Somaliland: Foreign Investment Law Analysis

Somaliland has in abundance investable natural resources such as minerals, oil, marine resources, frankincense, livestock, and various other raw materials.

According to the World Bank………. “The investment climate is an important determinant of a country’s success in raising investment levels. It, therefore, affects the country’s growth rate. For example, recent research on India suggests that if every Indian state attained best-practice levels in the best states (in terms of regulation and infrastructure), the economy as a whole could grow about two percentage points faster.

A good investment climate is the confluence of a number of factors, which determine the private sector’s decision to invest. These factors are well known (their importance is documented in a large number of investor surveys):

  1. A stable macroeconomic framework is imperative to reduce the risks faced by investors. This relates to the quality, predictability, and consistency of fiscal and monetary policies. It includes efforts to tackle unsustainable budget deficits, reduce inflation, ensure exchange rate stability and maintain sustainable levels of domestic debt. Governments also need to pay attention to linkages between trade and investment policies (e.g. openness can stimulate linkages with export markets, and competition from imports can raise the efficiency of domestic firms).
  2. External stability (i.e. the absence of war with (or in) neighboring countries) and internal stability (i.e. the absence of civil unrest, and acceptable levels of safety and security) are also very important.
  3. Microeconomic policies need to ensure that markets are dynamic, competitive and well-regulated. Competition policy and sectoral regulations have a key role to play in preventing monopolies and curbing anti-competitive practices. Investments must also not be undermined by bureaucratic red tape or excessive tax burdens. And governments should not try to compensate for shortfalls in the investment climate by providing subsidies or other incentives.
  4. Effective institutions, embodying the principles of transparency and accountability, are key to minimize corruption, protect property rights, improve governance and provide access to justice. Also important are business laws, bankruptcy regulations and commercial justice systems.
  5. Entrepreneurs and companies must also be able to rely on an efficient financial system to fund investments. The availability of credit is important, but so is the ability to store wealth or retained earnings for future investments. This is a particular concern for small local companies unable to access foreign capital markets.
  6. The availability of human capital – both general education and specific skills – is not only an important determinant of where investment will take place, but it is also crucial for ensuring that there will be technological spill-over effects. As such, human capital is important in ensuring that the benefits of investment spread beyond individual companies and industries.
  7. The state of a country’s physical and technological infrastructure is a significant determinant of transaction costs and of a country’s suitability as an export base for competing in world markets. Improvements to infrastructure are also important to ensure that poor people in rural areas can participate in markets and access new business opportunities.”

SOMALILAND FOREIGN INVESTOR LAW ANALYSIS.

DEFINITION OF FOREIGN INVESTOR

Somaliland foreign investor law (2004) defines foreign investor as any foreign juridical or physical person.

INVESTMENT SECTORAL PRIORITIES

According to article four of this law, Somaliland gives priorities to the following sectors:

  1. Agriculture
  2. Livestock
  3. Fishing
  4. Mineral resources
  5. Industrial activities using significant amount of inputs produced, by aforementioned sectors.
  6. Tourism provided the investment harmonizes with the prevailing social, economic and infrastructural condition.
  7. Any other investment, in production and service activities, suited to support and stimulate, in a significant degree the development of the aforementioned sectors.

INVESTMENT PROMOTION BODIES

  1. FOREIGN INVESTMENT BOARD

According to article five of this, a body called foreign investment board has the supreme decision-making authority over all matters concerning foreign investment in Somaliland, it is established at the Ministry of commerce and industry where it shall convene at least twice a month and consists of the following:

  1. The Director General of the Ministry of National planning.
  2. The Director General of the Ministry of Foreign Affairs.
  3. The Director General of the Ministry of Finance.
  4. The Director General of Ministry of Commerce and Industry.
  5. The Director General of the Ministry of Agriculture.
  6. The Director General of the Ministry of Livestock.
  7. The Director General of the Ministry of Fishery and Natural Resources.
  8. Director General of the Central Bank of Somaliland.
  9. The Chairman of the Chamber of Commerce, Industry, and Agriculture.
  10. Chairman of the Board is the Director General of the Ministry of Commerce and Industry.

Comment: This body should be established urgently.

  1. THE FOREIGN INVESTMENT PROMOTION OFFICE.

According to article eight of this law, foreign investment promotion office hereafter referred to, as the “the office” is the administrative and promotional office, which assists the board in performing its functions. The duties of this office include among others:

  1. To implement the decisions taken by the Board.
  2. To propose the administrative and regulatory procedures required for the implementation of the law.
  3. To provide information and advice to the foreign investor on matters such as application and registration procedures under this law, taxation, foreign exchange terms, economic legislation, foreign trade terms, investment opportunities, institutional framework, local sources of debt financing partner search.
  4. To assist the foreign investor in meeting the application requirements related to foreign investment.
  5. To assist approved foreign investment at the setting up stages, with guidance and advice concerning official institutions, and channels, and related administrative procedures,
  6. To formulated proposals concerning foreign investment policy and improvement of investment conditions.
  7. To promote and attract new foreign investment, in collaboration with other institutions involved in this field.
  8. To perform and other duty related to foreign investment arranged to it by the Board.

Comment: This office also needs to be established. The office should have overseas representation such as commercial attaches in Somaliland’s overseas missions.

