Following the adoption of the new uniform law on banking regulation, financial technology companies commonly referred to as « FinTech » are defined as firms delivering financial services and products designed and/or distributed through innovative information and communication technologies.

The new uniform law on banking regulations adopted by the WAEMU Council of Ministers on 16 June 2023 introduces numerous modifications and innovations into the said regulations. These include the recognition of FinTech as being amongst the “banking institutions” which are namely: credit institutions, payment institutions, electronic money institutions, bank holding companies, financial services companies and microfinance institutions.

The new law thus bestows on them on an exclusive basis the right to carry out one or more banking operations such as the receipt of funds from the public, credit operations and payment services.

But the other side of the coin, so to speak, is that they are no longer entitled, without prior approval or authorization, to act as FinTech, or create the appearance of such status, in particular by using the term “FinTech” in their commercial name, advertising or, in any way whatsoever, in their activity.

In other words, companies who wish to offer ICT-based financial services or products within the WAEMU space would need double approval, which is no mean feat.

This is why article 32 of the new law leaves it to the BCEAO to determine the specific regulations applicable to FinTech. 

All in all, the future of FinTech is in the hands of the BCEAO. One thing’s for sure; nothing will ever be the same again for FinTechs.

Senegal can do better !

Private equity can be defined as any financial transaction that consists in taking temporary and generally minority shareholdings in the form of capital (ordinary or preferential shares) or acquiring convertible or non-convertible debt securities, profit participation certificates, etc., from non-listed companies, in general Small and medium-size firms (SMEs), including start-ups.

Equity capital is raised through investment funds or vehicles who designate the legal entities (corporate or contractual) and who provide equity for the target firms, usually SMEs. bring the investment to the target firms, who are generally SMEs.

Private equity thus provides an alternative or complementary solution to traditional bank financing. It helps to finance, in the form of equity or quasi-equity, the start-up (seed or venture capital), the development (development capital), the transfer (buyout capital) or the recovery (turnaround capital) of non-listed firms.

SMEs wishing to accelerate their growth open up their capital to investment structures in exchange for equity and/or quasi-equity financing, for an investment period that generally varies from five to seven years

Senegal's tax framework for private equity is reassuring, even though the road to tax attractiveness is still strewn with pitfalls.

Private equity is an interesting financing tool for SMEs who are often faced with a chronic lack of equity and difficulties to access bank financing whereas they represent the core of Senegal's economic fabric. It could therefore be a privileged financing tool instrument for and are often faced with a chronic lack of equity capital and difficulties accessing bank financing. It could therefore represent a privileged instrument for the financing of the country's economic development through SMEs. However, this will require a favourable, neutral and attractive tax environment.

Senegal’s major challenge, therefore, would be to introduce (and/or strengthen) an incentive tax policy that would militate in favour of the attractiveness of equity capital. Senegal’s tax framework of private equity shows the existence of a system that has the advantage of being reassuring, even though it has limitations and shortcomings, which means that the road ahead is still a difficult one.

Senegalese SMEs financed through private equity are not subjected to any particular tax regime and are therefore subjected to the tax regime governed by the common law, even though the Startup Act referred to a special tax regime for startups through law No. 2020-01 of 06 January 2020 relating to the establishment and promotion of start-ups. We have not seen any specific tax regime in favour of start-ups. However, it should be stressed that the finance bill for 2020 approved an incentive regime applicable to new firms (including start-ups and all other SMEs). This preferential regime favourable regime consists in an exemption from the flat minimum tax (IMF) and from the flat-rate contribution payable by the employer (CFCE) during the first three fiscal years.

Tax incentives for investment vehicles.

The advantage of the incentive private equity policy in favour of SMEs will be indirectly assessed through the preferential regime granted to the investment vehicles that finance the latter. Indeed, if the capital investor would be more heavily taxed than if they had directly invested into the underlying assets (SME units or shares), resorting to a private equity vehicle would have limited interest.

Similarly, the avoidance of tax frictions within the screen structure (the investment vehicle) is essential when setting up any effective system for the benefit of SMEs. Therefore, an incentive tax policy in favour of investment vehicles would indirectly advocate for the attractiveness of private equity for the benefit of SMEs.

It is in this sense that the tax regime applicable to the SICAF (Investment companies with fixed capital), established under WAEMU (West African Economic Community) community law by Directive No. 02-2011/CM/UEMOA of 24 June 2011 and whose advantages have been partly transposed into the Senegalese tax system, grants to the said entities an exemption from corporate tax, a tax on distributed profits received by their investors that is comparable to the one granted to direct holders of securities portfolios and a preferential regime with regard to registration fees (registration free of charge), instruments of incorporation, deeds of extension, deeds of increase or reduction of capital and deeds of dissolution.

It is the same for the tax regime applicable Venture Capital Investment Organizations (OPCR) established by CREPMF (Regional Council for Public Savings and Capital Markets) Instruction No. 66/2021 of 16 December 2021 which provides for corporate tax exemption for OPCR companies, a tax on distributed profits received by holders of OPCR securities that is comparable to the one granted to direct holders of securities portfolios and a preferential regime with regard to registration fees (fixed registration fee) for instruments of incorporation, deeds of extension, deeds of increase or reduction of capital and deeds of dissolution of OPCRs.

It should be noted that these special regimes, established by Uniform Act 2007-15 for SICAFs and by CREPMF instruction no. 66/2021 for OPCRs, are only optional for private equity activities and they entitle investors to special tax benefits.

As a result, investment vehicles that have not opted for these special regimes are subject to the ordinary tax regime. In this respect, it should be emphasized that the provisions of the CGI (French General Tax Code) are not lacking in fiscal attractiveness, with more or less significant tax exemption on income from participating interests, depending on the applicable regime (parent-subsidiary Regime, holding company regime or investment regime), and a waiver of IRVM (Tax on Income from Investments/Securities) on redistributions (parent and subsidiary company).

It goes without saying that these incentives to invest in private equity are of undeniable interest to Senegalese SMEs which are an essential link in the country's economic fabric.

Limitations of the tax system applicable to private equity in Senegal

While the tax environment for Senegalese private equity can generally be described as satisfactory in terms of its attractiveness to SMEs, it nevertheless has a number of limitations and shortcomings, both at regulatory and functional levels.

Indeed, we cannot but recognized that, even if we can be happy with the existence in Senegal of an attractive tax regime for investment vehicles subjected to a special tax system, this regime is less generous than the one advocated by Directive No. 02-2011/CM/UEMOA of June 24, 2011 and by Directive UEMOA No. 02-2010 of March 30, 2010.

The incomplete transposition of Directive No. 02-2011/CM/UMOA of June 24, 2011 and the non-transposition of Directive UEMOA No. 02/2010/ have a negative impact on the attractiveness of private equity.

Similarly, at functional level, it is important to highlight the existence of a number of tax rules that are unfavourable to private equity.

Under the provisions of article 9-2 of the Senegalese CGI, the deductibility of interest paid to shareholders for corporate income tax purposes is subject to a number of conditions. This may be a constraining factor for investment vehicles who usually provide part of the investment in the form of quasi equity via cash advances.

The business model of private equity vehicles consists in taking minority shareholdings, which usually leads them to invest in the form of quasi equity in order to help the target firm absorb the investment while controlling the dilution effect resulting from the part of the investment to be provided in the form of equity capital. The implementation of this limitation on the deductibility of interests on cash advances is very unfavourable to quasi-equity investment.

Bond income is subject to VAT under the terms of Articles 352 and 356 of the French General Tax Code. This was confirmed by the tax doctrine (DGID letter n°1071 dated 22 November /2017).

Applying VAT on bond interests in counter-productive and harmful to investment. Indeed, the acquisition and holding of bonds for investment purposes should not be treated in the same manner as the grant of a loan, even though bonds are used to cover the needs of the debtor. Rather, such operations should simply be considered as a kind of investment simply intended for the management of one’s own assets. In other words, bond interests are less a remuneration for a service provided to a third party and which would aim at granting them a credit than a passive income resulting from the mere ownership of a security.

Unclear taxation of management incentives

Generally speaking, investment funds attach particular importance to the incentive mechanisms used by managers (in general, non-shareholders) of the financed company. These incentives are integrated into the remuneration of managers and therefore make it possible to align the interests of the management with those of the shareholders, including the investment vehicle.

Management package is often used in private equity transactions and, in particular, in leveraged buyout transactions. Indeed, it helps to encourage and to attract (and even impose sanctions on) the managers of the target company, at the time of the investment, mainly through the establishment of legal mechanisms granting deferred access to the share capital such as bonus shares, warrants (BSA) such as retrocessions of capital gains in outperformance, etc.

From a tax point of view, Senegalese legislation makes no specific provision for bonus shares and securities giving access to capital issued to the managers. As far as we are aware, the tax authorities have not yet taken a position on these legal incentives for managers. As a result, the tax treatment of bonus shares or securities giving access to the company's capital (warrants, etc.) may entail a degree of risk.

Thus, the negative impact of taxation on the remuneration of quasi-equity investments, the application of VAT on bond interest and the lack of visibility on the management package do not militate in favour of the fiscal attractiveness of private equity in Senegal and, de facto, for the financing of our SMEs.

In conclusion, while there is no doubt that, from an economic point of view, private equity has had a real and positive impact on SME growth, there is reason to believe that countries with a regulatory framework, and in particular a tax framework, conducive to private equity could better meet the financing needs required for their economic growth.

From this point of view, the issue of financing Senegalese SMEs through private equity should be more than ever at the heart of the government's concerns. Yet private equity is struggling to develop in Senegal. Is it because of tax regulations ?

Overall, Senegal's incentive tax policies to encourage private equity have produced mixed results. While there is no longer any question that the tax advantages granted by Senegal to promote private equity are undeniable, there are nonetheless three shortcomings to be regretted: the absence of tax incentives for investors in private equity funds, the lack of a clear tax regime for management incentive tools, and a number of tax rules that are unfavourable to private equity, such as the application of VAT on bond interest and assignments of receivables, thin capitalization rules, and so on.