SMART CHOICES

Mozambique 2016 | EXECUTIVE GUIDE | REVIEW: LEGAL

Foreign investments are sources of capital, foreign exchange, and technical know-how for developing countries such as Mozambique. Over the past three decades, Mozambique has been successfully striving to ensure a favorable legal framework for foreign private investment.

In general, when observing the legal framework for private investment in Mozambique, one can note that there is an increasingly marked tendency toward the continuous promotion and improvement of the investment environment. This is mainly done through the simplification of the licensing system, and the creation of special economic zones and industrial free zones with taxation regimes and benefits favorable to the private foreign investor and greater openness.

The purpose of this article is to provide an overview of the main aspects to be taken into account by a foreign investor when considering investing in Mozambique

Key Regulatory Issues

In Mozambique, both national and foreign companies and individuals may invest in a number of areas. This includes, inter alia, investment made into equity or goods, and into machinery, rights, and loans. For this purpose, investors may apply for investment projects with the Centre for Promotion of Investments (CPI) in various sectors of activity, including but not limited to industry, services, tourism, agriculture, fishery, hostelry, and public sector areas such as the production of electricity, the supply of water, and telecommunications.
The investment incentives available in Mozambique are of four types, namely: (i) tax incentives; (ii) customs incentives; (iii) incentives related to the repatriation of capital invested and profits; and (iv) the protection/guarantees provided by the Mozambican state for private property and investments.

A foreign investor has the same rights and is subject to the same duties and obligations applicable to nationals.
The general restrictions regarding private investment are that private investment cannot be made into areas where activities are reserved for public sector initiatives, with or without the participation of the private sector, such as the production, distribution, and storage of ammunition.

Note also that there are no restrictions on foreign capital, except those which are generally applicable; some sectors, such as game reserves, require a percentage of a company's capital to be held by a Mozambican person.
Now addressing the matter from a foreign exchange perspective, there are two matters to be considered by foreign investors: (i) the Foreign Direct Investment; and (ii) external loans.

1.1 Foreign Direct Investment (FDI)

Mozambican companies with foreign shareholders are required, under the Foreign Exchange Law, approved by Law no.11/2009, of 11 March and the Foreign Exchange Law Regulations, approved by Decree no. 83 /2010, of 31 December, to register its project and foreign investors with the Central Bank.

Foreign Direct Investment (FDI) is defined under the Foreign Exchange Law Regulations, article 3(bb) as any form of foreign capital contribution quantifiable in monetary terms, which constitutes own equity capital or other resources at the foreign investor's own risk, brought from external sources and intended for incorporation in an investment project to carry out an economic activity, or to acquire a long-term interest in companies registered and operating in Mozambique.

FDI can be made through capital contribution, goods, and intellectual property.

FDI, as a capital transaction, is subject to the Central Bank approval under the foreign Exchange Law, article 6(5)(a). This means that, prior to sending in the funds for the payment of the share capital, an authorization from the Central Bank is required for the import of funds.

This is enforced with particular attention to the import of funds as distinct from goods. Sometimes FDI is introduced under an Investment Project Authorization, but if it is not, the investor is still required to register the capital. Although the Commercial Code does not establish a minimum share capital requirement for companies, the Central Bank is now implementing the provisions of the Investment Law and, under this legislation, the minimum FDI amount is the equivalent to MZN2,500,000, approximately $51,546 at the exchange rate of $1=MZN48.5.

For the import of funds as FDI, the Mozambican company shall request an authorization from the Central Bank to import the FDI, by way of registration of the company and its shareholders. Once the import of funds is approved by the Central Bank, the investors may import the funds. Those funds sent as FDI are subject to registration with the Central Bank, to be effected within 90 days from the date of entry of each tranche of funds into the country.

The registration of the company, the foreign investors, and the FDI funds is of extreme importance in order to allow the transfer abroad of dividends resulting from FDI in Mozambique. In case of disinvestment or dissolution of the company, the investors will be allowed to repatriate the capital invested.

Failure to register the FDI funds may also delay other exchange transactions that the investors may require, as the Central Bank will insist on a “regularization process" (i.e. that all prior instances of required capital registration be carried out) before agreeing to consider an application for a new capital transaction (e.g. approval of an application to make a shareholder loan). In such cases, the Central Bank may also levy fines that may vary from MZN10,000 to MZN100,000 the equivalent to approximately $206 to $2,062 for natural persons and MZN40,000 to MZN400,000, the equivalent of approximately $825 to $8,247 for legal entities.

