Tax perspective of conducting business in Cyprus by South African residents

Introduction

There has been a recent upsurge in interest from Africans wanting to do business in Cyprus and, in particular, from South African citizens through diverse opportunities of investment. These include the Cyprus permanent residency program and the Cyprus citizenship program. Also, the use of an alternative/secondary form of foreign income from investments that ensure the foreign inflow of the Euro currency in the form of dividends and/or property rental income or the optimization of the preferential EU-Africa trade agreements. A closer look at the Tax relationship between Cyprus and South Africa makes one easily understand what has sparked this upsurge. 

Double tax treaty

On 26 November 1997 the Governments of Cyprus and South Africa entered into a Tax treaty aimed at the avoidance of double taxation, the prevention of tax evasion with respect to taxes on income and on capital gains and with a view to promote and strengthen the economic relations between the two countries. On 1 April 2015 Cyprus and South Africa signed a protocol amending certain articles of the above-mentioned agreement (namely amending the articles referring to the definition of a resident of a Contracting State, dividends and, in particular, withholding tax thereto and exchange of information). The protocol has been in force in Cyprus since 8 May 2015 and as of 18 September 2015 in South Africa.

As this treaty is only applicable to Cypriot and South African tax residents, one has to define how a taxpayer is classified as tax resident in the Contracting states.

In terms of Article 1 of the treaty, a person will be classified as a tax resident of South Africa if that person is liable to pay tax in South Africa by reason of his domicile, residence, place of management or any other criterion of a similar nature. If you are a resident of both South Africa and Cyprus based on the above test, then the deciding factor to determine your residence will be the country in which your personal and economic relations are closer.

 Tax benefits of this treaty

  • In terms of Article 6 of the treaty, income derived from the direct use, letting or use in any other form of immovable property by a South African resident in Cyprus may be taxed in Cyprus. What this essentially means is that South African residents will enjoy the favorable income tax system that Cyprus has to offer, free from having to pay any form of taxes in South Africa with regards to Income derived from immovable property as explained above.
  • It is also worth noting that in terms of Article 13 of the agreement, gains derived by a resident of South Arica from the alienation of immovable property located in Cyprus may be taxed in Cyprus. Capital Gains Tax from the alienation of immovable property situated in Cyprus and/or sale of shares in Companies that own immovable property situated in Cyprus, are taxed at a flat rate of 20%, while South Africa’s current capital gains tax rate is 28%. There are some disposals in Cyprus that are exempt from paying capital gains tax, the two most common exemptions being transfers arising upon death and gifts made from parent to child or between husband and wife or between up to third degree relatives.
  • In terms of Article 7 of the agreement, the profits of a South African enterprise in Cyprus shall be taxable only in Cyprus unless the enterprise carries on its business through a permanent establishment in South Africa. However, a company which is not tax resident in Cyprus is taxed on income accruing or arising from sources within South Africa. This is a huge incentive offered in terms of the treaty as the current rate of Cyprus Corporate income tax is 12.5% while the equivalent rate in South Africa is 28%.
  • In terms of Article 10 of the treaty, dividends paid to a South African resident by a company which is resident in Cyprus may be taxed in Cyprus. A company registered in Cyprus is not subject to withholding tax on the dividends paid to non-Cypriot tax resident shareholders, which consequently means that South African residents doing business in Cyprus enjoy a substantial advantage in that dividends that are due and payable in their capacity as shareholders from a Cyprus tax resident company will not be subject to any withholding tax.
  • There is no withholding tax, in either of the Contracting States on interest and royalty income.

Conclusion

Not only is it the strategic location of Cyprus and its excellent business infrastructure which is attractive but additionally , its benign tax regime and the favorable double tax treaty entered into with South Africa has now  made it an even more ideal place to invest in with many choosing Cyprus as a base for conducting their business in Europe and the Middle East.

For any enquiry or assistance please contact Alexis Christodoulou or your usual contact at Elias Neocleous & Co LLC.