It is clear that these days the South African market is one of the most promising in the African continent. It is therefore important for international investors to realise that by making use of Cyprus as an intermediary hub into South Africa, a wealth of advantageous rules are made available through the existing DTA between the two countries.
Withholding taxes without DTA; general rule
In general South Africa levies a withholding tax (WHT) of 15% on dividends, interest, and royalties paid to non-residents. Holding companies are not subject to this 15% WHT.
If the general South African tax rules are compared with the treaty rules, it is clear that Cyprus has an exceptionally favourable tax arrangement with South Africa. For starters the WHT on interest and royalties is reduced to zero.
Looking at the WHT on dividends, the maximum rate of tax for dividends is 5% in the case where the beneficial owner of the dividend holds at least 10% of the capital in the dividend paying company and 10% WHT shall be effective on the gross amount of dividends in all other cases.
Using Cyprus for holding purposes
If the rates mentioned are combined with the absence of both ‘tax on dividends and capital gains in Cyprus’ and ‘WHT paid on outgoing dividend payments’ it becomes immediately clear why Cyprus should be used as an intermediary hub.
An important point to note 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.
Using Cyprus for finance purposes
There are benefits in using Cyprus companies as financing companies for South Africa.
The main advantage is the zero WHT rate on interest payments from South Africa to Cyprus, as well as the low 12.5% rate of corporation tax applied to any margin on the interest in Cyprus. In addition there is no WHT on interest payments from Cyprus.
Using Cyprus for the holding of intellectual property exploited in South Africa
Cyprus offers favourable tax treatment for assets such as patents and computer software through an intellectual property (IP) tax regime that meets new EU and OECD rules. On certain so-called ‘qualifying’ intangible assets, businesses can benefit from an effective tax rate as low as 2.5%. Combined with the robust protection for IP that Cyprus offers, this makes it an attractive location for relevant companies. Cyprus is an efficient jurisdiction to hold IP that is to be exploited in South Africa. There is a zero WHT on royalty income paid from South Africa to Cyprus. It is also possible to transfer profits from a Cyprus company with zero WHT 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.
Various other advantages offered by the jurisdiction of Cyprus
- 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 makes tax planning a more certain and efficient process
- Shipping regimes whereby tax is based on an annual tonnage rate instead of a corporate tax
- Advantageous geographical location and time zone
- English as a business language
- Pleasant climate
- European standard of living
- Comparatively lower set-up and maintenance costs of international business entities
- Highly developed and efficient accounting, legal, and banking sectors
- Strict confidentiality with the local authorities and banks
- Excellent transport and telecommunication facilities
- Exemption from foreign exchange control
- Possibility for acquisition of immovable property
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