The years 2011 and 2012 in Morocco were marked by the reelection of the members of Parliament and the constitution of a new government. Because of that political process and the imminence of the 2013 Tax Bill, Finance Law 2012 (FL2012) was not adopted until May 15, 2012, and was relatively limited in scope. It focused mainly on the reinforcement of the preferential tax regime applicable to export free zones (EFZs).
In October 2012, the government presented its proposed 2013 tax bill to Parliament. The bill was adopted by the House of Representatives on December 28 and was published in the official gazette on December 31 as Finance Law 2013 (FL2013). As in many other countries, Morocco’s finance laws reflect the government’s eagerness to reduce its expenditures and cut the public deficit to a sustainable level. FL2013 also focuses on the continuation of structural reforms, the stimulation of domestic growth, the enhancement of Morocco’s business environment, and the reduction of social inequality and poverty.
From an international tax perspective, however, FL2013 could be seen as sending mixed signals to foreign investors. Indeed, while some of its proposals extend business-friendly tax incentives implemented in the past, other measures, especially some tax increases, may reduce Morocco’s competitiveness and potentially hamper foreign investment in an area of Africa where expectation of GDP growth is rising. Morocco was also particularly active in 2012 in the area of tax treaties. The country extended its tax treaty network and pursued treaty negotiations with various countries, strengthening its international standing and increasing its tax footprint. There are approximately 50 tax treaties in force.
Finance Law 2012
The main pro-foreign-investment features of FL2012 were the extension of tax advantages for companies established in EFZs and a temporary corporate income tax (CIT) reduction for sports companies.
Companies established in Moroccan EFZs enjoy several advantages relating to tax, customs, and foreign exchange regulations. The goal of this preferential regime, which applies both to resident and non-resident individuals and corporations, is to promote Moroccan exports and international competitiveness.
FL2012 contained numerous provisions that have enriched the EFZ preferential tax regime. Subject to some conditions, it extended existing preferential CIT and income tax regimes to profits derived from EFZ-to-EFZ transactions, and excluded those transactions from the scope of VAT. FL2012 also removed the prior 10-year holding period required for the exemption of registration fees on acquisitions of EFZ land for investment purposes.
On May 15, 2012, the government adopted Decree 2-12-01, which created the new Technopolis EFZ in Salé, a city adjacent to Morocco’s capital. The purpose of Technopolis is to build a technological and scientific hub and attract top-notch technological firms, talent, and know-how. Only manufacturing companies that perform specialized scientific, technical, or research and development activities can incorporate in Technopolis.
FL2012 also provided that duly organized sports companies would be subject to a reduced CIT rate of 17.5 percent during the first five fiscal years of operation. Aside from these limited business-friendly tax provisions, the government tried to increase revenues through the institution of new corporate taxes.
FL2012 instituted a new solidarity contribution applicable, with few exceptions, to any entity subject to CIT. The contribution applied to companies’ 2012 net profits at rates of 1.5 percent for companies earning between MAD 50 million and MAD 100 million (about $5.85 million and $11.7 million) in annual profits and 2.5 percent for amounts in excess of MAD 100 million. Notably, solidarity contribution payments could not be deducted from future revenues, and while the contribution’s purpose was praiseworthy, its ensuing double taxation was prejudicial.
Indeed, in the context of a group structure, not only did the subsidiary pay the contribution on its net profits, but the parent also paid it on the dividends received (notwithstanding the 100 percent participation exemption applicable under domestic law to prevent such double taxation).
Although FL2013 cosmetically replaces the solidarity contribution with a re-branded Social Contribution on Profits and Income (SCPI), it does not remedy the double taxation issue. Tax authorities seem comfortable with the idea of multiple taxation hitting group entities all the way up to the managing corporation.
FL2012 also increased to 4 percent (from 3 percent) the registration fee applicable to some real estate transactions, including the acquisition of constructed buildings (other than buildings constructed by financial institutions) and land on which such buildings are erected (up to a maximum of five times the building-covered area).
Finance Law 2013
Although, FL2013 offers some business-friendly tax features, some of the tax increases it has instituted could hinder Morocco’s future competitiveness.
