One thing has always been clear since the start of the startup bubble in Africa: a lot of local startups are increasingly being registered in offshore territories. One doesn’t have to look so hard to find one. Jumia easily comes to mind. One of the revelations made about the e-commerce startup during its IPO adventure on the New York Stock Exchange is that even though its market base is Africa — Nigeria, Kenya, Morocco and Egypt , etc.— its birth place, that is, its place of incorporation is Germany. The company, easily touted as a perfect example of an African startup with a global face — and the continent’s first unicorn — not only claimed its German citizenship in its IPO prospectus, but also went as far as preferring its headquarters in Dubai and housing its central tech team in Portugal. While Jumia may be easily forgiven in that its founders, Jeremy Hodara and Sacha Poignonnec for instance, are not African natives so to say, a case to extend such forgiveness to startups founded wholly by Africans — such as Flutterwave, which has its headquarters in San Francisco, United States — may not be strong. The funding statistics for African startups in the past four years don’t seem to belie this reality, either. Newest report from African Venture Capital and Private Equity Association says that foreign-registered companies significantly shape the continent’s early stage startups funding landscape. The report notes specifically that about one fifth (21%) of the total number of VC deals between 2014 and 2019 went to startup companies headquartered outside of Africa. Of these companies, the majority (53%) are based in the United States. Even though 21% looks negligible, it is not so negligible compared to the spread of funding to individual African countries. For instance, at 21%, foreign-registered startup companies received exactly the same quantity of investments as startup companies based in South Africa (which got 21% of the total funding accruing to Africa in the past four years (2014–2019). This, therefore, implies that, at 21%, it is a little bit easier for an African startup registered in the United States, for instance, to secure funding from VC investors than for locally registered startups based in, say, Kenya (which received about 18% of total VC investments in Africa between 2014–2019); or Nigeria (14%); or Egypt (9%); or Ghana (3%). Even more confusing is the established fact that some of the locally registered startups are, themselves, substantially owned by non-African expats. 

Why would it then make some sense for African startup founders to register their startups outside their respective countries. A number of factors may account for this: 

Government Policies On Taxation, Incentives & Returns On Investments

Startups are minded about profit making as much as investors. This perhaps explains the trend among startup founders, with or without the encouragement of their investors, to explore foreign territories with the right policies around investments. For African startup 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. 

Mauritius is one such big example. The country has attractive investment incentives and favorable tax policies for its innovative startup ecosystem. As an instance, 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. 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. 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. 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% ( unlike regular business entities that attract a tax rate of 15%), 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 startup 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. However, while investors may prefer Delaware for investment-related reasons, there are other US states favorable to out-of-state startups, like Nevada with its zero tax rate; California, although the state charges a minimum of $800 annually as “franchise tax” for any business. Texas also tops the list of the top US 10 states to start a small business with no tax paid for businesses below $1.1 million. 

Across Europe, the choice of country of incorporation is more of logic than an established pattern. 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 startups 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 startups. 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 (value-added tax). 

There are other startup-friendly European countries such as Estonia, Sweden and Finland, although language-related barriers still remain a major issue. 

Singapore is also a choice incorporation destination for most founders. The Singaporean government gives freedom to foreigners to own 100% of the stock of a company incorporated in Singapore, without the need to have local partners or shareholders.There are also minimal controls on currency movement. Apart from ranking 4th in the world, Singapore’s startup ecosystem has an estimated value of $25 billion, far exceeding the global average of $5 billion. The Singaporean government supports young startups with its Startup Tax Exemption Scheme. The scheme exempts 75% of a company’s first $73,000 in income. Additionally, Singapore raised tax deductions for IP registration fees from 100% to 200% and qualifying expenses incurred on Research &Development from 150% to 250% in 2018. Thus, Singapore startups are able to put off paying taxes until they are larger and more established. The country’s corporate tax is a flat rate of 17% on chargeable income.

“I have a preference for the US because it is a deeper capital market with more experienced investors,” says Iyinoluwa Aboyeji, co-founder of Andela and Flutterwave. “Sometimes with Europe there is a colonial overhang, and they have small expectations for African businesses. They are not willing to have a frank conversation about how to scale. A European investor is worried about the downside, they still have that mindset. US investors are like: “We want to be a billion dollar company, let’s do it in two years”. And for us that’s helpful.”

“The US tends to be the biggest and the most obvious choice. Also from an IP perspective, a tax perspective… It is a lot more open to African startups scaling there,” adds Zachariah George, co-founder and chief investment officer (CIO) at Startupbootcamp AfriTech. “The cost of moving to the US, as opposed to Europe or Asia, is miles apart.”

Intellectual Property & Valuation

Intellectual property plays a strong role in the choice of where a startup is to be incorporated. Since most startups’ assets are their intellectual property — patent, trademark, designs, copyright — it makes more sense to strategically locate them where the location would not only permit them to have long term security over their assets, by way of certainty in legal protection, but would also allow them to extend the geographical range of application of the assets so as to save cost of IP registration and violation monitoring. 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 (and the world in general) at the same time. However, this is more possible for countries that are part of the Bangui Agreement of 1977 (and part of the African Regional Intellectual Property Organization (ARIPO) — for English-speaking countries — and the Organisation Africaine de la Propriété Intellectuelle (OAPI) — for French-speaking countries). 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. 

Founders therefore consider these permutations before choosing which country to incorporate in. That explains why, coupled with favorable 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 trade marks and the Paris Convention for Protection of Industrial Property ( which applies to industrial property in the widest sense, including patents, trademarks, industrial designs, utility models, service marks, trade names, geographical indications and the repression of unfair competition.) Consequently, it is possible to claim priority under the Paris Convention for intellectual property registered in or outside Mauritius. This is also the case with the UK, Germany, Estonia or Singapore. 

In effect, the intellectual property value of a startup depends on the legal, tax, financial, ease of infringement or freedom to operate, as well as other business circumstances affecting the IP. Some of this value may be deduced by looking at the global reach of the IP. The IP value therefore invariably influences the overall valuation of the startup. 

Investors’ Confidence & Perception Index

While African startups are free to pursue their goals, many of them who are relatively obsessed with funding from all sources may confront a hard wall, thanks to subtle doubts, bias, and stereotypes held by investors — usually, in most cases based outside of Africa. This bias stems from perceived political, economic, social or cyber-security risks associated with investments in some countries.

The Bottom Line:

In as much as the choice of where to incorporate depends largely on the need for it — investment, strategic, stronger legal systems, transfer pricing etc. — it pays to always remember that where a business chooses to do business is one of the factors that determine whether it will continue to exist in the long run or not. Therefore, it does not pay to be myopic in the short term. Every African startup founder should look at their startups’ long term plans — may be 10 or 20 or more years from now. Upon closer scrutiny and advice, if the choice of place of incorporation may result in uncertain issues within that range of time, it may be a hint to think twice before proceeding on incorporating abroad. 

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.