying" assets (shares, permits, licences, real estate rights, contracts, etc.) is legally realised locally, many French-speaking African countries have gradually incorporated specific tax mechanisms into their legislation to deal with such indirect transfer.
These new mechanisms, documented by several studies carried out by international organisations (OECD, IMF), are particularly important for international companies carrying out investment or reorganisation operations. particulièrement importants pour les entreprises internationales menant des opérations d’investissement ou de réorganisation.

Sometimes unsuccessful due to a lack of suitable domestic regulations, these states have amended their tax legislation over the past ten years. [1].

Sometimes unsuccessful due to a lack of suitable domestic regulations, these states have amended their tax legislation over the past ten years.

For example, following the Republic of Congo (2014), Gabon (2014), Cameroon (2015), Uganda (2018), Togo (2019), Mauritania (2020), Benin (2022), and Rwanda (2022), Chad incorporated a general provision in 2023 to tax indirect capital gains (Art.77 of the General Tax Code).

A Variety of Connection Criteria

The traditional principles of territoriality of the tax on capital gains (corporate tax, personal income tax, or movable property tax, depending on the case) were generally not satisfactory for effectively taxing indirect transfers; therefore, specific connection criteria had to be introduced, including:

Indirect transfer without a triggering threshold:

Some states have chosen to tax locally any transfer of shares of a non-resident company which directly or indirectly owns all or part of a locally established company (e.g., Art.42 of the Cameroonian General Tax Code). Unless administrative commentary provides more

This type of operation requires in-depth upstream study, given the stakes involved, particularly when the underlying asset is a government-issued permit or licence for which administrative authorisations are required.

clarity such provisions with no precise triggering threshold risk being interpreted extensively as targeting any transaction conducted abroad between foreign companies.

Indirect transfer with a threshold related to the asset composition of the transferred company

Other legislations focus on analysing the asset composition of the company whose shares are transferred: transactions may target the transfer of shares in companies whose assets are mainly, directly or indirectly, rights in a local company (see Art.7 of the Gabonese General Tax Code) or local assets (e.g., real estate or petroleum assets, see Art.100 of the Mauritanian General Tax Code).

Indirect transfer involving a "change of control"

The notion of change of control (direct or indirect) is sometimes chosen as the triggering criterion (e.g. Art. 243 (4) of the Guinean General Tax Code); this criterion aims to target only significant transactions and may allow excluding simple intra-group reorganisations.

Indirect transfer with a condition linked to substantial participation

Following the example of Article 244 (2) B of the French General Tax Code, a "substantial" level of shareholding by the transferor (e.g. 25%) can be chosen as the trigger condition (regardless of the percentage effectively transferred).

Indirect transfer with a threshold related to the transferred percentage

Some legislations provide for the taxation of indirect transfers when the transferred share involves the indirect transfer of a certain percentage of ownership in a local company. For example, the Mauritanian General Tax Code defines indirect transfers as transfers "direct or indirect, equal to or greater than 10% in a legal entity" established locally (Art. 120 of the Mauritanian General Tax Code).

Specific Mechanisms in Strategic Sectors (hydrocarbons, mineral substances, telecommunications, forests, etc.)

Indirect asset transfers in strategic sectors, typically operated under concessions or permits issued by states, often have specific regulations: whether it is an indirect transfer of a permit or a licence or a change of control of an entity holding such permit or licence, the taxation modalities (scope, taxable event, base, rate, taxpayer) are specifically defined by the specific legislations (see petroleum codes of Cameroon, Benin, mining code of Chad, or hydrocarbons code of Gabon). This situation can sometimes lead to conflicts of norms that are difficult to apprehend (the articulation with the general rules laid down by the applicable general tax code being sometimes tricky).

Sometimes Imperfect Mechanisms and Source of Legal Uncertainty

The issues raised are often complex and not always covered by administrative comments, which is a source of legal uncertainty. Here are just a few of the complex questions faced by companies:

In case of a general wording of the applicable tax code, should we assume that an indirect transfer essentially requires a change of control? What about listed companies subject to daily disposals? What about intra-group reorganisations (in the absence of a change of control)?
What is the taxable base: comment déterminer le coût d’acquisition et le prix de cession pour évaluer la plus-value ? Doit-on se référer aux actifs sous-jacents « indirectement » cédés (valeur comptable ?) ou aux droits sociaux transférés (intégralement ou à hauteur de la quote-part des actifs sousjacents s’il y a des actifs d’autres États – choix fait par exemple par le Gabon et la Guinée) ?
Who is liable for taxation: cédant ou cessionnaire (non-résidents), société « cible » établie localement dont les droits/actifs sont indirectement transférés ; ce dernier choix est fait par plusieurs États pour assurer une effectivité de l’imposition, mais pose des questions complexes d’interaction entre les différentes normes (notamment l’interdiction pour une société de financer l’achat de ses propres actions – art 639 de l’AUSCGIE).

Necessary Coordination with Tax Treaties

In the presence of a tax treaty, the right to tax is generally exclusively assigned to the state of the seller, rendering the domestic legal framework for taxing indirect transfers ineffective unless (given the nature of the rights transferred) specific articles of the applicable tax treaty allow the application of the domestic taxation; this notably includes assessing whether:
(i) the assets/shares in question qualify as real estate (taxable at the place of location) or shares of a predominantly real estate company;
(ii) the treaty includes a substantial participation clause.

Concerning Registration Duties

Indirect asset transfers may also be subject to registration duties (see Art. 583 of the Gabonese General Tax Code) at rates provided for shares transfers, real estate transactions, or business transfers, depending on the classification provided by the applicable domestic law.

[1] 10 Sept 2014, Court of Appeal of Uganda «Commissioner General and URA v Zain International BV» ; RCOMA 0027/12/CS, 13 mai 2016, ORC c/Total Rwanda SARL/Engen Rwanda Ltd ;Vodafone International Holdings BV v. Government of India, PCA Case No. 2016-35.

François NOUVION
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