1.2 External Loans

Another important consideration that foreign investors should take into account is the requirement for obtaining Central Bank prior approval for external loans, such as shareholders' loans and third party loans between residents (the company in this case) and non-residents (the shareholders or other foreign third parties).

External loans are considered capital transactions under article 6(5)(f) of the Foreign Exchange Law, and as such it is subject to the Central Bank prior approval. The loan disbursement funds shall also be registered with the Central Bank within 90 days from the date of entry of funds in the country.

Failure to obtain the Central Bank authorization and/or to register the loan disbursement funds will result in fines described in the FDI section above and, more importantly, in the inability to export funds for the service of the debt.

In addition to the above, when coming to the Mozambican market, foreign investors and companies should also consider the following: legal vehicles available for registration of their entity in terms of the Mozambican legal framework; tax and labor obligations; rules for the employment of foreigners; as well as other applicable foreign exchange rules, including the need to be registered with Mozambican Central Bank.

Available company structures and vehicles

In Mozambique, companies are governed by the Commercial Code. A commercial company may be wholly owned by a foreign investor, except for those areas where local content may apply. The Commercial Code enables foreign entities to do business in the country with limited liability either by incorporating a company or registering a branch. Although the Commercial Code provides for several forms of business enterprises that distribute and limit liability, the most commonly used limited liability Mozambican business vehicles are Limited Liability Quota Company (Sociedade por Quotas de Responsabilidade Limitada “Limitadas"), and Limited Liability Share Company (Sociedade Anónima de Responsabilidade Limitada “S.A.s").

Limitadas are appropriate vehicles for business enterprises of a relatively small scale that bring together the capital and labor of a number of co-venturers. Limitadas can be managed by their members and with relatively few formalities. Quotas for limitadas are not embodied in certificates. The evidence of ownership depends on the public record as published in the Official Gazette (the “Boletim da República"). As such, transferring interests in Limitadas, whether by public deed (required when the equity capital includes real property or when the company was originally incorporated that way) or by private instrument, must become a matter of public record.

S.A.s are appropriate vehicles for larger business enterprises that bring together the capital of large numbers of co-venturers. Although S.A.s can be managed by shareholders, they are typically structured so as to separate ownership and management. There are more formalities associated with the corporate life of the S.A.s, including requirements for the publication of notices and certain corporate acts. Their accounts must be audited and, in limited cases foreseen by specific legislation, published in a newspaper. On the other hand and in light of Mozambican commercial legislation, branches are normally registered to carry out economic activities or to execute specific contracts or assignments for a specific renewable period of up to five years.

Employment Issues

The general principles and the legal framework applicable to individual and collective subordinate labor relationships, in respect of work rendered to an employer for remuneration, are defined by Law No. 23/2007 of the 1st of August, known as the Labor Law.

As per the Labor Law employment contracts may be: (a) indeterminate period employment contracts; (b) fixed term employment contracts; (i) for period certain, or (ii) for period uncertain.

With regards to the types of employment contracts that may be concluded for the recruitment of Mozambican employees, the general rule is the indeterminate period employment contracts. Fixed-term contracts are the exception, and may only be used in accordance with legally stipulated limits.

With regard to employment of foreign employees, the Mozambican legislation recommends the hiring of foreign employees only when there are no national employees with enough qualifications and experience to perform the work. Usually, in order to prove that there are no Mozambicans available, with enough qualifications and experience to perform the work, employers advertise the positions in newspapers and recruitment websites. Kindly note that there are two forms of employment of foreigners in Mozambique, namely communication to and authorization by the Minister of Labor.

The parties may establish a probationary period in the employment contract, the initial period of execution of an employment contract, which enables the parties to adjust to and become acquainted with each other, in order to evaluate their interest in maintaining the employment contract. The Labor Law establishes the maximum probationary periods for new employees.

Generally, working hours cannot exceed 48 hours per week or eight hours per day. However it may be extended to nine hours per day provided that the employee receives a further half-day of rest per week, in addition to the weekly rest period), which is of at least 24 hours in any given week. The daily work period must be interrupted by an interval of not less than 30 minutes and not more than two hours.

As a general rule, employees must have a rest period of at least 24 hours in any week. Normally, this is on a Sunday but exceptions are allowed. The Minister of Labor, Employment and Social Security may declare tolerância de ponto (ad hoc holidays) on a workday but must do so at least two days in advance. On such days, employees may suspend performance of work without loss of pay.

The termination of an employment contract may take one of the following forms: i) expiry; ii) termination by way of an agreement between employer and employee; iii) cancellation by either party; and iv) termination by either contracting party on the basis of just cause. When terminating contracts, employers must take special care to comply with the formalities required by law.