Investments from the Gulf States in Africa: expanding the network of tax treaties
The countries of the Gulf Cooperation Council (Saudi Arabia, United Arab Emirates, Qatar, Oman, Kuwait, Bahrain), and the United Arab Emirates in particular, have developed in the last ten years an active investment policy on the African continent, sometimes in association with investors (European in particular) with a long-standing presence or with a specific technical expertise (as seen recently with strategic partnerships in the port sector). This has led them to build a network of attractive bilateral tax treaties, coupled with trade agreements or investment promotion and protection agreements.
KEY POINTS
The Gulf States have significantly expanded their network of tax treaties to support their direct investment strategy in Africa (investments sometimes made as part of strategic partnerships with European players).
The tax treaties signed in recent years are characterised by generally advantageous withholding tax rates.
Investments in the oil and mining sectors are subject to specific provisions.
In certain situations, the benefit of treaty advantages may be called into question in the event of a set-up or transaction with a primarily tax-related purpose – or when an entity cannot be considered a resident of the other contracting State (an in-depth study of the extent of tax liability may sometimes prove necessary).
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- Investments from the Gulf States in Africa: expanding the network of tax treaties
Bilateral tax treaties play a key role in the attractiveness strategy of Gulf countries for companies wishing to develop their activities in Africa, by offering significant tax advantages and guaranteeing greater legal security for investors.
In this context, the United Arab Emirates (UAE) currently stand out as the Gulf country with the most developed network of agreements in Africa – particularly in French-speaking Africa – with agreements recently signed with Cameroon, Ivory Coast, Gabon, Guinea, the Democratic Republic of Congo (DRC) and Benin, among others.
It can sometimes be tricky to determine whether these agreements are fully in force in the absence of publications or official announcements by certain countries, which may make it necessary to make a formal check with the tax authorities of the countries concerned.
1/ Withholding tax rates generally favourable for capital income and royalties
The tax treaties signed by the Gulf States are characterised by generally favourable withholding tax rates.
With regard to dividends, these tax treaties offer particularly competitive withholding tax rates (see, for example, the tax treaty between Saudi Arabia and Gabon, which provides for a withholding tax rate of 5%), and in some cases even allow for the complete elimination of any withholding tax in the payer's State of residence (see, for example, the treaties concluded between the UAE and Guinea, the DRC or Mozambique, which exempt dividend distributions from withholding tax).
In the case of interest and royalties, the rates also appear to be generally more favourable (between 0% – for example on interest in the tax treaty between the UAE and the DRC – and 10%) than those provided for in the tax treaties signed with the historical partners.
2/ The particular case of technical services
Many tax laws in sub-Saharan Africa provide for the application of withholding taxes on services rendered or simply used locally, sometimes at significant rates (e.g. 25% in Gabon), which apply in particular to intra-group technical assistance services.
In this context, most of the agreements concluded between the Gulf States and the African States contain specific provisions through:
- an original and specific article dedicated to « fees for technical services » defined broadly and covering any management, technical or consultancy service (see, for example, the agreements concluded between the UAE and the DRC, Gabon and Ivory Coast, which allow the rate of withholding tax to be limited to 5%, 7.5% and 10% respectively); or
- the inclusion of remuneration for technical services in the definition of royalties, which advantageously limits the withholding tax rates applicable locally (see, for example, the agreement between the UAE and Cameroon, 10%, or the agreement between Saudi Arabia and Gabon, 10%).
In addition, these agreements may, in certain cases, allow to override the – sometimes very severe – limitations on deductibility recently set by the legislation of the payer's State, in particular in the case of technical assistance costs, where such limitations constitute discrimination to which the agreements object.
3/ A broad definition of permanent establishment
The tax treaties recently concluded between the Gulf States and the States of French-speaking Africa (like the tax treaties recently concluded by France, for example with China or Colombia) adopt a relatively broad definition of permanent establishments, inspired by the United Nations model tax treaty rather than the OECD model, by including so-called « service » permanent establishments.
Under these treaties, the provision of services (including consultancy services) rendered locally by employees or representatives of a foreign company constitutes a permanent establishment of that company if the services exceed a specified period. This period may be calculated over a fixed period (six months over a twelve-month period – see for example Article 6.3 of the UAE-DRC treaty) or not (see for example Article 6.4 of the UAE-Cameroon tax treaty, which only provides for the continuation of services during « a period or periods totalling 6 months »).
In addition, certain treaties concluded with the UAE contain specific features to be taken into account, in particular in the natural resources sector. For example, the tax treaties with Ivory Coast and Cameroon stipulate that the term permanent establishment includes services or the supply of rental equipment and machinery used for the exploration and exploitation of natural resources (Articles 5.3 and 6.6). Within the meaning of the tax treaty with Gabon, the term includes « any place of extraction and exploitation of natural resources or other activity relating thereto ».
4/ Provisions specific to oil and mining activities in treaties concluded by the UAE
Notwithstanding any other provision in the tax treaties, a provision specific to the UAE treaty network gives each State the right to apply its domestic legislation to income from oil activities (and mining in the case of the treaty between the UAE and the DRC).
Some treaties (e.g. those with Cameroon and Gabon) extend this provision to all « activités connexes », which may prove to be a source of uncertainty.
5/ Possible questioning of treaty benefits
Some recently concluded agreements include a general anti-abuse provision inspired by the multilateral instrument (e.g. Article 29 of the agreements concluded between the UAE and Cameroon or the DRC). This provision makes it possible to call into question treaty advantages (reduced withholding tax rate, for example) when it is reasonable to conclude that the granting of this advantage is one of the main objectives of an arrangement or transaction.
In the absence of such provisions, the treaty benefits could also be called into question if the entity established in the Gulf State does not meet the treaty definition of « resident » of that State (to be assessed on a case-by-case basis in view of the sometimes unprecedented definitions contained in the treaties concluded with the Gulf States), for example if the latter cannot be considered as « subject to tax » or is subject to tax only in respect of income from sources located in that State (an in-depth study of the extent of tax liability may be necessary).
