INSIGHT : BUSINESS NEWS
Branch Companies under OHADA
The Organisation for the Harmonisation of Business Law in Africa (“OHADA”) was established in 1993 to foment legal certainty and facilitate foreign investment into the member states by harmonising business laws.
Today there are 17-member states with a total population of 250 million. The member states are Senegal, Ivory Coast, Cameroon, Equatorial Guinea, Republic of Congo, Democratic Republic of Congo, Chad, Benin, Burkina Faso, Central African Republic, Comoros, Gabon, Mali, Niger, Togo, Guinea and Guinea-Bissau.
The organisation sits in Yaoundé, Cameroon and regulates corporate law, transportation, sales law, provisions concerning the status of merchants, debt enforcement, accounting rules, securities, labour law, foreclosure, arbitration, restructuring and insolvency. Since its inception, substantive rules and regulations have been passed to increase investor confidence.
The rules regulating formation and activities of branch companies are provided by the Uniform Act on Commercial Companies and Economic Interest Groups (the “Act”). A revised version of the Act was adopted on 20 January 2014 by the OHADA Council of Ministers.
Some companies had failed to comply with the obligation to renew their branches either due to lack of internal accountability, red tape or rejection by member states.
Before the Revised Act
Before the revised Act, article 120 stipulated that a branch company registered by a foreign company had to be converted into a subsidiary within a period of two years (from the date of registration). An unlimited waiver could be granted by means of an order of the Ministry of Trade of the OHADA member state. This is what many companies relied on to operate.
However, under this old regime, some companies had failed to comply with the obligation to renew their branches either due to lack of internal accountability, red tape or rejection by member states. In some countries, the requirements applicable to branches were further complicated by local content laws requiring companies operating in certain sectors to partner up with local companies. This is for instance the case in Equatorial Guinea where Law N. 124/2007 stipulates that foreign companies operating in the petroleum sector must ensure that a minimum of 35% of their share capital is held by at least 3 Equatorial Guinean companies or individuals. In addition, one-third of the board of directors must be comprised of Equatorial Guinean nationals. Albeit mindful of the risk, some companies have continued operating as branches in many member states.
The Revised Act
The revised Act has now limited the duration of branches to a maximum period of two years. Consequently, businesses that previously benefited from the waiver had no alternative but to regularise their corporate structure in accordance with the revised Act.
The Act provides for an exemption if the foreign company intending to benefit from the exemption is subject to a “special regime”. There is no definition of “special regime” under the Act, resulting in ambiguity and widespread legal uncertainty. While some foreign companies proceeded to register local companies, others submitted applications under the “special regime” exemptions. Some member states have been slow to react and thus probably leaving numerous foreign companies today operating in contravention with the Act.
From a tax viewpoint it means no taxes on dividends and in some member states no taxes on branch remittances.
Countries such as Senegal, Gabon, Congo-Brazzaville, Ivory Coast and Cameroon granted branches a two-year extension. Some countries have defined “special regime”, considering certain sectors as being subject to a “special regime” (e.g.: the petroleum sector). In doing so, they have effectively opened the door for branch companies within those sectors to continue operating as branches indefinitely. Yet others have limited the extensions and refused to grant exemptions. In Gabon, there is even more uncertainty as to the implications because domestic legislation provides that the branch of a foreign oil and gas company does not have to be converted to a Gabonese company during the exploration period, which can last up to seven years.
Branch companies do not have a separate legal personality to their parent companies, which translates into several legal, tax, financial and structural advantages. From a tax viewpoint it means no taxes on dividends and in some member states no taxes on branch remittances. So unsurprisingly, foreign companies operating in OHADA member states are faced with legal uncertainty about how to continue with their operations without racking up huge costs. Some branch companies that had been granted one or two-year extensions are now operating in contravention with the Act.
Further uncertainty surrounds the criminal and civil sanctions applicable in the event of breach of the provisions of article 120. The lack of an interim regime for branches registered by foreign companies prior to the revised Act’s entry into force brings further confusion into the mix.
Member states – particularly those highly dependent on revenue from the capital intensive natural resources sector – are in a quandary to strike a balance between promoting foreign direct investment into their countries and increasing their tax revenue and promoting local content.
ABOUT THE AUTHOR
Abraham Abia is the Managing Partner of Clarence Abogados & Asociados. Abraham holds a BA (Hons) in History from SOAS, University of London and a LLB and LPC from the University of Law (“formerly the College of Law of England and Wales). Abraham worked as a regional in-house counsel for Schlumberger and Centurion Law Group before founding Clarence. For enquiries, please contact us at firstname.lastname@example.org.