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Newest report from African Venture Capital and Private Equity Association says that foreign-registered companies significantly shape the continent’s early stage start-ups funding landscape. The report notes specifically that about one fifth of the total number of VC deals between 2014 and 2019 went to start-up companies headquartered outside of Africa. Of these companies, the majority are based in the United States.
Start-ups are minded about profit making as much as investors. This perhaps explains the trend among start-up founders, with or without the encouragement of their investors, to explore foreign territories with the right policies around investments. For African start-up founders, the choice of an offshore territory to register in is usually a strategic way of pulling investors in. Among founders looking to incorporate offshore but within Africa, there is increasing appetite towards the continent’s tax havens, encouraged by the presence of double tax avoidance treaties between countries.

The country has attractive investment incentives and favourable tax policies for its innovative start-up ecosystem. For investment funds such as private equity companies and venture capital firms, effective January 1st, 2019 they would be taxed at the rate of 3%, provided the fund managers satisfy key conditions relating to their activities being carried out in Mauritius. Compared to other African countries, at 15% Mauritius has the lowest corporate tax rate in Africa. The consequence of that is that even after the expiration of all the tax holiday periods, the amount paid as tax for companies is still negligible.

This is also further strengthened by the fact that a company registered as GBC 1 in Mauritius and having its operations centrally managed and controlled from Mauritius, pays no capital gains tax and also no withholding tax on dividends, interest, and royalties or estate duties, and are also beneficiaries of double taxation treaties between Mauritius and other countries. Other similar African countries are Seychelles and South Africa. Outside Africa, there are many options, but there is increasing rush by founders towards the United States, possibly for investment-related reasons. However, in as much as the choice of an offshore territory is heavily influenced by investment possibilities, the life of the start-up after such investments is critical for its long-term survival.

For instance, while VC investors are attracted most by companies registered in the US state of Delaware for issues around privacy protection, established court system with deep expertise on corporate law, no tax income, sales or intangible income such as trademark royalties for companies that don’t do business in Delaware, the state appears to be largely suited for big corporations, with companies expected to pay up to $300 annually for the Delaware LLC franchise tax. For instance, while it would make more sense to incorporate in the UK, where about 30% of the European venture capitalists are based and where start-ups raised between €4.5 and €5 billion in venture capital in 2017, it would look more reasonable to go to Germany where as far as taxes are concerned, corporation tax is at 15%. Companies are also subject to commercialization taxes there, but businesses with taxable turnover of less than €50,000 do not need to register for and pay VAT. Nevertheless, it is further arguable that even the UK favours start-ups.

There, companies pay a 19% corporate tax, even though there are intentions and talks to decrease that to 17% in 2020, as a way to discourage companies benefiting from EU’s single market from moving out in the wakes of Brexit. UK companies with less than £85,000 taxable turnover will not have to register for VAT. There are other start-up-friendly European countries such as Estonia, Sweden, and Finland, although language-related barriers remain a major issue. Apart from ranking 4th in the world, Singapore’s start-up ecosystem has an estimated value of $25 billion, far exceeding the global average of $5 billion.

The Singaporean government supports young start-ups with its Start-up Tax Exemption Scheme. Thus, Singapore start-ups can put off paying taxes until they are larger and more established. “Sometimes with Europe there is a colonial overhang, and they have small expectations for African businesses. Many African start-ups are in foreign countries.
Intellectual property plays a strong role in the choice of where a start-up is to be incorporated. However, this usually works best in combination with policies of government on taxation, incentives and returns on investments. In Africa, for example, it is possible to register trademark in one country and it applies to other African countries at the same time. Both ARIPO and OAPI are also part of the Madrid System which allows one registered trademark to have effect across 122 countries.

Thus, registration in any of these countries usually covers registration in other countries. That explains why, coupled with favourable government policies on taxation, incentives and returns on investments, and ease of doing business, Mauritius, in Africa, seems the to-go destination for founders shopping for offshore incorporation within Africa. Mauritius is a party to the Madrid System for international registration of trademarks and the Paris Convention for Protection of Industrial Property Consequently, it is possible to claim priority under the Paris Convention for intellectual property registered in or outside Mauritius. In effect, the intellectual property value of a start-up depends on the legal, tax, financial, ease of infringement or freedom to operate, as well as other business circumstances affecting the IP.
The IP value therefore invariably influences the overall valuation of the start-up. Most VCs funding African start-ups are also located in foreign countries.
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