Investment act throughout Madagascar history
In 1961 (Madagascar recovered its independence on June 26th, 1960), the first investment act has established the first incentive measures towards foreign investors: act 61-027 of October 09th, 1961.
Following the 1972 events (period of riots against the government and the French “economic imperialism”), the new regime has adopted another investment code – Ordinance 73-057 of September 19th, 1973 – which highlighted the willingness from the State to intervene in the economic sector and to incite the Malagasy investors to take part more in the economic development. Such policy has led to the nationalization of important French commercial companies like Compagnie Marseillaise, Compagnie Lyonnaise and other Foreign Private Companies. The real policy of this investment act was clear: to limit foreign investments and to promote Malagasy companies. It led to a real reluctance of foreign investors to do business in Madagascar. Such reluctance has been strengthened with the adoption of the Charter of Socialist Revolution of 1975 (the so called “Red Book”) which has provided for “an appropriation by the State and the people of all the means of production”. The State took over the economic sector of Madagascar.
During the economic crisis of the eighties, the State has been obliged to allow private initiative to intervene in some sectors. It led to the adoption of a third investment act: act 85-001 of June 18th, 1985. This investment act has tried to bring the confidence of the foreign investors back through allowing them to intervene in the economic sectors, except for some sectors which remained in the scope of public State intervention. Nevertheless, in these specific sectors, the State had the possibility to ask for eventual contribution or cooperation from the private sector.
The act 85-001 of June 18th, 1985 did not succeed to overcome the economic crisis. So, a new investment act has been drafted: act 89-026 of December 29th, 1989. This fourth investment act has cancelled the provisions relating to the sectors which were deemed to belong to the State. Nevertheless, this investment act has just pointed out the general principles which rule the investments in Madagascar. It was not really obvious to know specifically the real and concrete scope and implication of these new principles.
This investment act did not provide with the expected results, so on 1996, it has been abrogated by the act 96-015 which provides in its article 02 that “any natural person or legal entity can, under the respect of the legislation and the current regulations, freely invest in the national territory, without any sort of investment authorization or investment approval which is not requested by a particular regulation for a particular activity.”
In its article 05, this act provides for the “equality of treatments” between local and foreign investors in Madagascar. Since 1996, the investments in Madagascar have not been regulated by any specific legal text until the year 2008.
This new investment act which was promulgated on January 14th, 2008 is the fifth investment act of Madagascar: act 2007-036.
This new investments act has been drafted especially to attract international investors and to make the Malagasy private sector as the main engine for fast and sustainable development.
Clearly, the act 2007-036 of January 14th, 2008 expresses the huge effort and willingness from the State to grant more opportunities for international investors. Through this new investment act, the State expresses its determination to make a tremendous change on its relationship with private investors. We even can assume that the Malagasy State has once for all decided to get rid of its protectionism trend for the benefit of an economic policy which moves forward to a complete liberalism.
The main purpose of the act 2007-036 of January 14th, 2008 is to transform substantially the climate of investments in Madagascar, to promote entrepreneurship and to provide private initiatives with warranties which are necessary for their implementation. Such private initiatives should contribute to the improvement of Malagasy people’s life through employment opportunities, the acquisition of know-how and an up growing improvement of national productivity.
Chapter I – The International standards which are the basis of the investments act
There are 06 leading International standards which are the unavoidable conditions to deserve the confidence of International investors as well as local ones:
· Freedom of investment;
· Equality of treatment;
· Protection of the rights of ownership;
· Freedom of money transfer;
· Fight against AIDS.
Freedom of Investment
According to the article 02 of the act, any foreign or local entity (natural person or legal entity) is free to invest in Madagascar. Their investment projects have to respect and above all have to comply with Malagasy laws and local regulations. Consequently, it obviously appears that an International or a local investor should also include within its market and feasibility studies, an accurate due diligence on the Malagasy laws and regulations in order to enable its investment project to be fully operative in Madagascar.
Nevertheless, such freedom of investment is subject to laws and regulations which rule these specific sectors:
– banking sector;
– insurance sector;
– mining sector;
– petrol sector;
– telecommunication sector;
– medical sector;
– paramedical sector;
– Pharmaceutical sector.
