Lowtax Country Focus: The Comoros Islands
Sponsored by Delta West Credit Bank
16 May, 2016
It has had a troubled start to life as an independent nation, with political instability holding back its development. But the Government of the Comoros Islands (also referred to here as Comoros) is putting in place a legal framework designed to attract foreign investment in a number of sectors with enormous economic potential, especially tourism.
Introduction: Where Are The Comoros Islands?
The Comoros are situated at the northern mouth of the Mozambique Channel, about two-thirds of the way between northern Madagascar and northern Mozambique. The four main inhabited islands include Grand Comore, Anjouan, Moheli and Mayotte, although only the first three form the Republic of Comoros; Mayotte is a French department.
With a total surface area of 2,235 sq km, the terrain of the islands varies from low hills to rugged volcanic mountains, the tallest of which is Mount Karthala at 2,360m, an active volcano which last erupted in 2007. The climate is tropical marine and there is a rainy season from November to May each year.
Population and Language
The population of approximately 780,000 (July 2015 est.) is a diverse ethnic mixture of African, Arabian and South Asian origin. However, the overwhelming majority of the population (about 98 percent) are sunni muslim, and Arabic is one of the three official languages alongside French, the language of business, and Shikomoro, a blend of Swahili and Arabic. Moroni is the largest city, federal capital and seat of the government of Comoros, with a population of about 56,000 in 2014.
A Brief History Of The Comoros Islands
The islands have been inhabited since the first half of the first millennium AD. Islam arrived in the Middle Ages with traders from the Arabian Peninsula and North Africa, with Comoros a key staging post on maritime trading routes between Africa, the Middle East, India and South East Asia. A prosperous area with Swahili culture was formed by alliances between the Comoros Islands, Zanzibar, Pemba, Lamu, and the towns along the Kenyan and Tanzanian coast which exported slaves, ivory and other goods from Africa to Arabia and India.
France established a colony in Mayotte in 1841 and protectorates over the other islands in 1886, which were constituted as a single administrative unit under the authority of the Governor General of Madagascar in 1908. In 1912 the colony of Mayotte and its dependencies became a province of the colony of Madagascar, then under French rule. Following World War Two, the islands were detached as an administrative area of Madagascar and became an Overseas Territory of France.
At a referendum organized by the French administration in 1974, the Comorians voted overwhelmingly in favor of independence, which was declared in the following year. France maintained sovereignty over Mayotte, however. The political history of Comoros has been rather turbulent in the meantime, with coups forcing power to change hands a number of times. In 1997, demands for increased autonomy on the islands of Anjouan and Moheli led to the breakup of the Federal Islamic Republic. In 2001, the government reformed as the Union of the Comoros under a new constitution which gave each of the three islands more autonomy than had been enjoyed previously. The island country continues its present form of confederal government albeit with minor changes approved in a 2009 referendum. In May 2011, Ikililou Dhoinine won the presidency in peaceful elections widely deemed to be free and fair.
Although the rugged landscape makes farming difficult, agriculture remains the largest component of the economy, with just under half of available land given over to food production. Agriculture, including fishing and forestry contributes 50 percent to GDP, employs 80 percent of the labor force, and provides most of the exports. Export income is heavily reliant on the three main crops of vanilla, cloves, and ylang-ylang, used in the manufacture of perfume. Remittances from 200,000 Comorans contribute about 25 percent to the country's GDP. Economic growth has gradually declined since 2013, from 3.5 percent to an estimated 1 percent in 2015. The currency is the Comoran franc (KMF) which is pegged to the euro at a rate of EUR1 = KMF492.
Recent political instability has restricted economic development of the Comoros Islands, and investment in infrastructure is sorely needed. However, there have been some encouraging signs for the economy in last few years: in December 2012, the IMF and the World Bank's International Development Association supported USD176m in debt relief for Comoros, resulting in a 59 percent reduction of its future external debt service over a period of 40 years; and in late 2013, a US-based investment company invested USD200m in a project to explore for hydrocarbons in Comoran territorial waters, the largest financial investment in the country's history. Tourism has yet to really take off in the Comoros Islands, but with its tropical climate, natural beauty and 400km of coastline, it is a sector with much potential, and one the Government is keen to develop. Indeed, a law on tourism was recently passed by the legislative assembly intended to promote investment in this industry.
