Value Added Tax (VAT) in Cape Verde: Structure, Standard Rate (15%) and the Strategic Impact of Customs Exemptions on the Cost of Investment, in accordance with Law No. 21/VI/2003

Structure and Principles of Value Added Tax (VAT) in Cape Verde

Value Added Tax (VAT) in Cape Verde, established by the Law No. 21/VI/2003 of 14 July, forms the cornerstone of indirect taxation in the country. This piece of legislation, which approved the VAT code (CIVA) represented a significant modernisation of the tax system, replacing the previous Transaction Tax (IT). The tax policy underlying its introduction aimed not only to bring the country into line with international best tax practices, but also, initially, to ensure that tax revenue for the State was at least equivalent to that generated by the taxes it replaced. The consolidation of VAT within the Cape Verdean tax system is reflected in its comprehensive application and in the subsequent legislation that has been updating it.

1.1. Scope of Application, Taxable Event and Territoriality

CIVA applies to a clearly defined set of transactions for consideration carried out within the national territory. The tax is levied primarily on three main categories of transactions. Firstly, the supply of goods (which encompasses the transfer for consideration of tangible goods, including items such as electricity and gas) and the provision of services by taxable persons acting in that capacity. Secondly, the tax is levied directly on imports of goods, which are defined as the entry of goods into the national territory, with the levy being governed by customs legislation. The concept of “national territory” for VAT purposes covers land, sea and airspace, in accordance with the provisions of the Constitution of the Republic of Cape Verde.

1.2. Taxable Persons and the Public–Private Distinction

The concept of a taxable person is broad, encompassing all natural or legal persons, whether resident or non-resident, who, independently and on a regular basis, carry out economic activities involving production, trade or the provision of services. This includes activities traditionally exempt in other contexts, such as extractive, agricultural, forestry, livestock and fish farming activities, when carried out by taxable persons.

An important distinction concerns the treatment of public bodies. The State and other legal persons governed by public law are, as a general rule, not regarded as taxable persons when acting within the scope of their official powers. However, the principle of neutrality requires that these entities be taxed if they carry out commercial or industrial activities that may distort competition with the private sector. Activities listed as potentially taxable include, but are not limited to, telecommunications, the distribution of water, gas and electricity, the transport of goods and passengers, and the operation of port and airport services. An exception to this taxation applies only if such activities are carried out on a non-significant scale, a criterion to be defined, if necessary, by the Government minister responsible for finance.

1.3. The Principle of Neutrality: Deduction of Input Tax (Articles 19 and 20)

The right to deduct, enshrined in Article 19 of the VAT Code, is essential to guarantee the neutrality of the tax, ensuring that VAT is solely a tax on final consumption. Taxable persons are entitled to deduct the tax paid on the purchase, import or use of goods and services, provided that these are intended for the purpose of carrying out taxable transactions, or certain specific exempt transactions which confer the right to deduction (so-called “zero-rated” transactions), such as exports.

However, this neutrality is not absolute. Article 20 sets out specific exclusions from the right to deduction, which are crucial for analysing the effective cost of the investment. Specifically, VAT incurred on expenditure relating to the acquisition, manufacture, import or use of passenger cars, pleasure craft, helicopters, aeroplanes and motorcycles is not deductible. This exclusion means that the VAT of 15% incurred on these assets becomes a final non-recoverable cost for the investor. Large investors who require fleets for management or personal transport must, therefore, budget for VAT as an ongoing cost, which results in a 15% increase in the Effective Cost of Investment (ECI) for these assets, thereby limiting tax neutrality precisely where operating or management expenses are concentrated.

II. Applicable Fee Regime and Tariff Structure

The Cape Verdean VAT rate structure comprises multiple rates, reflecting concerns not only regarding revenue but also in relation to income distribution and industrial policy.

2.1. The Standard Rate and the Multi-Rate Structure

The standard rate of Value Added Tax in Cape Verde is set at 15%. Although the original text of Law No. 21/VI/2003 and subsequent legislation may have been amended, the rate of 15% is the standard rate applied to most supplies of goods and services that do not qualify for exemption or special schemes.

The CIVA also provides for a structure of differentiated rates:

1. Reduced rate: Originally proposed at 8%, this rate applies to goods and services considered to be more essential, although not as critical as those eligible for exemption with a right to a tax credit (zero rate). The aim of this measure is to ease the pressure on household spending.
2. Aggravated Rate: Intended to tax luxury consumption (historically proposed at 30%), this tax complies with the constitutional principle of imposing a heavier tax burden on luxury consumption.
3. Zero Fee: Although it is not a numerical rate, it is legally structured as an exemption with a tax credit (e.g. exports).

2.2. Sector-specific schemes and the flexibilisation of the VAT rate

Fiscal policy in Cape Verde uses VAT rate adjustments as a tool for macroeconomic policy and sectoral stimulus.

