IN456 - Reasons Why the Double Tax Agreement Between Cyprus and South Africa is so Attractive

South Africa is one of the most sophisticated and promising emerging markets globally.

The potential offered by the South African economy is evident in its diversity of sectors and industries. It has a modern and extensive transport infrastructure and  labour costs are priced competitively. 

These factors, together with the country's significant natural resources, have made it a popular country for investment.

South Africa and Withholding Tax

South Africa generally levies a withholding tax of 15% on dividends, interest and royalties paid to non-residents. Holding companies are not subject to this 15% withholding tax.

The Double Tax Agreement between Cyprus and South Africa

Cyprus has an extremely favourable double tax agreement with South Africa, reducing withholding tax on interest and royalties to zero.

Since April 2015, the following low withholding tax rates have been applied to dividends as follow:

  • 5% where the recipient of the dividend is the beneficial owner and owns a minimum 10% of the share capital of the company paying the dividend.
  • 10% in all other cases.

This low withholding tax rate, combined with the zero taxation on dividends and capital gains in Cyprus, and the lack of any withholding tax on dividends paid from Cyprus, makes Cyprus the jurisdiction of choice for many companies investing into South Africa.

An important feature that was retained in the Protocol signed in April 2015, is that there is no taxation on the sale of shares in South African companies by Cyprus tax residents. This includes companies in South Africa holding immoveable property located in South Africa.   

Use of Cyprus Financing Companies for South Africa

There are benefits in using Cyprus companies as financing companies for South Africa.

The advantage is due to the zero withholding tax rate on interest payments from South Africa to Cyprus and the low 12.5% rate of corporation tax applied to any margin on the interest in Cyprus. In addition there is no withholding tax on interest payments from Cyprus.

Cyprus as a Location for the Holding of Intellectual Property (IP) exploited in South Africa

Cyprus is an efficient jurisdiction in which to hold intellectual property that is to be exploited in South Africa. There is a zero withholding tax on royalty income paid from South Africa to Cyprus.

In addition, only 20% of royalty income is taxed in Cyprus. Application of the Cyprus corporate tax rate of 12.5% then provides an effective tax rate of 2.5%. It is also possible to transfer profits from a Cyprus company with zero withholding tax being payable on dividends or onward royalty payments.

An additional advantage is that, on disposal of the IP rights, 80% of the proceeds are exempt from corporation tax in Cyprus.

Other Advantages Offered by the Jurisdiction of Cyprus

Cyprus offers a number of other important benefits:

  • Profits from a permanent establishment located outside of Cyprus are exempt from Cypriot taxes as long as no more than 50% of the income has arisen from investment income (dividends and interest).
  • There is no capital gains tax. The only exception to this is on gains from the sale of immoveable property in Cyprus or shares in companies owning such property.
  • The availability of tax rulings from the Cypriot Tax Authority make tax planning a more certain and efficient process.
  • No withholding tax on interest and royalties.
  • No tax on dividend income.
  • No tax on income or gains derived from the disposal of securities.
  • Shipping regime whereby tax is based on an annual tonnage rate instead of a corporate tax.

 Summary

The Double Tax Agreement between Cyprus and South Africa is very favourable due the zero withholding tax on interest and royalties. This can be particularly tax efficient for the holding of IP in Cyprus that is to be exploited in South Africa and the use of Cyprus financing companies for South Africa.  

Additional Information

If you require any additional information regarding the benefits available through the Double Tax Agreement between Cyprus and South Africa, or have any questions relating to the advantages that the jurisdiction of Cyprus offers, please speak to the  Dixcart office in Cyprus: advice.cyprus@dixcart.com

Categories: Cyprus, 2017