Senegal can do better !
Private equity can be defined as a set of financial transactions involving the acquisition of temporary, generally minority stakes, in the form of capital (ordinary or preference shares), convertible or non-convertible debt securities, equity securities, etc., in unlisted companies, generally small and medium-sized enterprises (SMEs), including start-ups.
The private equity business is conducted through investment funds or vehicles, which are legal entities in either corporate or contractual form (co-ownership of shares), and which provide investment to target companies, which are generally SMEs.
Private equity thus offers an alternative or complementary solution to traditional bank financing. It provides equity or quasi-equity financing for the start-up (seed capital/venture capital), expansion (expansion capital), transfer (transfer capital) or turnaround (turnaround capital) of unlisted companies.
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.
The major challenge facing Senegal is therefore to introduce (and/or strengthen) a tax policy that provides incentives to make private equity more attractive. An overview of Senegal's tax framework for private equity shows that the system is reassuring, even if its limitations and shortcomings mean that the road to performance and tax attractiveness is still strewn with pitfalls.
Senegalese SMEs financed by private equity funds are not covered by any special tax regime, and are therefore subject to the ordinary tax system. Even if the Startup Act has, through law n°2020-01 of January 6, 2020 relating to the creation and promotion of startups in Senegal, made reference to a special tax status for startups. As far as taxation is concerned, we have not identified any special tax treatment for start-ups. However, it should be pointed out that the Finance Act for the year 2020 has established an incentive scheme applicable to new businesses (including start-ups and all other SMEs). This preferential regime consists of an exemption from the minimum flat-rate tax (IMF) and the flat-rate contribution payable by the employer (CFCE) for the first three years of business.
Tax incentives for investment vehicles.
From a tax point of view, the benefits of the policy of encouraging private equity investment in SMEs can be assessed indirectly through the preferential treatment granted to the investment vehicles that finance them. Indeed, if capital investors were to be taxed more heavily than if they had invested directly in the underlying assets (SME shares or units), there would be little point in using a private equity vehicle.
Avoiding tax friction at the level of the screen structure (the investment vehicle) is therefore essential for any effective scheme to benefit SMEs. Consequently, a tax-incentive policy in favor of investment vehicles would, in turn, make private equity more attractive to SMEs.
C’est dans ce sens que le régime fiscal des SICAF (Société d’Investissement à Capital Fixe), organisé au plan du droit communautaire UEMOA (Union économique et monétaire ouest africaine) par la Directive n°02-2011 CM/UEMOA du 24 juin 2011, dont les avantages sont partiellement transposés dans le dispositif fiscal sénégalais, consacre auxdites entités une exonération d’impôt sur les sociétés, une imposition des distributions perçues par leurs investisseurs comparable à celle des détenteurs directs d’un portefeuille titres et un régime de faveur en matière de droits d’enregistrement (enregistrement gratuit) pour les actes de constitution, de prorogation, d’augmentation ou de réduction du capital et de dissolution.
The same applies to the tax regime for Undertakings for Collective Investment at Risk (OPCR) instituted by CREPMF (Conseil régional de l'épargne publique et des marchés financiers) Instruction no. 66/2021 of December 16, 2021, which exempts OPCRs from corporate income tax, taxation of distributions received by holders of VCIO securities comparable to that of direct holders of a securities portfolio, and a preferential registration duty regime (registration at a fixed rate) for the incorporation, extension, capital increase or reduction and dissolution of VCIOs.
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).
Il va sans dire que ces mesures de faveur incitant à investir dans le capital-investissement consacrent un intérêt indéniable aux PME sénégalaises, lesquelles constituent un maillon essentiel du tissu économique sénégalais.
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.
En effet, force est de reconnaitre que, même si l’on peut se réjouir de l’existence au Sénégal d’un régime fiscal intéressant pour les véhicules d’investissement soumis à un régime particulier, celui-ci est moins généreux que le régime préconisé par la Directive n°02-2011/CM/ UEMOA du 24 juin 2011 et par la Directive UEMOA n°02-2010 du 30 mars 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.
Article 9-2 of the Senegalese CGI makes the deductibility of financial charges paid to shareholders subject to certain conditions. This can be quite restrictive for investment vehicles, which generally contribute part of the investment in quasi-equity via cash advances.
The business model of private equity vehicles is to take minority stakes, which regularly leads them to invest in quasi-equity to enable the target company to absorb the investment while controlling the dilution effect resulting from the portion of the investment to be allocated to capital. Thus, the application of this deductibility limit to interest on cash advances is highly unfavorable for quasi-equity investments.
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).
The application of VAT to bond interest is counter-productive and detrimental to investment. Indeed, the acquisition and holding of bonds for investment purposes should not be treated in the same way as the granting of a loan, even if the bond loan serves to cover the debtor's financial needs. On the contrary, these operations should be considered as a type of investment that merely involves the management of one's own assets. In other words, bond interest is not so much remuneration for a service provided to a third party, the purpose of which is to grant credit, as passive income resulting from the simple ownership of a security.
Unclear taxation of management incentives
Investment funds generally attach particular importance to incentive mechanisms for the managers (usually non-shareholders) of the company being financed. These incentive tools are integrated into the management remuneration structure, thereby aligning the interests of management with those of shareholders, including the investment vehicle.
Management packages are frequently used in private equity deals, and particularly by buyout funds in LBO transactions. It enables the target company's managers to be incentivized and incentivized (or even sanctioned) at the time of investment, notably through the introduction of legal mechanisms for deferred access to share capital, such as bonus shares, share subscription warrants (BSA) or contractual mechanisms such as retrocessions of capital gains in the event of outperformance...
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.
Ainsi, l’impact négatif de la fiscalité sur la rémunération de l’investissement en quasi fonds propres, l’application de la TVA sur les intérêts d’obligations et le manque de visibilité sur le management package ne militent pas pour l’attractivité fiscale du capital investissement au Sénégal et, de facto, pour le financement de nos PME.
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.
