Three years after Europe’s frontal attack on the CFC, it seems that the CFC has lost all its fiscal advantages with the new 2023 Finance Law.
One wonders what is left and whether the benefits it provides are “worth” the significant fee that companies with CFC status have to pay, plus the high cost of office space in the two CFC towers, which they are obliged to occupy. (Spoiler: in my opinion, the answer is “yes”).
Casablanca Finance City, a project spearheading Morocco’s export policy
The particularity of CFC is that it is export-oriented. The desire to make Casablanca an international financial centre, a leader in Africa, is coupled with an aggressive approach to exports. The role of the CFC is not to help companies invest in Morocco, but to help them invest in Morocco to develop exports.
And it works.
Globally, the Casablanca financial centre is progressing in the international rankings, to the point of becoming the first African centre, the second in the MENA region, behind Dubai.
Meanwhile, Morocco is developing its presence in Africa, rejoining the African Union in 2017 and BMCE Bank changing its name to Bank of Africa (and this is more than a symbol).
Tax haven accusations
This is what bothers Europe. If Morocco had just facilitated foreign investment, no one would have said anything. But Morocco’s development in Africa is bothering the European countries with which it competes directly, France in particular.
As of 2018, Europe is putting pressure on Morocco, threatening to put it on a blacklist of tax havens (and thus to end, at least temporarily, its privileged partner status).
A number of technical demands, notably on financial transparency, are perfectly justified. They are even useful for Morocco, which will be able to set up two-way information exchanges.
But the European Commission considers that Casablanca Finance City and the free zones are “harmful”. Liberalism is when it suits the strongest…
In short, Morocco is obliged to bend and agrees to normalise these two statutes, i.e. to abolish the tax advantages granted to companies.
The objective of a 20% corporate tax rate is close to that practised in the EEC (21% on average), tax equity will be re-established, French companies will no longer be encouraged to relocate to Morocco solely for tax reasons…
The 2023 Finance Law
Corporate tax for CFC companies
The exemption from tax on profits for five years from the date of obtaining CFC status is maintained, but with a limitation to five years following the date of creation of the company.
The tax rate for CFC companies will move to the standard 20%, but the few CFC companies that would make more than 100 million dirhams in profit are exempted from the 35% rate and remain at 20%.
Income tax for CFC employees
The tax rate on employees’ income remains at 20%, instead of the 38% corresponding to their usual salary level, and this exemption remains limited to ten years.
However, the 2023 Finance Act adds an exception for credit and insurance institutions, whose employees return to the normal rate of income tax, with a withholding tax of 38% instead of 20%.
When I worked in a CFC company, I reviewed all the employment contracts that mentioned a net remuneration, as is usually done in Morocco, and made an amendment to mention a gross remuneration… just in case!
But this was a legal protection. An employee will never accept such a drop in income and the company will have to make an effort for its employees. Since CFC banks avoid the 40% tax rate that will hit financial institutions, they can take care of this additional income tax.
What is left of the CFC benefits?
The CFC press release, explaining that it retains its tax attractiveness, is therefore partly true. For a company with a profit of less than 100 million dirhams (which is the case for most of them), the tax benefits are reduced to the rate of income tax for employees.
This is still important, as it allows for high salaries to be paid at a lower cost.
There are still other advantages, all of which they put under the “Doing Business” label, that are also interesting.
Flexibility in the use of foreign currencies
This can be summarised as “CFC companies are not subject to exchange controls”, in practice this means that they are totally free to use their currencies as they wish, escape the obligation to repatriate at least 30% in dirhams, etc.
Facilities for employees
Obtaining a CTE (Employement contract for foreigner) when you are a CFC employee is much simpler than for the average person, simplified Taechir file, fast processing…
It is the same for obtaining a residence permit, everything is done to avoid the daily hassles of the Moroccan administration.
In addition to these legal advantages, there are structures offering relocation services and assistance upon arrival or departure from Morocco.
Is the CFC still attractive?
Clearly, the sharp increase in the corporate tax rate will weigh on the results of CFC companies, but there are still other advantages, which can hardly be questioned by the European Union.
A basic rule of thumb is:
if the profitability of your investment is based on a tax advantage, it is a very risky investment, to be avoided if you cannot get out in the short term.
This applies to both large and small projects.
CFC companies are really going to be less profitable. A bit like a Visa advertisement, some of the remaining benefits are priceless…