Comoros is a member of the Common Market for Eastern and Southern Africa, which counts the following other countries within its membership: Burundi, D.R. Congo, Dijbouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Seychelles, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
Comoros also belongs to the Organization of Islamic Conference, the Arab League, the Indian Ocean Commission.
The Banking System
The financial system of Comoros consists of the Treasury, a Central Bank, three commercial banks, one development bank, two micro-finance agencies and one financial services provider. The Central Bank has the exclusive right to issue the local currency and its main role is to formulate the monetary and credit policy and manage international reserves.
Other financial services are provided by intermediaries such as Western Union, MoneyGram and Comores Express.
Economic Sectors and Investment Opportunities
Opportunities exist for foreign investors in the following economic sectors: food processing; fishing; energy; ICT; infrastructure; mining; real estate; and tourism.
While agriculture remains the predominant sector of the Comoros economy, it is characterized by small farms and traditional farming methods. However, according to the country's investment promotion agency, the development of processing plants for agricultural products which increase the added value of food products "represents an attractive investment opportunity for both domestic and export."
In a similar vein, there is much potential for investment in the country's underdeveloped fish processing facilities. Tuna is the main source of income from fishing. But there is a wide variety of fish in Comorian waters, and untapped reserves of lobsters and octopus near the coast. "The fisheries sector in the Comoros offers vast opportunities for investment not only in terms of increased fishing capacity, but also more widely in the development of infrastructure and port facilities that support the sector," the agency says.
Indeed, the Comoros Islands are described as a "paradise of opportunities" for investors in infrastructure more generally, particularly in roads, airports and marine facilities.
However, it is the tourism sector that perhaps presents the most profitable opportunities, with the sector largely unexploited, in spite of the islands' natural beauty. Potential exists for the construction of beach resorts and for the development of "eco-tourism" ventures.
Importantly, telecommunications, particularly the provision of high-speed internet, is improving in the Comoros Islands, with the country one of 10 landing stations on the 10,000km-long East African submarine fiber optic cable. This has enabled the Government to invest in a new telecoms venture, Telecom Comores, giving Comoros the second-largest capacity of all submarine cable systems on the East Coast of Africa with speeds of 3.7 terabits per second. Additionally, China has committed some KMF11bn to complete the fiber optic project and bring high-speed internet connections to all parts of the islands. The introduction of fiber optic in Comoros has also resulted in a fall in the price of telecom services.
The Legal Framework and Commercial Law
Comoros has a mixed legal system of Islamic law, the French civil code of 1975 and customary law. Importantly however, Comoros is a member state of the common legal area known as the Organization for the Harmonization of Business Law in Africa (usually referred to by its French acronym, OHADA). Formed by treaty in 1993, OHADA's goal was to harmonize certain aspects of the legal frameworks of the countries situated in West and Central Africa which use the CFA Franc as their currency. Including the Comoros, there are currently 17 members of OHADA, including: Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of the Congo, Côte d'Ivoire, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Senegal, Togo, and the Democratic Republic of Congo.
OHADA member states are obliged to enact, subject to transitional measures, Uniform Acts that have direct effect and supersede national laws. There are nine Uniform Acts including General Commercial Law; Commercial Companies and Economic Interest Groups; organizing Security Interests; organizing Simplified Recovery Procedures and Measures of Execution; organizing Collective Proceedings for Clearing Debts; Arbitration; organizing and harmonizing Undertakings Accountings Systems; Contracts for the Carriage of Goods by Road; and Cooperative Companies.
To ensure compliance with, and encourage consistent interpretation of, the Uniform Laws, a supranational court has been established, known as the Common Court of Justice and Arbitration.
All traders, including legal and natural persons, situated in a contracting state to the OHADA treaty are subject to the Commercial Law. Natural persons or corporate bodies, and economic interest groups, set up or being formed on the date of entry into force of Uniform Acts must harmonize the conditions under which they carry on their activity within a period of two years from the date of publication of this Uniform Act in the Official Gazette.