Corporate Measures Aimed at Enhancing Morocco’s Competitiveness Continuation of the partial CIT exemption for newly listed companies:  
FL2013 extends the CIT exemption for companies issuing new shares through the Moroccan stock Exchange (MSE). For the record, the standard CIT rate in Morocco is 30 percent (37 percent for financial institutions and insurance companies). Through December 31, 2016, any company opening its share capital to the public by means of an initial public offering on the MSE will be eligible for a 25 percent CIT exemption. Moreover, any company opening its capital to the public by means of an increase of at least 20 percent of its share capital on the MSE (with a waiver of preferential subscription rights) will be eligible for a 50 percent CIT exemption. It should be noted that under Moroccan law, capital gains derived by nonresident companies upon the disposal of securities listed on the MSE are exempt from CIT.
Extension of the CIT exemption for companies undertaking a capital increase:
FL2013 extends through December 31 the 20 percent CIT exemption (adopted in Finance Law 2009) for companies undertaking a capital increase in 2013, provided that they earned less than MAD 50 million in revenue during each of the past four fiscal years and have not reduced their share capital since January 1, 2012.
Institution of a reduced CIT rate for small and medium-size companies: 
Companies with profits of MAD 300,000 (about $35,000) or less will be subject to a reduced CIT rate of 10 percent, applicable to profits earned after January 1. This new tax rate replaces the 15 percent CIT rate applicable since January 1, 2011, to companies with revenues of MAD 3 million (about $350,000) or less.
Extension of the transitory tax merger relief regime:  
FL2013 provides for an extension (through December 31, 2016) of the existing transitory tax merger relief regime, which ensures fiscal neutrality for mergers and spinoffs. Under this favourable tax regime, and provided that certain conditions are met, any capital gain resulting from the transfer of the merged company’s fixed assets and shares is exempt from CIT. The government deems the extension necessary to encourage further corporate restructuring and economic concentration and to boost domestic competitiveness in the face of growing international competition.
In contrast, however, this relief regime does not apply to capital gains on asset contributions, which are immediately taxable. This lack of relief is considered a tax constraint by many groups that are willing to reorganize through the carving out of certain activities to dedicated special purpose vehicles. Indeed, excess revenue in Morocco has historically been invested in real estate assets that are not always directly connected to the core business of the company. Under the current legislation, any asset contribution aimed at separating business activities will trigger taxation of the latent capital gain (even if the consideration for the exchange is in securities and no cash is involved).
Registration fee amendments:
Under Moroccan law, any incorporation is subject to a 1 percent registration fee. FL2013 has modified the applicable registration fees as follows:
  • Small companies: Any incorporation or capital increase of a company with a subscribed capital of MAD 500,000 or less is now subject to a fixed MAD 1,000 MAD (about $117) registration fee. Casablanca Finance City companies: To encourage the development of Casablanca Finance City and to provide a further incentive for companies to incorporate there, FL2013 has exempted from registration fees all Casablanca Finance City companies incorporating or increasing their share capital. For the record, Casablanca Finance City aims to create an attractive business environment for national and international institutions and the conversion of Casablanca into a North African financial and service hub. Casablanca Finance City companies already enjoy full CIT exemption for the first five years of operations and a reduced 8.75 percent CIT thereafter (regional and international Casablanca Finance City headquarters are also subject to a reduced 10 percent CIT). With the new exemption from registration fees, Casablanca Finance City companies will enjoy the same tax advantages as financial institutions, offshore holding companies, and companies incorporated in export processing zones.
Extension of the incentives to register with tax authorities: The government has extended the steps taken in FL2011 to encourage the companies in the informal sector to register with tax authorities. Through December 31, 2014, any company registering with the tax authorities for the first time will be subject to income tax solely on its post-registration revenues. In other words, the government is extending tax immunity until 2015 for newcomers entering the legal and formal economy. 
Personal Tax Measures Aimed at Enhancing Morocco’s Competitiveness Reduced holding period for the capital gains exemption on personal residence sales: As of January 1, any sale of real property will be exempt from capital gains tax if the property was the seller’s personal residence for over six years. Before FL2013, the holding period was eight years. As a reminder, FL2005 had reduced that period from 10 years to eight years.