Equality of treatment
This is a basic principle which is among the conditions that investors, especially International investors, have requested the most: to be treated on an equal footing as their Malagasy counter-parts.
As provided by the Commercial Companies act (act 2003-036 of January 30th, 2004), Foreign investors can legally control the entire ownership of their companies in Madagascar. Such provision appears as very important for International investors due to the fact that in order to be allowed to invest in Madagascar, they are subject to the duty to have a permanent establishment. Actually, the cross-border monitoring is not yet authorized in Madagascar.
Protection of the rights of ownership
In the article 04 of the act, the Malagasy State guarantees the respect and the protection of the rights relating to individual or collective ownership. Through such clause, the rights of ownership are deemed to have been legally granted to the investors and consequently such rights are granted by the State with a legal protection.
The provision stated in this article 04, leads to the duty of the Malagasy State to protect the investors against any sort of nationalization, expropriation or requisition. This means that the Malagasy State binds itself towards private investors not to proceed with such measures (which are among its sovereign rights) unless for reason of public usefulness.
If such reason is invoked by the Malagasy State, the concerned investor will have the right to benefit from a prior and fair compensation.
The protection of the rights of ownership is among the most wanted conditions.
Freedom of money transfer
The local or international investors can freely without any sort of prior authorization from the authorities, transfer to abroad some financial resources relating to its business in Madagascar.
These financial resources are:
– the benefits after tax clearance;
– the dividends;
– the various payments and repayments, including but not limited to: the repayments of loans made on shareholders’ current account with their incomes, the incomes from shares assignment, the incomes from business house or assets assignment, the incomes from withdrawal of contribution, profit from liquidation and the compensations for expropriation.
The article 06 of the act, entitled “stability”, provides in its paragraph 03 that “the investors who benefit from the advantages provided by the present act, will carry on benefiting from such advantages, notwithstanding any new legal or regulatory measure which is aimed to cancel or to mitigate these advantages, which would be passed in a prior way to the publication of the present act”.
We have to mark out the effect of a stability clause in this investments act towards any foreign investor and the effect brought by the same clause towards a foreign investor who is protected by an International commitment made by Madagascar through for example a bilateral treaty about investments protection.
Unilaterally promulgated by the State within the scope of its internal normative power, this clause can be abrogated at any time by a new provision brought by at least a new act. It is accepted almost everywhere that a sovereign state can do as it pleases for the sake of the good of its people. Such power includes the fact of not giving support to a project or a law that may have been started by their predecessors and political opponents.
If the fact of having such stability clause can not keep the state from legally modifying the law, it strengthens the duty to find another economic balance between the contribution of the state and from the investor.
Actually, such provision leads to the motivation of the investors to do business in Madagascar and creates expectation that the state should not ignore.
Such duty can be claimed to the Malagasy state not only before the local competent jurisdictions but also before an International arbitration court.
The International duty of the state can be questioned whether the violation of the investor’s rights arises from a legal relationship which is internationally protected, it means, whether the investor benefits from a sort of umbrella agreement like a bilateral treaty of investments protection.
At this stage then, we come up with the assumption that a stability clause is legally enforceable and above all is opposable to the State if there are conventions on investments protection between Madagascar and the country of origin of the investors who are willing to be protected by such clause.
If this clause applies to an investor who can not benefit from such umbrella agreement, the principle of sovereignty of the state prevails over the principle of stability.
It is necessary to highlight the fact that all former investments act in Madagascar, had put the stability clause in their content.
The stability clause is the guarantee that the State gives to investors for a legal stability in Madagascar. Most of the time, this is the most appreciated clause in international investors’ view.
Fight against AIDS
This point is the detail which has given its specificity to the new investment law: fight against AIDS. Through such provision, the Malagasy State has launched a strong message: any investment project in Madagascar has to care about AIDS and the fight against its propagation. Through such provision, the Malagasy State has evidenced its heaviest will to prior the fight against AIDS.