Under the Commercial Law, traders are defined as persons whose regular occupation is to carry out commercial transactions. Commercial transactions include the following:
- the purchase of movable or immovable property for resale;
- banking, stock-exchange, currency exchange, brokerage and transit transactions;
- contracts between traders for business purposes;
- the industrial exploitation of mines, quarries and any natural resource deposit;
- rental of personal property;
- manufacturing, transportation and telecommunication operations;
- intermediary transactions such as commission, brokerage and agency, as well as intermediary operations relating to the purchase, underwriting, sale or rental of immovable property, businesses, shares in commercial companies or building societies; and
- transactions carried out by commercial companies.
The Uniform Act relating to Commercial Companies and Economic Interest Groups was substantially updated and improved by an amendment which came into force on May 5, 2014. These changes are intended to enhance legal certainty while making company law more flexible in a bid to promote investment and economic development in OHADA member states.
Under OHADA law, companies can be incorporated as sole proprietors, partnerships, limited partnerships, limited liability companies and public limited companies. Any natural person or corporate body may be partner in a commercial company where he is not subject to any prohibition, incapacity or incompatibility as defined in the Uniform Act relating to the General Commercial Law. The minimum share capital for a société à responsabilité limitée (SARL, or a limited liability company), is KMF750,000, and for a société anonyme (SA) is KMF7.5m.
Applications for business licenses are made through the National Agency for Investment Promotion, Invest in Comoros. However, the following steps must be made in order to register a company in the Comoros:
- Registration of the statutes with the island-area services
- Registration with the Commercial Register
- Registration in the Personal Property Credit Register
- Registration at the General Directorate for Taxes
- Publication in the journal of legal notices
Taxation in Comoros is based on the French tax system. However, taxes are complex and tax rates are quite high.
Under the General Tax Code, corporate tax applies to Comoros-source income at a rate of 35 percent. However, corporate tax rises to 50 percent if a company's turnover exceeds KMF500m.
Individual income is taxed at progressive rates up to 30 percent, which applies on income of more than KMF3.5m. No tax is paid on income up to KMF150,000. All individuals with a permanent occupation in Comoros are subject to personal taxation. Self-employed individuals are subject to corporate tax. There is also a capital income tax of 15 percent.
There are a number of taxes on property. Taxes on recording property transactions are levied at 2 percent of the value for property rights and mortgages and 1 percent of the cumulative value for leases. Tax on real estate transfers is charged at 2-9 percent of the selling price depending on the type of property involved.
There is an annual tax on the rental value of a property of 20 percent for residential units and farms, and 30 percent on industrial and commercial units.
There is also a per-hectare tax of up to KMF10,000 on agricultural land, the rate of tax depending on the type of land use.
Real estate capital gains are taxed at a flat rate of 20 percent.
There is a consumption tax of 10 percent, except for basic necessities (0 percent), water supplies, private school fees and inter-island air fares (3 percent) and electricity and telephone supply, and banking services (5 percent).
Import tariffs apply on various items imported into Comoros at rates of up to 30 percent.
However, as mentioned above, foreign investors can take advantage of special tax holidays.
The Investment Law
In an attempt to improve the business environment of Comoros, boost foreign investment and create employment, the Investment Code was passed in 2007, which is seen as a more liberal and attractive law than its predecessor. It provides investors with a conducive legal framework, the free movement of capital and profits and equal rights for foreign and national investors. Invest in Comoros, is the main institution tasked with liaising with investors under the Code. Its role is to serve as an intermediary between the government and investors, carry out business registration procedures and issue special permits.
The Investment Code also provides tax incentives for approved investors, including the following:
- exemption from customs duties and taxes on imported materials and equipment intended to be used in the investment project;
- potential for substantial reductions in corporate tax, in an amount related to the amount spent by the investor.
These tax incentives are available for seven years on investments of at least KMF5m. However, they are extended to 10 years on investments exceeding KMF100m.
Entry and Work Permits
A passport valid for at least six months from the date of entry is required to enter Comoros. A 45-day visa it issued to tourists and businesses on arrival in return for a fee of EUR30 (USD34).
Investors are able to employ foreign workers if the skills they require cannot be found locally. Although no minimum quota of foreign workers is guaranteed to investors, the Comorian authorities tend to treat requests favorably. Work permits are renewable annually without limit. Fees for entry vary depending on the number of entries and the length of stay.
A one-year residence permit costs EUR250 and the 10-year residence permit costs EUR500. An employer is responsible for obtaining visas for employees. If no response is received from the local authority within 30 days after requesting an employee visa, it is assumed that the visa request has been granted to the employee.
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