Measures That Could Hinder Morocco’s Competitiveness
In contrast to the foregoing beneficial measures, some of the proposed measures included in FL2013 could decrease the attractiveness of the Moroccan economy.
Increase of the withholding tax on outbound dividends: One measure that could have significant consequences on direct investments in Morocco is an increase to 15 percent (from 10 percent) of the withholding tax rate applicable to proceeds from shares and capital rights, and similar revenue. This increase applies to any outbound dividend paid by a Moroccan company to a foreign parent unless an applicable tax treaty provides for a lower rate.
Significantly, most of Morocco’s tax treaties cap the withholding tax on dividends at 10 percent for eligible companies (that is, recipient companies that hold at least 25 percent of the capital or voting power of the company distributing the dividends). Under Morocco’s domestic tax rules, a 10 percent withholding tax applies to outbound dividends paid to foreign entities.
As a result of the 2013 withholding tax rate increase, the location from which the parent/holding company holds the participation in the Moroccan subsidiary has become particularly relevant. For example, the Luxembourg-Morocco tax treaty (which respects the U.S. check-the-box rules) caps the withholding tax on dividends at 10 percent. Until now, that treaty provision was irrelevant because Morocco’s domestic rules provided for an identical withholding rate. However, the rate increase triggers the treaty provision, allowing U.S. investors or others seeking to invest in Luxembourg to keep the 10 percent withholding rate on their outbound dividends streams.
The withholding tax rate increase may therefore prompt foreign investors to incorporate their companies and operate their businesses from countries with which Morocco has entered into a tax treaty, providing for a low cap on the outbound dividend withholding rate. Such a move would permit foreign investors to benefit from a more tax-efficient structuring and help them maximize their return on investment and reach their financial targets. For example, investors from the Middle East could invest in Morocco from a country such as Bahrain, Qatar, or the United Arab Emirates, with which Morocco has entered into tax treaties providing for a 5 percent withholding rate on outbound dividends (for qualifying companies).
Withholding tax increase on interest: FL2013 also has increased to 15 percent (from 10 percent) the withholding rate on interest paid by Moroccan companies. This measure is significant because Morocco’s companies are highly leveraged and dependent on debt. Like the increase in the dividend withholding tax rate, the increase in the interest withholding rate may push companies to shop around to find the best location from which to finance their activities.
Indeed, most of Morocco’s tax treaties cap the withholding rate on interest at 10 percent. Accordingly, it has become crucial for a company to finance its activity from a country that has entered into a tax treaty with Morocco.
The withholding rate increase is particularly prejudicial because:
  • the maximum deductible interest rate paid to foreign or local shareholders is 3.33
percent;
  • Morocco has not instituted a tax unity (group tax consolidation) system; and
  • for the time being, domestic law does not permit synthetic tax unity through the use of pass-through companies.
The tax increase on interest adds to these existing tax constraints and constitutes an additional obstacle to debt push-down mechanisms. In any event, it raises questions about the government’s intent: Is the government trying to limit the financing of economic activity through foreign debt? The answer is pending.
Solidarity contribution levied on corporations and individuals: FL2013 also provides for the institution of new taxes, including the SCPI, which carries into 2013 the government’s 2012 purported wealth redistribution efforts. The SCPI is expected to apply for three fiscal years.
The SCPI has a wider tax base but lower corporate tax rates than the SC. It applies not only to corporations but also to individuals (on their net Moroccan-based income over MAD 360,000 (about $42,280)). It also applies to a larger number of companies (companies earning more than MAD 15 million (about $1.7 million) in net profits). The rates range from 0.5 to 2 percent for corporations and from 2 to 6 percent for individuals.
Unfortunately, the government has ignored the double taxation issue introduced by the solidarity contribution and has not instituted a mechanism to prevent the same outcome from the SCPI. Arguably, a better solution would have been to increase the SCPI rate on corporations, but with an associated tax relief mechanism (such as a tax credit) allowing groups to avoid multiple taxation.