Following the provisions set by the act 2005-040 of February 20th, 2006 (AIDS act), any company has to set up a program of sensitization and education for its employees and has to facilitate the access for their employees to voluntary AIDS tracking.
Chapter II – The EDBM (Economic Development Board of Madagascar)
The complexity of the relationship between the Malagasy State through its various organisms or public bodies and the private sector, has led to the conclusion that the setting up of a real “investment prompter” is unavoidable for the promotion of economy in general and investments in particular in Madagascar.
The EDBM, autonomous (but not independent) organism acting on behalf of the Malagasy State and under the direct supervision of the presidency of the Republic of Madagascar, gathers all the public services which are involved in the normal conduct of business in Madagascar (various ministries, trade and companies registry, taxation offices, statistic offices, …). Public Organism devoted for investors according to the article 08 of the investments act, the EDBM is in charge of facilitating the approval of investments projects in Madagascar, especially the delivery of permits, authorizations, licenses and visas which are required by specific regulations.
In all its decisions, it is bound by the so-called strict rule of 20 days deadline. The article 10 of the investments act provides that “under the reservations of other deadline provided by specific regulations, the EDBM has to assure that the authorizations, visas, and certifications which are part of its mission, are delivered within a deadline of 20 business days starting from the receipt of the complete requested documents. Failing to respect such deadline, the authorization, the visa, the permit or the certification would be deemed to be granted. Such deadline is also enforceable for the delivery of a specific permit named authorization for land acquisition for companies which are under foreign control (companies incorporated in Madagascar but are owned in majority by foreign individuals or companies). This permit allows these companies to purchase Malagasy land.
Within its duty to ease the administrative formalities relating to company setting up and investments implementation, the investments act entrusts the EDBM:
– to extend the entry visas and the stay visas;
– to convert the entry and the stay visas into “professional visas”;
– to deliver the professional visas: the professional visa, which is new type of visa, is granted to any foreign investors. This professional visa gives to its holder the right to reside and to work in Madagascar. The requirement about the obligation to obtain an employment authorization has been abrogated. The professional visa is valid for 03 years starting from its date of application. The professional visa bears the same legal value as a residence. Moreover, a resident card is duly delivered. The application for the renewal of the professional visa has to be done within a deadline of 01 month before its expiry date. The dependants of the main applicant are also granted with the same rights with the same duration.
– to deliver the license for Off Shore companies;
– to deliver the authorizations for land acquisition;
– to handle with the incorporation, the corrective entries and the cancellation of companies at the trade and companies registry;
– to grant taxation and statistic identifications;
– to deliver licenses, permits and authorizations required for tourist activities;
– to deliver building permits;
– to receive declaration of activities discontinuance from companies;
– to receive decision of authorization, visa or permit withdrawal and to notify these decisions to investors and companies.
The EDBM is also involved in the improvement of the legal and taxation framework. Through such mission, the EDBM is entitled to give its consent and its comments on any legal or regulatory bill which could lead to substantial changes on the climate of investments in Madagascar. The EDBM also can offer new legal or regulatory provisions to the attention of the relevant authorities. As a major element of the State, the EDBM can take part into the negotiation of new conventions or treaties concerning the protection of investments, the free trade and conventions which will avoid double taxation.
The EDBM in its management and in the implementation of its mission is autonomous.
Chapter III – incorporation and corporate deeds
Incorporation of Companies
Companies have to be incorporated before a public body named “Trade and Companies registry” without distinction on grounds of its managing agent’s nationality or residence. However, within three months of the company being incorporated, at least one of the managing agents must reside in Madagascar whether he is a Malagasy or an expatriate citizen holding a residence visa or the receipt of its filed application.
Registration of the articles of association (Memorandum of Associations)
With the exception of deeds proving the incorporation, extension of the duration, transformation or dissolution of the company, the increase, amortisation or reduction of its registered capital and the articles of association do not necessarily have to be formally registered. These deeds, in their original unaltered state, are admissible by all administrative services and particularly the Trade and Companies registry. Statements of the produced documents, in particular the date sealed on the documents, prevail, as appropriate unless countering evidence or plea of forgery is shown.