SOMALILAND INCENTIVES FOR FOREIGN INVESTORS

A.GUARANTEES FOR FOREIGN INVESTMENT

According to article 12 of this law, foreign investor’s investment and properties are protected as follows:

  1. All enterprise object of foreign investment shall receive as favorable treatment as domestic enterprise.
  2. The property of foreign investment duly registered under this law shall not be subject to expropriation measures, except in the only case where public interest cannot be satisfied by measures other than expropriation.
  3. In the case of such expropriation, prompt compensation shall be paid. Said compensation shall reflect the fair market value of the assets as freely transferable.

B.INVESTMENT TAX INCENTATIVES

According to article 13 of this law, foreign Investment is exempted from payment of tax on profit for a period of three years from commencing operations. In addition, after the expiry

Of the initial tax holiday period, foreign investors shall be entitled to a 50% reduction of the tax due for the profit reinvested.

C.FACILITIES FOR FOREIGN PERSONNEL

According to article 15 of this law, the investment promotion Board shall ensure that the immigration authorities facilitate the granting of the entry visas and residence permit to foreign personnel employed by an enterprise registered under this law, and to their families.

  1. The Board shall also ensure that said personnel and their families be granted access, for reasons of work, to any part of Somaliland.
  2. Said personnel may freely transfer abroad up to fifty percent of their salaries, wages, gratuities and allowances paid in Somaliland by the enterprise employing them.
  3. Any enterprise registered under this law shall employ qualified Somaliland national whenever they are available, foreign investment shall seek to make a significant contribution towards the transfer of technology and managerial know-how, and the upgrading of professional skills available in Somaliland.

Comment: foreign personnel must be allowed to transfer up to 100% of their salaries

D.REINVESTMENT OF PROFIT

According to article 16 of this law:

  1. “Profit” shall be understood as the “net income” less income taxes payable, as applicable, in accordance with the prevailing Legislation. Profit organization form duly registered foreign investment may be invested in the same enterprise, object of the investment, or in another enterprise in accordance with the provisions of this law.
  2. When such profit is to be reinvested, the Board shall be notified to this effect by registered mail or directly against issue of delivery receipt.
  3. The Board shall proceed to register profit reinvested in the Convertible currency specified in the “Certificate of foreign investment registered”. The amount shall be determined in accordance with the prevailing laws and regulation governing foreign exchange.
  4. To this effect, The Board shall issue a “Certificate of Reinvestment”.

Subsequent rights to transfer profit and repatriate investment, as well as other benefits under this law, shall be determined on the basis of the original investment registered plus profit reinvested.

  1. In case of reinvesting profit in an enterprise other than the enterprise object of a duly registered foreign investment, the provisions of article 9 and 10 of this law shall apply.

E.TRANSFER OF PROFIT

According to article 17 of this law:

  1. Profit originating from a duly registered foreign investment, as per paragraph 1 of Article 11 may be freely transferred abroad.
  2. In case that only part such profit is transferred abroad in one year, the foreign investor may transfer this remaining portion in any one of the following years.

F.TRANSFER OF CAPITAL AND PROFIT

According to article 18 of this law:

  1. Duly registered foreign investment, defined, as the original investment, plus profit reinvested, shall be freely transferable abroad after three years from the date of the registration of the original investment, as specified in the “Certificate of Foreign Investment Registered”.
  2. The Board may reduce the said period, taking into consideration the priorities under the policy guidelines as per Article 4. of this law.
  3. The transfer abroad shall be affected in the original currency specified in the “Certificate of Foreign Investment Registered.” The fund destined for transfer shall originate from the liquidation of assets or the transfer of capital stock of the enterprise, object of the foreign investment, to other juridical or physical persons. The foreign investor is free to transfer abroad the physical assets that were the object of the investment, in the event this alternative is opted for.
  4. In case were the amount realized from the liquidation or sale of capital stock exceeds the amount of the original investment plus reinvested profit registered, the foreign investor shall be free to transfer abroad, in the freely convertible currency exchange conducted and warranted by the Bank Somaliland, the difference, in accordance the prevailing tax legislation and foreign exchange regulations

E.SETTLEMENT OF DISPUTES

According to article 19 of this law; disputes in respect of the implementations of these laws shall be settled:

  1. in a manner to be agreed upon with the investor, in the absence of such agreement.

Within the framework of the agreements in force between the Somaliland Republic and the investor’s home country.

  1. In the absence of agreements, disputes shall be settled through arbitration. An arbitration board shall be established comprising one member on behalf of each disputing party and a third member acting as a chairman, to be jointly named by the said two members. Failing agreement of the nomination of the third member, the chairman shall be appointed, at the request of either party, by the president of the supreme court of Somaliland.

The Arbitration Board shall lay down its of procedures unrestricted by the rules contained in the civil and commercial code procedures, save for the rules which relate to the basic guarantees and principles of litigation.

The board shall see to it that the dispute be expediently resolved.

Awards shall be rendered by majority vote, and shall be final and binding on both parties and enforceable as any other final judgment. The Arbitration boards shall decide who shall bear the arbitration costs.

Comment: A formal commercial arbitration mechanism should be established such as commercial court. The basis of arbitration should be English commercial law or international commercial law.

F.FOREIGN INVESTMENT NOT SUBJECT TO THIS LAW

According to article 23 of this law, the Provisions of this law shall not apply to foreign investment in mineral research and mining activities, including those related to the petroleum Industry and nuclear power. Such investments shall be subject to the mining code and the mining regulations, and of agreements reached, hereunder, between the Government of Somaliland and the interested party.

By: Mohammed Dahir Ahmed

      M_ddahir@hotmail.co.uk

      Senior Financial Consultant and Independent Political Analyst.

      Hargeisa, Somaliland

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