More than ten years after Nigeria’s fintech company Paga was registered in the small East African island of Mauritius, the company has poured out a stream of invective against the previously notorious tax haven as it moved its headquarters to its new found love — the UK.
“I will NEVER register a business in Mauritius again,” Tayo Oviosu, founder and CEO of Paga declared last year, in a series of tweets. “You can take that to the bank. So painful — not worth it.”
Mr. Oviosu then went on to add that “the tax benefits of Mauritius can be gained onshore UK or offshore UK or Netherlands or Luxemburg.”
The CEO, whose company has raised more than $34.7 million in funding from investors since inception said he was very excited about the UK move, as he looked forward to working with its government to promote trade in the country.
“The Paga Group has redomiciled to the UK!” Oviosu said. “The Paga Group is the holding company for our operations in all countries — Nigeria, México, Ethiopia, and the United Kingdom. Very excited about this move and look forward to working with @tradegovuk to promote trade with the UK!”
The following is an extensive discussion about why Paga is courting the UK now and what lessons African startups desirous of domiciling their startups in the small East African country can glean from these events.
Mauritius Tax Rules Have Changed For International Companies Using The Country As Their Headquarters In Order To Benefit From Low Tax
- Under the former regimes operational in Mauritius, the Global Business Licence Category 1 (GBL 1), for instance, granted Holding Companies (majority of which were foreign companies with their headquarters in Mauritius) certain tax benefits, including an 80% foreign tax credit, which reduced the effective tax rate of such companies from 15% to 3%. This was also the case with Global Business Licence Category 2 (GBL 2) which granted tax exemption to companies.
- By that structure, foreign companies as well as businesses operational in Mauritius profited simply by setting up Mauritian Holding Companies with little or no economic substance in Mauritius. By doing so, such companies effectively reduced their effective tax rates to a large extent.
- To take care of that, Mauritius discarded the GBL Regimes in 2018, introducing a Partial Exemption Regime forGlobal Business Corporations (GBCs) operating in the country. This new regime provided for an 80% tax exemption on specified passive income of the GBC companies in Mauritius. To put it differently, since companies in Mauritius are generally taxed at 15%, the 80% tax exemption means that GBC companies have a tax liability of only 20% of the original 15%, meaning that they’re suffering a maximum effective tax rate of 3%.
Mauritius has changed its tax rules for international companies, which has partly influenced Paga ‘s choice of the UK over the country. Image for: Paga ‘s re-domiciling from Mauritius to the UK
- Another key feature in the new partial exemption regime is the requirement of substance.
- Under the substance feature, companies in Mauritius must meet certain requirements to enjoy the 80% tax exemption.
- Some of these requirements include that a GBC company must prove that it is centrally managed and controlled in Mauritius.
- In determining what operations of a company are centrally managed and controlled, the Financial Services Commission in Mauritius usually considers whether the company meets at least one of the following criteria:
a) The company has or shall have office premises in Mauritius.
b) The company employs or shall employ on a full-time basis, at the administrative/technical level, at least one person who shall be resident in Mauritius.
c) The company’s constitution contains a clause whereby all disputes arising out of the constitution shall be resolved by way of arbitration in Mauritius.
d) The company holds, or is expected to hold, within the next 12 months, assets (excluding cash held in a bank account or shares/interests in another corporation holding a Global Business Licence) that are worth at least 100,000 United States dollars (USD) in Mauritius.
e) The company’s shares are listed on a securities exchange licensed by the Commission.
f) The company has, or is expected to have, a yearly expenditure in Mauritius that can be reasonably expected from any similar corporation that is controlled and managed from Mauritius.
In practice therefore, a South African company, for instance, may have its board of directors in Mauritius while it is managed from South Africa. In this case, the authorities could say the company is not eligible for tax residency. They will now look at the substance on the ground in Mauritius.
This, therefore, partly explains why Paga is relocating to the United Kingdom. Mauritius is simply now less of a place of free tax, and has been declared so by the Organisation for Economic Cooperation and Development (OECD).
Read also: How Mauritius’ Laws Encourage Local Startup Growth
Paga Has Outgrown All The Tax Incentives Available To Early Stage Startups In Mauritius
After spending more than 10 years domiciling on the island, Paga is no longer qualified to benefit from tax exemptions available to early stage innovative startup companies in the country.
- In sweeping reforms introduced in Mauritius in 2017, income generated by any company set up in Mauritius on or after 1 July 2017 which are involved in innovation-driven activities and where the IP assets are developed in Mauritius are exempt from tax. This exemption applies for eight tax years, starting from the tax year in which the company starts its innovation-driven activities. For existing startups or companies, the eight-year tax holiday would be on income derived from intellectual property assets developed in Mauritius after June 10, 2019. In practical terms, all startups that are internet-driven in Mauritius will pay zero tax for eight years notwithstanding the size of their income.
