PricewaterhouseCoopers explains some of the 'do's and don'ts' when it comes to paying tax in southern Europe

For more than sixty years, since the end of World War II, Europe has seen a period of extraordinary economic growth, with an accompanying and astonishing increase in the wealth of its citizens. The social changes brought about in that time, the abandonment of extremist politics and increasing levels of mobility and communication have led to a society which looks beyond its national boundaries for investment and for cultural and lifestyle experience, and which has both the time and the money to experiment in this new playground of finance and leisure.

Southern Europe has long been a favourite destination for investment and, while many projects are now mature, the cranes and diggers that dot the landscapes of the Algarve, southern Spain, Italy and Cyprus show that there is still life in these more established markets.

But others are looking further afield, and it seems nowhere with a reasonable climate and a relatively dependable legal system is off limits for these financial legionnaires of the 21st century.

One of the latest destinations to come into favour is the Cape Verde archipelago, a handful of sleepy islands off the coast of Africa, another hour's flying- time south, after passing the giant peaks of Tenerife. Bare and rugged in some places, green and lush in others, the islands offer a range of opportunities for development. In response, the new investors have ambitious plans for a variety of projects - hotels, apartments, golf resorts, marinas, and all that goes with them. The existing infrastructure is far from adequate for all that is envisaged but this, in turn, offers opportunities galore for providers of goods, systems and services.

While the sun-worshipper will be happy with the constant, year-round temperatures of 29oC, the near-absence of rainfall in many regions provides both challenges and opportunities for providers of eco-friendly technology. Projects involving investments of up to x2bn in the next 10 years, bear witness to the hopes and ambitions of the first movers, with much of the initial phases of real estate development already sold.

A former colony of Portugal, whose language and legal system it has inherited, the country struggles with its minimal financial resources and the near absence, until recently, of more than a rudimentary economy. It has a functioning public service, however, and a system of law and public administration which offers the prospect of legal security and enforceability of contracts and obligations. The tax system is based on that of Portugal, albeit in simplified form, and there are warm contacts between the two countries.

Taxation
While the tax system is gratifyingly simple in its structure, in practice it can be difficult to determine the tax treatment of specific transactions. In addition it can sometimes be difficult to get a reliable interpretation of provisions of the tax law. In some cases - for example the VAT code - these have been transposed into local legislation, from other more sophisticated tax environments, without complete consideration of how they may be implemented in practice.

The corporate tax rate is 30 percent, pretty much middle-of-the-road by today's international standards, and applies both to local companies and to branches of foreign companies. An entity is considered to have a branch if it is providing services in Cape Verde for more than 90 days in the year.

Any income obtained by a non resident, without a branch in Cape Verde, is taxed at the rate of 20 percent.
Profit distributions (dividends) are exempt from income tax (IUR). Capital gains on the sale of shares are taxable as ordinary income but are exempt if owned for more than one year.

The relatively high rates of personal tax, up to 45 percent on resident individuals, will not be of relevance to the typical overseas investor but they will certainly need to be aware of the 3 percent tax on property acquisition, with a 3 percent annual tax thereafter. There is also a capital gains tax at 20 percent on real estate, together with an additional 3 percent of sale price, if the selling price of the immovable property exceeds the purchase price by more than 30 percent.

Import duties have to be taken into account in any investment, as hefty tariffs of up to 50 percent apply to a broad range of goods, such as beverages and furniture. A variety of tax incentives are available to investors, such as exemption of withholding tax on loan interest paid to the external investor.

Specific benefits can be granted by the Cape Verde government to foreign investors in the case of investment projects that are considered to make an exceptional contribution to the economic and social development of Cape Verde.

The co-called Tourism Utility Status provides various tax benefits, such as exemption from the Unique Property Tax on the acquisition of land for construction, exemption from custom duties on the importation of materials, equipment, furniture, transportation vehicles for the transportation of tourists and pleasure yachts among others. A 100 percent exemption from Income Tax in the first five years and a 50 percent reduction of the income tax in the following 10 years is also offered.

Investment
It is worth noting that Cape Verde's only tax treaty is with Portugal, which can thereby provide a useful point of entry for investment. For example, the 20 percent withholding tax on services can be avoided by a Portuguese resident with no permanent establishment in Cape Verde. If the services are provided through a company which benefits from the tax incentives of Madeira (part of Portugal), the result can be the payment of tax at a very low rate or no tax at all. Such Madeira companies are also attractive for holding investments in Cape Verde.

As well as offering reduced rates of withholding tax, the tax treaty also provides for 'tax sparing credits' on payments made from Cape Verde. This means that, in calculating Portuguese tax, a credit may be claimed, not only for taxes which have been paid in Cape Verde, but also for taxes which have been exempted or reduced by Cape Verde's system of tax benefits.

Tax-free
A further attraction of Portugal is the exemption of resident individuals from tax on the profit from sale of shares which have been held for more than 12 months. Under the terms of the tax treaty with Cape Verde, a Portuguese resident is not subject to tax in Cape Verde on capital gains, other than on sale of land, so there exists a possibility of paying no tax at all on gains from sale of shares. It is worth noting that similar provisions exist in most of Portugal's other treaties, offering interesting possibilities for residents of other countries, prepared to move residence for a few years.