Cyprus-South Africa Double Tax Agreement – Why is it so Attractive?
South Africa, currently, hits the headlines for the ‘wrong’ reasons but it remains a jurisdiction where investment, in the correct manner, can be attractive.
The South African economy offers a 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 an investment destination worth consideration.
South Africa and Withholding Tax
South Africa does not levy a withholding tax on interest and royalties paid to non-residents. The withholding tax rate on dividends is 5% if the dividend is received by a company which holds at least 10% of the capital of the dividend paying company. 10% in all other cases.
The Double Tax Agreement between Cyprus and South Africa
The initial Cyprus-South Africa DTA was signed in 1997, and a Protocol was signed in April 2015, which amended certain key clauses.
- The Cyprus-South Africa DTA remains very attractive and reduces withholding tax on interest and royalties to zero.
In terms of dividends, the following amounts of withholding tax are payable:
- 5% – if the beneficial owner of the company holds at least 10% of the capital of the company paying the dividend.
- 10% – in all other cases.
Dividend payments from Cyprus continue to enjoy a zero rate of withholding tax. The withholding tax payments for dividends, detailed above, only relate to the payment of dividends from South Africa.
The Exchange of Information article was revised in 2015, in line with the OECD Model Tax Convention.
Use of Cyprus Financing Companies for South Africa
There are benefits in using Cyprus companies as financing companies for South Africa.
The advantages relate 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, no withholding tax is applicable 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:
- Zero withholding tax on royalty income paid from South Africa to Cyprus.
- Subject to certain conditions, only 20% of royalty income is taxed in Cyprus. Application of the Cyprus corporate tax rate of 12.5% therefore provides an effective tax rate of 2.5%.
- It is possible to transfer profits from a Cyprus company without there being withholding tax payable on dividends or on onward royalty payments.
- 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 tax 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 immovable 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 dividends, 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 to its zero withholding tax on interest, royalties and dividends paid from Cyprus, and its relatively low rate of withholding tax on dividends paid from South Africa.
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 Charalambos Pittas at our office in Cyprus: advice.cyprus@dixcart.com.