- There is also tax incentive on research and development (R&D) to the effect that during a period from 1 July 2017 to 30 June 2022, if a person has incurred any qualifying expenditure on R&D that is directly related to one’s existing trade or business, one may, in the tax year in which the qualifying expenditure was incurred, deduct twice the amount of the expenditure, provided that the R&D is carried out in Mauritius and no annual allowances have been claimed on the same. The term ‘qualifying expenditure’ means any expenditure relating to R&D, including expenditure on innovation, improvement, or development of a process, product, or service as well as staff costs, consumable items, computer software directly used in R&D, and development and subcontracted R&D.
- There is also a five-year tax holiday for a startup or company setting up an e-commerce platform provided the company is incorporated in Mauritius before June 30, 2025. Also within the five-year bracket are peer-to-peer lending operators, provided the company starts its operation prior to December 31, 2020.
- The newly introduced regulatory sandbox licensing regime, whereby any person who has an innovative project for which there exists either no regulatory framework at all or the existing supervisory infrastructure is inadequate for the implementation of the project, may apply for a regulatory sandbox license, also aids innovative early stage companies to obtain certain regulatory relaxations for the limited purpose of the license.
In this regard, Paga is apparently relocating to the UK because there is nothing more exceptional again, in terms of tax benefits, to gain in order to continue to reside in Mauritius, having passed the age of tax exemptions discussed above.
Paga ‘s move from Mauritius to the UK was also inspired by the latter’s increasing influence within the European startup ecosystem. Image for: Paga ‘s re-domiciling from Mauritius to the UK
None Of Paga’s Investors Is Domiciled In Mauritius, And So This Could Have Influenced The Decision To Relocate
Currently, Paga has more than 8 investors, some of which are located in the United States, the Netherlands, the United Kingdom and Nigeria. For instance, while Unreasonable Capital, Capricorn Investment Group and Omidyar Network are located in the United States, Global Innovation Fund is domiciled in the UK, while Goodwell Investments is headquartered in the Netherlands. Adlevo Capital, Acumen Fund are also both based in Nigeria. Even individual investor Jeremy Stoppelman, co-Founder and CEO of Yelp, is based in the United States.
This is perhaps one of the strongest reasons why the decision to move out of Mauritius came so easily.
“The tax benefits of Mauritius can be gained onshore UK or offshore UK or Netherlands or Luxembourg,” Oviosu noted in his tweet.“Depends on how your business operates and where your investors are domiciled.”
It makes sense therefore that Paga is now moving to London, in the United Kingdom. About 30% of European venture capitalists are based there. Startups in the UK, alone, raised between €4.5 and €5 billion in venture capital in 2017. And although companies pay a 19% corporate tax in the country, 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.
Additionally, UK companies with less than £85,000 taxable turnover do not have to register for VAT (value-added tax). In any case, tax rate is lower in Germany compared to the UK with corporation tax pegged at 15%. Germany also exempts businesses with taxable turnover of less than €50,000 from registering for and paying VAT. Perhaps the most convincing reason why Paga preferred the UK over other possibilities like Germany, the Netherlands, Luxembourg, or even Estonia, Sweden and Finland is because of language barrier. A majority of Paga’s investors are English-speaking; therefore, the decision to settle for the UK, which is an English-speaking country, must have been quickly reached. This is also aided by the country’s fast-paced legal system, as highlighted by Oviosu.
“The laws and courts of Mauritius are not very fast moving and the rules are difficult,” he said. “I’ve had one court case that was eventually thrown out after a year. In the UK it would have been thrown out immediately and the person would have had to pay us for our lawyer fees.”
Growth And Ease Of Doing Business
Again, eleven years down the line, Paga appears to have grown so big that it has become increasingly more difficult to continue to have its tail in Mauritius and its heads in Nigeria, and other countries. It takes approximately 6 hours to travel from Nigeria to London, but takes more than 8 hours to do so from Lagos to Port Louis, Mauritius’ capital.
“I have been burned twice now on things I was told were done but it turned out were not,” Paga CEO Oviosu said. “…To verify I may need to go to Mauritius myself or as I’ve done so far pay a lawyer to go verify.”
Therefore, given the size and growth the company has recorded in recent times, continuing to stay in Mauritius even when none of its core businesses or its investors is resident there rather appears untenable. It would have been a lot easier if the company has run most of its business activities from Mauritius all those years.
Read also: Why African Startup Founders Incorporate Their Startups In Foreign Countries
The Bottom Line
Mauritius is still a tax haven compared to most countries. To Paga, it however, didn’t make any more sense to continue to prefer the country over other jurisdictions that operate similar tax regimes, especially as those other jurisdictions also appear to have better language advantage or court system.
“They (Mauritians) speak English but…the accent is extremely hard to understand,” Oviosu said.
All these, therefore, do not mean that Mauritius no longer continues to hold the best business environment and tax regime in Africa. In terms of ease of doing business, Mauritius ranks first in Africa, and 13th in the world, ahead of countries like Australia, Germany, Canada, China, Netherlands, Belgium or Hungary.
The country also ranks first as the most innovative country in Africa and 52nd in the world according to the World Innovation Index. Globally, the Mauritian capital, Port Louis, is the 9th economy in terms of the quality of institutions and the dynamism of the markets.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer