MOZAMBIQUE: An Introduction to General Business Law

Presence and Operation of Foreign Entities in Mozambique

Mozambique is a country with a long Indian Ocean coastline of 2,500 kilometres with beautiful beaches, flora and fauna and a tropical climate. In addition to the abundant natural resources, the country offers relatively inexpensive energy (derived from hydroelectricity and natural gas), excellent natural ports and a motivated, trainable workforce. Furthermore, its strategic geographical location and the access to the sea serves as a gateway to global markets for the country and for some of the landlocked neighboring countries.

Due to massive gas reserves discovered in the country, which attracted many international players in the oil & gas arena like Total, Eni and ExxonMobil, the country has secured the largest single investment in Africa and is expected to soon become one of the top 10 LNG (liquefied natural gas) producers in the world. In fact, a floating platform with the capacity of producing 3.4 million metric tonnes of LNG per year has arrived in the country and the production of LNG is scheduled to begin in the second half of 2022.

According to the African Development Bank Group the onset of the COVID–19 pandemic caused a sudden stop to Mozambique’s good economic performance. The GDP is expected to grow more rapidly in the next years on the back of the gas investments. Despite the impact of COVID-19 in 2020, the economy advanced by 3.36% in the third quarter of 2021, following a revised 1.96% rise in the previous quarter.

The most commonly used business vehicles are the limited liability share company and the limited liability quota company. It is also possible to register with a foreign commercial representative 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, there are no limitations in having a company owned only by foreign entities. However, some limited sectors of activities may require a percentage of local participation. The same is valid for appointing foreign individuals as directors or having a foreign local representative for the branch. However, 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 is able to start activities. Under the Competition Law, a merger and acquisition ("M&A") may be effected through several types of transactions, and mandatory notifications are required. With a view to improving the existing legal framework for competition, by Decree 101/2021 of 31 December, specific amendments to the turnover thresholds, as well as clarification on the circumstances under which the simplified merger notification should be submitted have been approved.

Mozambique has undertaken various legal reforms in the main legislation dealing with start-ups to facilitate and encourage foreign investments in the country. Procedures for obtaining operating licences have been reduced and streamlined (some have suffered a setback with the COVID-19 pandemic, particularly due to the effect of public staff rotation/shift systems and suspension of some legal procedures, which are expected to decrease with the preventative measures which have been put in place). Of note is the ongoing revision of the Commercial Code.

While some kinds of business vehicles or legal arrangements established in the foreign investor’s country of origin may not have a direct correspondence in the Mozambican legal framework, in most cases it is possible to find ways to implement the intended structure for the transaction or for the local entity, with satisfactory safeguards for the investor’s interests. Timely and adequate advice of legal experts is essential for the success of the envisaged options or arrangements.

Mozambique has established a legal framework for investments which provides for investment 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 the purpose of the above, investors may apply for investment projects with the Investment and Export Promotion Agency (APIEX) in various sectors of activity.

As regards taxes, 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-residents 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 the new law is expected to be enacted and published still in 2022. The Regulatory body for this matter is the Bank of Mozambique (“BoM”), which has powers to oversee foreign exchange transactions.

The FEL and its regulations apply to exchange transactions, understood as any act, business or transaction carried out between residents (Mozambican companies and Mozambican branches of foreign companies) and non-residents, which could result in payments or receipts abroad, or that are simply qualified as such by law.

The Exchange Regulations provide for the general principle that, unless explicitly exempt by law, all exchange transactions require approval of the BoM. Foreign Direct Investment (“FDI”) is already pre-approved by the BoM, but it is subject to registration with BoM 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 is the equivalent to 7.500.000,00 MT. Failure to register FDI will result in fines as well as prohibition to perform exchange transactions or even the inability to export dividends or profits and repatriate invested capital. This is particularly important in the case of M&As, since to expatriate the funds resulting from the transaction FDI has to have been duly registered.

As regards Labour Relations, the Mozambican labour system is very formal and orientated towards the protection of employees. Although employers have disciplinary and direction powers, the protection of employees is reflected in the principle of more favourable treatment to the employees as well as the need for the union's involvement in processes such as disciplinary proceedings, termination of employment contracts and hiring of foreign employees. In case of an M&A, the rights of the affected employees, including length of service, are protected, and in principle the employees must be transferred to the buyer.

The Labour Law is under revision, being currently under public consultation; however the inclination for a greater protection of the employees will remain.

Concerning the hiring of foreigners, employers may, by way of a simple communication to the Minister of Labour, employ a certain number of foreign nationals under a quota system, which ranges from 5% to 10% of the total workforce, depending on the size of the company. Special quotas which may stipulate a number of foreign workers that are greater or less than the quota standard above may be obtained through investment projects. Once the quota has been exhausted, the work authorization regime of the Minister of Labour might be applied, provided that certain conditions are met.

With regards to compliance of legal procedures before public authorities, there has been a trend to gradually implement computerization of services for greater efficiency, despite the fact that it still presents some challenges.

Mozambique is a developing country with many business opportunities for investors, having the legislation required for the safeguarding of investments in force. For better financial planning, understanding of the applicable legal requirements and the timeline to start operations in the country, prior legal advice under the specific framework for the transaction or project in question, should be sought from legal experts.