MOZAMBIQUE: An Introduction to General Business Law

PRESENCE AND OPERATION OF FOREIGN ENTITIES IN MOZAMBIQUE

Mozambique is blessed with a long Indian Ocean coastline of more than 2,500 kilometres, untouched beaches and a tropical climate. In addition to abundant natural resources, the country offers relatively inexpensive energy (derived from hydroelectricity and natural gas), excellent natural ports and a motivated, trainable workforce. Its strategic geographical location and ports make it a gateway to global markets for various landlocked neighbouring countries.

Mozambique has very large natural gas reserves and is now host to the largest single investment in Africa, Total’s USD20 billion liquefied natural gas (LNG) project. While temporarily suspended, the project (one of various, the others also involving Eni and ExxonMobil) will, in due course, catapult the country into the league of the world’s top ten LNG producers.

According to the African Development Bank Group, the COVID–19 pandemic caused a sudden drop in Mozambique’s economic performance. Real GDP contracted by an estimated 0.5% in 2020, the first decline in 28 years. GDP is expected to grow rapidly in the next years on the back of the gas and other mineral investments.

The most commonly used business vehicles are the limited liability share company and the limited liability quota company. It is also possible to register a foreign commercial representation (a “branch”) in Mozambique, for a specific period of up to five years, with the possibility of renewal. The branch is considered an extension of the head office.

As a general rule, a Mozambican company may be owned entirely by foreign entities. However, a few sectors require a percentage of local ownership. It is permissible to appoint foreign individuals as directors or branch representatives (though in some cases there are immigration requirements to be met).

After the incorporation of a company or registration of a branch there are subsequent steps to be followed before the local entity may start activities.

Under the Competition Law, a merger or acquisition may be effected through several types of transactions; in some cases, mandatory notifications are required.

Mozambique has undertaken various legal reforms to the main legislation affecting the creation of businesses in order to encourage foreign investment. Procedures for obtaining operating licences have been reduced and streamlined, though the speed of execution of these procedures has been adversely affected by the COVID-19 pandemic; of note is the ongoing revision of the Commercial Code.

While some kinds of business vehicles or legal arrangements common abroad may not have direct correspondents in the Mozambican legal framework, it is usually possible to find ways to implement the intended deal structure with satisfactory safeguards for the investor’s interests. Timely and sound legal advice is essential for the success of such arrangements.

Mozambique has established a legal framework for investments which provides for incentives of four types, namely: (i) tax incentives; (ii) customs incentives; (iii) incentives related to the repatriation of capital invested and profits; and (iv) protection/guarantees provided by the Mozambican State for private property and investments. For those purposes, investors may apply for investment projects with the Investment and Export Promotion Agency (APIEX) in various sectors of activity.

The Mozambican tax system features both national and municipal taxes. The main national taxes applicable to companies include the Corporate Income Tax (IRPC) and Personal Income Tax (IRPS) for its employees, Value Added Tax (VAT), Specific Consumption Tax (ICE) and Customs Duties. There are other taxes, including the Stamp Duty (IS) and Real Property Transfer Tax (SISA). Municipal taxes include Municipal Personal Tax (IPA), Municipal Real Estate Tax (IPRA) and other municipal fees such as the Municipal Fee for Economic Activities (TAE).

The general rate of IRPC is 32%. Income subject to withholding at source is taxed at the rate of 20%. IRPC is subject to withholding at source in respect of income of non-resident entities without permanent establishment in Mozambique, among other instances. Where a Double Taxation Treaty is in place, the withholding tax rate may be reduced or eventually eliminated, as the case may be, to avoid double taxation.

In terms of foreign exchange controls, the Foreign Exchange Law (“FEL”) is under review and a new law is expected to be enacted in 2021. The regulatory body for foreign exchange is the Bank of Mozambique (“BoM”).

The FEL and its regulations apply to exchange transactions, understood as any act, business or transaction carried out between forex residents (Mozambican companies and Mozambican branches of foreign companies) and non-residents and which results or may result in payments or receipts abroad, or that are qualified as such by law. Unless explicitly exempted by law, all exchange transactions require approval of the BoM. Most ordinary-course commercial transactions (e.g. import and export of goods) do not require BoM approval.

Foreign Direct Investment (“FDI”) is considered pre-approved by the Bank of Mozambique  but is subject to registration within 90 days from the date of approval of the transaction or from the date of import of the funds, as applicable.

The minimum investment amount to enjoy investment incentives is approximately USD45,000. Failure to register FDI may result in fines as well as prohibition to carry out exchange transactions or even the inability to export dividends or profits and repatriate invested capital.

In matters of employment law, Mozambique is very formal and protective of employees. Although employers have management and disciplinary powers, the law makes disciplinary proceedings highly bureaucratic, and it can be challenging to terminate employment contracts or to hire foreign employees beyond statutory quotas (see below). In the event of an acquisition, the rights of the affected employees, including length of service, are protected, and in principle employees and their accumulated liabilities must be transferred to the buyer.

The Labour Law is currently under revision and it is highly likely that the principle of careful protection of employees will remain in place.

Concerning hiring of foreigners, employers may, by way of a simple communication to the Minister of Labour, employ a number of foreign nationals under a quota system. This ranges from 5% to 10% of the total company workforce, depending on the size of the company. Special quotas which may stipulate a number of foreign workers that is greater than the statutory quota may be negotiated in the course of an investment authorisation application process. Once the quota has been exhausted, the Minister of Labour may, on application and at her discretion, grant a work permit to a foreign national provided that certain conditions are met.

There has been a gradual trend to implement computerisation of public services for greater efficiency, though many challenges (and opportunities for improvement) remain.

Mozambique is a developing country with many business opportunities for investors and has the basic legislation required to safeguard investments in place. For best results as an investor, it is important to take timeous and sound legal advice under the specific framework applicable to the transaction or project in question.