Dispense from legalising signatures
Agreements, deeds, minutes or documents which require an administrative formality of registration, transcription, publication, filing of a deed or any other formality, are not subjected anymore to legalisation process or recognition of the parties’ signature. The authenticity of signatures sealed on the documents prevails unless countering evidence is proved. This is not applicable to conventions which prove the sale of real estates by means of a transfer or the constitution of a perpetual lease.
Chapter IV – Visas and employment authorization
Freedom to hire and fire expatriate employees
Any company is free to hire or fire specialised expatriate employees it may need for the good conduct of its business.
Expatriate employees’ employment contracts may validly not comply with the labour laws and the social regulations with regard to the following:
• Insurance under a social security scheme in Madagascar;
• Insurance to the corporate medical service;
• Length and grounds for appeal to a fixed-term contract;
• Applicable recruitment regulations.
Practical arrangements for the derogation cases above-mentioned will be established by regulatory means. Those derogations shall not undermine the fundamental rights of employees as recognised by Conventions and international agreements to which Madagascar is a party. These specialised expatriate employees are automatically granted a professional resident visa.
Chapter V – Access to corporate real estate
The investments act offers a global opportunity for companies which are governed by the Malagasy law to purchase and to own land regardless to the fact that they are controlled by foreign interests or not.
The State guarantees a long run exploitation of the land. Moreover, the land is the most current surety which is used by banks as mortgage.
The article 18 of the investments act provides at the same time large and restrictive possibility of land acquisition for foreigners:
In one hand, the investments act does not anymore require a threshold of investments, nor require a maximum size for the land to be purchased by the foreign investors.
On the other hand, the investments act requires a mandatory destination for the real estate which has to be exclusively assigned in a permanent way to the implementation of the company’s activity.
Moreover, it expressly excludes the activity of developers.
Such tremendous change to the basic Malagasy traditional land principles is only permitted after the authorization of the EDBM, known as the “authorization for land acquisition”.
As well as for the application relating to investment, the delivery of such authorization is bound by the rule of strict deadline of 20 days.
Failure to respect the conditions for obtaining an authorization for land acquisition, and especially modifying without prior authorization the purpose of the use of the land, and failure to realize the investment project within a deadline of 06 months starting from the date of issuing the land title, are the official motives for the EDBM to withdraw the authorization for land acquisition.
The article 20 of the investments act provides that the withdrawal of the authorization for land acquisition leads to the cancellation of the land title and to the transfer of the land to the Private land of the State, without any sort of compensation.
The article 20 has been obviously put in the investments act in order to dissuade the “sac à dos” investors from cheating the Malagasy State.
The analysis of the provisions of the article 20 leads to 02 important questions:
– Does such provision comply with the constitution?
– Does such provision comply with International standards?
The article 34 of the constitution provides that any transfer of private property to the benefit of the State, has to be done with a due and fair compensation.
In this article 20, it is not the case at all. Does it mean that we are facing an element of breach of the constitution?
May be not because the property expropriation deserves compensation if and only if the expropriation has been made for serving national and public interests.
If we keep on with such view on the matter, we come to the conclusion that actually the authorization for land acquisition is just an authorization to use the land, which is quite similar to the status of a land lease.
The article 04 of the investments act provides for the protection of rights of ownership.
The article 20 of the same act contradicts the provisions of the article 04 through allowing the State to proceed with discretionary expropriation. Discretionary because there is no compensation for the investors who lose their land.
Obviously, the success of investments in Madagascar does not depend on this legal text. But nevertheless, it is necessary to put legal limits (or guidelines?) for local and international investors. The investments act shows at least the will of the Malagasy State to be more open to potential investments, especially from abroad.
A real promotion of investments in Madagascar has to go through a thorough reform and improvement of the climate of investments. This starts with the change of the structure and should end with the simplification of administrative procedures (the famous red tape).
Investors have money, this is obvious … but they also need something from the Malagasy State: “A clear guarantee that their investments will not be disturbed”. Is the current Malagasy Government doing such a thing? I start to have some serious doubts …
Nevertheless, the will to make Madagascar more open to Investments put our country in front of the danger of mitigation of its own sovereignty.