Viewpoint: Éric N’guessan
In recent years Côte d’Ivoire has been engaged in a structural reform of the tax and legal system, along with the dematerialisation of tax and Customs procedures. This digitisation of public services has gone far in reducing delays in the creation of new companies and promoting transparency in administrative procedures.
Finance Law 2022 increased the tax credit rate applicable to the acquisition of patents and new manufacturing processes by 10 percentage points, from 20% to 30%. The tax annex in Finance Law 2020 granted tax benefits to private companies engaged in research, development and technological innovation activities, as well as to individuals and legal entities that had acquired shares in the capital stock of such companies.
However, one of the major changes in Finance Law 2022 is the implementation of a preferential tax regime for closed-end investment companies. This reform could allow private equity to support the emergence of a national productive base mainly composed of small and medium-sized enterprises (SMEs). Thanks to the tax exemptions granted by the legislation, more foreign investors may be able to invest in companies in strategic sectors and infrastructure projects with high growth potential, thus contributing to the modernisation of the economy.
In addition, the National Development Plan (Plan National de Développement, PND) 2021-25 enabled a growth rate of 7% in 2021, compared to 2% in 2020 due to the disruptions caused by the Covid-19 pandemic. The fiscal annex in Finance Law 2022 cancelled a series of tax exemptions for industrial and commercial profit, income from movable capital, patents and value-added tax (VAT). These modifications were based on UEMOA recommendations for VAT and the intention to rationalise tax exemptions with limited social impact – particularly in terms of increasing the cost of living. The cancellation of these tax exemptions constitutes less tax expenditure and therefore is a vital source of funding for the objectives set by the PND 2021-25.
Similarly, with the rise of online sales platforms, Finance Law 2022 specified the conditions for non-resident operators to be subject to VAT – also a significant source of financing. The new legislation and the ongoing reforms, which are to be further re-evaluated as they are implemented, are expected to enable the government to achieve its strategic targets.
The latest developments in the regulatory and tax framework governing private equity could allow investors to invest directly in a target company or create an investment fund that will then provide capital to the target company, a process called intermediated investment. A requirement of tax neutrality is that intermediated investment not be a source of additional taxation compared to a direct investment, and there should not be any tax friction between the assets of the investment fund and the investors. Instead, the intermediated investment fund must be tax neutral.
That being said, the current tax framework does not guarantee such neutrality to private equity investors, compared to the best practices observed in reference markets. The alignment of Finance Law 2022 with UEMOA Directive 2/2011 related to the harmonisation of taxation applicable to closed-end investment companies within the region is good news. The resulting tax system will improve tax neutrality, a key measure of a country’s attractiveness for private equity operators. This tax reform could increase the flow of savings to unlisted companies, including SMEs, and consequently generate inclusive growth to attract investors.
Furthermore, it is important to note that knowledge about environmental, social and governance (ESG) criteria has never been so important. Investors are integrating ESG criteria into their investment policies, and investment fund management companies are making it a differentiating factor. Reforming the tax regulations for private equity could attract more ESG-oriented investors. This would foster the longterm transition to a more sustainable economic model.
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