Notably, the implementation of the SCPI on individuals also appears fairly inequitable because:
  • the tax is triggered at a relatively low revenue level; and
  • the SCPI rates applicable to individuals are fairly high as compared with those applicable to corporations, and unlike corporations, which are subject to the SCPI on their net profits, individuals are subject to the tax on their revenues (from which deductions are limited).
Finally, although Moroccan politicians have debated at length about the institution of a net worth tax, they eventually chose not to move in that direction. Nonetheless, because the SCPI significantly increases individual income taxation, its implementation
on individuals sidesteps the absence of the net worth tax. However, it puts a regrettable
tax burden on individuals (for example, top earners will be de facto taxed at a 44 percent tax rate instead of the current 38 percent rate).
Branch tax increase: FL2001 introduced a branch tax on after-tax profits realized by a branch or establishment of a foreign company. FL2013 increases the branch tax withholding rate to 15 percent (from 10 percent) unless a lower treaty rate applies. 
Withholding tax on security lending transactions: FL2013 extends the withholding tax applicable to fixed income securities to also apply to security lending transactions. Any interest stemming from such transactions will be subject to a withholding tax.
For the record, under article 4 of the Moroccan Tax Code, the withholding tax applies to proceeds from fixed income securities made available to or credited to the account of Moroccan individuals or corporations.
Although repo transactions, security lending, and nominee arrangements are not that common in Morocco, this new tax on lending transactions runs counter to the government’s stated goals of developing a financial hub in Casablanca and to encourage the growth of Casablanca Finance City.
CGT increase on sales of certain real property: Since the adoption of FL2013, the CGT on some sales of real property (namely, the first sale of undeveloped real estate in urban areas) has risen to 30 percent (from 20 percent).
Increased withholding tax on income paid out to foreign directors: Unfortunately, FL2013 increased to 15 percent (from 10 percent) the tax on revenues paid to non-resident directors of companies subject to CIT in Morocco.
Other Developments: Tax Treaty Activity
The tax treaty between Ireland and Morocco (signed on June 22, 2010) entered into force on August 31, 2012, and applies retroactively from January 1, 2012. The Croatia-Morocco tax treaty (signed on June 26, 2010) entered into force on October 25, 2012; the Morocco-Vietnam tax treaty (signed on November 24, 2008) entered into force on September 12, 2012; and the Indonesia-Morocco tax treaty (signed on June 8, 2008) entered into force on April 10, 2012.
The last three treaties generally apply from January 1, 2013. The government continued to pursue other tax treaties in 2012, signing tax treaties with Cameroon (September 7, 2012) and Burkina Faso (May 18, 2012); initialing tax treaties with Lithuania and Albania; and negotiating new or updated tax treaties with Lithuania, Luxembourg, Mali, and Qatar.
Conclusion
From a foreign investment standpoint, Morocco has undeniable advantages as compared with other North African jurisdictions because of its political stability and business-friendly environment. The growing number of investment projects in the country and the expected increase in foreign direct investment figures speak well of Morocco’s economic takeoff.
Nonetheless, Moroccan tax law has not always followed this trend. The lack of tax relief for asset contributions and debt push-down constraints and the absence of a tax unity regime are examples of the country’s lagging tax rules.
For Morocco to maintain its competitive edge over its neighbours, its lawmakers must modernize the tax code and introduce standard, internationally recognized fiscal concepts into domestic law. The government could also implement a tax regime mimicking the U.K. non-domiciled fiscal regime or the Swiss forfeit tax regime, both of which have contributed to the vitality and attractiveness of some of the most thriving international financial hubs.
While the institution of Casablanca Finance City status and the multiplication of EFZs are steps in the right direction, Morocco could go beyond the local tax regimes and implement a complete, comprehensive set of favourable tax incentives.
In sum, while it is undeniable that Morocco’s economy has gained in competitiveness in recent years, there is still room for improvement. Hopefully, the Moroccan government will implement a countrywide tax regime aimed at the talented managers and directors who run corporations in Morocco. It is indeed the combination of tax incentives targeted both at corporations and at individuals, together with progressive foreign exchange policies, that will give Morocco a winning hand.
Hicham Kabbaj, Attorney at Law, Kab LS Avocats, Paris, Casablanca