Galp Must Pay Taxes Claimed By Mozambican State

The Mozambican government has firmly reiterated its demand that Portuguese oil company Galp pay capital gains tax arising from the 2025 sale of its 10% stake in Area 4 of the Rovuma Basin to XRG, a subsidiary of Abu Dhabi National Oil Company (ADNOC). The dispute centers on a significant discrepancy in the calculation of the taxable capital gain, with Mozambique's Tax Authority (AT) claiming approximately US$176 million (or 162 million Euros) based on a sale value of around US$1.3 billion, while Galp asserts a much lower taxable gain of 26 million Euros and claims the tax was settled. Galp has initiated international arbitration proceedings at the International Centre for Settlement of Investment Disputes (ICSID), invoking bilateral investment treaties with Portugal and the Netherlands, setting the stage for a critical legal battle over the taxation of natural resource wealth in Mozambique.

The Mozambican government has taken an unequivocal stance, reaffirming its insistence that Portuguese energy giant Galp settle the capital gains tax claimed by the national Tax Authority (AT) following the sale of its significant stake in Area 4 of the Rovuma Basin. This directive underscores a deepening fiscal dispute that has now escalated to international arbitration, pitting the sovereign right of Mozambique to tax its natural resources against a foreign investor's interpretation of its tax obligations and investment protections. The core of the disagreement lies in the valuation of the taxable capital gain derived from Galp's divestment, a transaction that saw its 10% interest in one of Africa's most promising natural gas concessions transferred to XRG, a subsidiary of the Abu Dhabi National Oil Company (ADNOC).

This high-stakes dispute carries substantial implications for the landscape of foreign direct investment in Mozambique's burgeoning extractive sector, particularly concerning the predictability and stability of its fiscal regime. The outcome will not only determine a significant tax revenue for the Mozambican state but will also serve as a critical precedent for how similar cross-border transactions involving strategic national assets are treated under domestic tax laws and international investment agreements. This article delves into the legal and factual contours of the Galp tax dispute, examining the relevant Mozambican tax framework, the nature of the disagreement, and the potential ramifications of the ongoing international arbitration proceedings.

The genesis of the dispute traces back to Galp's decision to sell its 10% participating interest in Area 4 of the Rovuma Basin, an offshore natural gas block located off the coast of Cabo Delgado province, to XRG in March 2025. This strategic asset is part of a consortium that includes major international energy groups such as Eni, ExxonMobil, CNPC, Korea Gas Corporation, and the Mozambican state-owned Empresa Nacional de Hidrocarbonetos (ENH). The transaction, which saw Galp receive an upfront payment of approximately US$881 million, with potential contingent payments bringing the total value up to US$1.38 billion, triggered a capital gains tax assessment by the Mozambican Tax Authority.

Under Mozambican law, capital gains are generally subject to Corporate Income Tax (IRPC) at a standard rate of 32%. Specifically for the oil and gas sector, the Petroleum Operations Tax and Fiscal Benefits Law (Law No. 27/2014) and the Hydrocarbons Law (Law No. 21/2014) govern the tax regime. For oil and gas assets held for more than five years, capital gains tax is levied on 55% of the capital gain, resulting in an effective tax rate of 17.6%. Crucially, Mozambican legislation stipulates that capital gains arising from the direct or indirect transfer of petroleum and mining rights concerning assets located in Mozambican territory are taxable, irrespective of where the transaction is concluded or whether the entities involved are non-residents. Furthermore, such capital gains are subject to autonomous taxation and cannot be offset against any tax losses. Mozambique also maintains a network of double taxation agreements, including one with Portugal (initially signed in 1991 and revised in 2008, with a new protocol signed in December 2025), and has bilateral investment treaties with countries like Portugal (1995) and the Netherlands (2001).

The crux of the dispute between Galp and the Mozambican Tax Authority does not revolve around the applicable capital gains tax rate, but rather the methodology for calculating the taxable gain itself – specifically, what constitutes the deductible cost base. The AT asserts that Galp realised a capital gain of approximately US$1 billion from the sale, leading to a tax liability of around US$176 million (or 162 million Euros). Conversely, Galp contends that its taxable gain was significantly lower, amounting to only 26 million Euros, and claims that the corresponding tax due was already settled as part of the transaction. This stark difference highlights fundamentally divergent interpretations of the costs that can be legitimately deducted from the sale price before the tax is applied.

From Mozambique's perspective, the national legislation is designed to capture the increase in value between the acquisition and disposal of an asset, particularly those linked to the country's natural resources. Legal experts in Maputo, with experience in extractive-sector tax disputes, reportedly suggest that the Tax Authority's position is legally robust, arguing that companies cannot unilaterally expand the deductible cost base beyond what is explicitly envisaged by the law. This interpretation seeks to ensure that the state benefits adequately from the transfer of valuable national assets. Galp, on the other hand, is likely to argue that the fiscal interpretation adopted by the Mozambican state lacks sufficient legal basis or is inconsistent with the guarantees provided under international investment protection agreements.

In response to the unresolved disagreement, Galp Energia SGPS, Galp Energia Portugal Holdings B.V., and Galp East Africa B.V. formally initiated international arbitration proceedings against the Republic of Mozambique on June 26, 2026, registering the case (ARB/26/31) with the International Centre for Settlement of Investment Disputes (ICSID). In doing so, Galp is invoking the bilateral investment promotion and protection agreements concluded between Mozambique and Portugal in 1995, and between Mozambique and the Netherlands in 2001. These treaties typically provide protections for foreign investors, including provisions for fair and equitable treatment, protection against expropriation without compensation, and access to international arbitration for dispute resolution. The invocation of these BITs elevates the dispute beyond domestic tax law, bringing it into the realm of international investment law.

The case is poised to become a significant test of Mozambique's ability to effectively enforce its right to tax substantial gains generated from its natural resources, particularly in complex cross-border transactions. Similar disputes over capital gains from indirect transfers of resource assets have emerged in other African jurisdictions, reflecting a broader tension between host states' efforts to maximise revenue from their natural wealth and investors' expectations of fiscal stability and protection under international agreements. The outcome of this arbitration will therefore be closely watched, as it could establish important precedents for future investment and taxation in Mozambique's critical extractive industries.

The ongoing tax dispute between Galp and the Mozambican government, now subject to ICSID arbitration, represents a pivotal moment for Mozambique's extractive sector and its relationship with foreign investors. While the Mozambican government remains resolute in its demand for the claimed taxes, viewing it as a rightful share of national resources, Galp's decision to pursue international arbitration underscores the complexities inherent in interpreting tax liabilities within the framework of both domestic legislation and international investment treaties. The core disagreement over the calculation of the taxable capital gain, rather than the tax rate itself, highlights the critical importance of clear, unambiguous, and consistently applied tax regulations for large-scale, cross-border transactions.

For legal practitioners advising clients in Mozambique's oil, gas, and mining sectors, this case serves as a potent reminder of several key considerations. Firstly, it emphasizes the necessity of meticulous tax due diligence and robust tax planning that anticipates potential discrepancies in the interpretation of deductible costs and capital gains calculations. Secondly, it highlights the increasing reliance on bilateral investment treaties as a mechanism for dispute resolution when domestic remedies are exhausted or perceived as inadequate. The eventual ruling from ICSID will provide crucial clarity on the interplay between Mozambique's sovereign right to tax and its international obligations under investment protection agreements. Practitioners should closely monitor the arbitration proceedings, as the precedent set by this case will undoubtedly influence future investment strategies, risk assessments, and contractual negotiations for all foreign entities operating within Mozambique's resource-rich economy.