Mar 31,2013 / News / Legal Brief

The challenges of establishing a new business in Africa do not stop with commercial considerations. The rule of law, taxation and protection of intellectual property vary from country to country and having a commercial lawyer in your corner is a necessity.

Understanding this fact, South African corporate law firm Werksmans as long ago as 1993 established a network of reputable African law firms, called LEX Africa. Its 29 subscription-paying members each represent one African country.

Pieter Steyn, a director at Werksmans and chairman of LEX Africa, says there is enormous demand for legal and tax advice to businesses wanting to structure themselves in various African countries in a legal and tax efficient way.

“Typically, a businessman is coming into a new jurisdiction blind. Language may be the most obvious barrier, but there are local customs in for example Muslim countries that the average South African businessman will be completely unfamiliar with,” says Steyn.

Apart from protection of their intellectual property (IP) and contractual rights, the issue that concerns most businesses is the danger of paying double taxation in both the local and their home country.

South Africa has double taxation treaties with a number of African countries, but by no means all – not even all SADC (Southern African Development Community) or even all neighbouring countries have signed such treaties. The Government is negotiating new treaties, particularly as avoiding double taxation is a prerequisite for a future free trade area in SADC.

“In this case, an investor may establish a holding company in a third country that shares double taxation treaties with both South Africa and the target country in order to enjoy the benefits of those treaties. Mauritius is a country that is investor friendly, and has many such tax treaties,” he says.

Protection of IP is a growing issue in Africa. Steyn says no country in Africa openly flouts IP rights on the scale of, say, China, but there are issues around enforceability in certain African countries.

Companies may want to protect their IP through one of the international treaties like the Patent Cooperation Treaty whereby they may register their IP so as to protect their rights in member states.

“Issues of IP, governance and the rule of law are all on the agenda in Africa, particularly in Nepad forums and through the African Peer Review. The world investor community increasingly insists on such rights, and if a country wishes to attract sustained foreign investment, they have to deliver an “investor friendly” environment,” adds Steyn.

Nonetheless, the rule of law is a hot issue in many African countries.

“If one compares the position today to thirty years ago, it is clear that corruption and the rule of law is now increasingly recognised by African governments as an issue that must be addressed both locally and through bodies like Nepad. In fairness, the record of some countries has been very good and it is not correct to say that corruption is a problem unique to Africa or developing countries. However companies looking to invest in a particular country need to make a call as to whether it is prepared to be party to corruption, bearing in mind that the party giving the bribe is also guilty of a crime and that certain countries like the USA have laws against foreign corrupt practices by its nationals. Quite apart from criminal consequences, there may be serious reputational issues (particularly for listed companies) and financial risk, for example if lucrative contracts are cancelled by a new government due to corruption” adds Steyn.

Where companies run into contractual disputes in Africa, “they may not want to litigate locally”, says Steyn. The common practice is for a contract to state the jurisdiction and governing law that will decide disputes, for example arbitration in Johannesburg or London.

“The problem still remains one of enforcing one’s rights in a particular country if that country does not have a proper legal infrastructure to recognise and enforce foreign judgments or arbitral awards.”

“The good news is that no African country except Zimbabwe has an active nationalisation policy. Most countries understand they have to abide by international agreements and norms on trade and investment if they want to attract foreign investment,” he says.

Other challenges that are best resolved by having a commercial lawyer “on the ground”, says Steyn, are: corporate structuring, exchange controls, work permits, the repatriation of funds, ensuring proper contractual protection and taking advantage of various incentive programmes. Local partners are often very useful.

“There are also sometimes sector specific regulations and protected industries in specific countries,” adds Steyn.