Tax Reduction for the Tourism Sector (10%)

A prominent example of this adjustment is the reduction in the VAT rate applicable to the tourism sector. At specific times, notably through Amending Budgets or temporary tax measures, the Government has reduced the VAT rate for the hotel and catering sector to 10%. This measure is intended to boost the competitiveness of the sector, which is vital to the national economy.

The application of the reduced rate for tourism (10%), whilst the service provider is liable for VAT on the purchase of inputs at the standard rate (15%), results in a structural repayment arrangement (tax credit). Input VAT exceeds output VAT, resulting in permanent credit balances for tourism businesses. This discrepancy requires investors in the sector to implement a system of cash flow which incorporates the efficient planning and swift management of VAT refund claims submitted to the National Directorate of State Revenue (DNRE), failing which the company will end up subsidising the State’s VAT.

Historical experience shows that these sectoral rates may be subject to periodic reviews; for example, in 2022, the tourism rate was temporarily reverted to 15% before being reduced or adjusted again. Such volatility means that investors must continuously monitor annual budgetary legislation.

Basic VAT Rate Structure in Cape Verde

The following table summarises the applicable fee structure:

Basic VAT Rate Structure in Cape Verde

III. The Framework for Customs Exemptions and VAT on Capital Investment

The key issue for foreign investors is the optimisation of investment costs, which is largely determined by the VAT exemption on imports of capital goods. Although this exemption is provided for in the VAT Code, it operates in close conjunction with the customs regime and broader tax incentives.

3.1. Types of Exemptions and Article 12 of the CIVA

The CIVA sets out exemptions which are divided into domestic transactions (Article 9) and imports (Article 12). Domestic exemptions are intended to protect specific social sectors and professional services (e.g. medical, hospital and healthcare services provided by doctors, nurses and healthcare establishments).

As regards investment, the focus is on the Article 12 of the CIVA (Law No. 21/VI/2003), which sets out the exemptions applicable to imports. Specifically, the VAT exemption on the importation of investment goods (capital goods) is referred to in subparagraph (g) and in point (ii) of subparagraph (b) of paragraph 1 of this article.

The significance of this exemption lies in its ability to eliminate the tax liability on the entry of assets into the country. It is a direct instrument of fiscal policy, often complemented by special schemes that exempt the import of goods under international agreements or diplomatic arrangements.

3.2. Strategic Synergy: CIVA and the Tax Benefits Code (CBF)

Achieving a zero tax liability on the import of capital goods depends on the synergistic application of two pieces of legislation: the CIVA and the Tax Benefits Code (CBF).

1. Exemption from Customs Duties (DI): The CBF (approved by Law No. 26/VIII/2013 and subsequent republications) provides for an exemption from Import Duties (DI) in Articles 47 and 62 for eligible capital goods. This exemption is essential, as import duties form part of the VAT taxable base on imports.
2. VAT exemption: Granted under Article 12 of the CIVA, this exemption ensures that VAT (15%) is not levied on the value of the goods, which are already exempt from import duty.

The full tax benefit is realised when the investment project meets the criteria set out in the CBF, which acts as the limiting factor (gating factor) to qualify for VAT exemption. The investment process is primarily validated by the customs authority and under the incentive scheme (CBF/ZEET), and the VAT exemption (Law No. 21/VI/2003) falls within this framework.

3.3. Risks and Obligations Associated with the Use of Exempt Assets

The granting of this VAT exemption on imports is subject to the condition that the goods must be retained and used for the declared investment purposes during the period prescribed by law. If the goods are misappropriated, sold or used for ineligible purposes before the end of the period of allocation, the exemption is revoked.

Investors should be aware that the misappropriation of exempt assets results in a immediate tax liability, which consists of the recovery of tax (VAT and DI) that was evaded on importation, plus interest and any customs penalties. Breaches of the VAT Regulations are treated as customs tax offences, which establishes a direct link between the compliance customs officer and the compliance tax. Enforcement of these obligations is rigorous due to the close integration between the National Directorate of State Revenue (DNRE) and Customs.

IV. Analysis of the Impact on the Effective Cost of Investment (ECI)

The main significance of the exemption from VAT (Article 12) and import duties lies in the optimisation of the cash flow initial investment, thereby significantly reducing the immediate Effective Cost of Investment (ECI).

4.1. Definition and Optimisation of the CEI

The Effective Cost of Investment (ECI) is the actual cost that an investor must bear in order to bring an asset into operation.

CEI = {Base Value of the Asset} + {Import Duties (DI)} + {VAT Incurred on Importation}

In a scenario without exemptions, the investor would be obliged to pay, at the time of customs clearance, both the DI and the 15% VAT on the extended tax base. Although the 15% VAT would, in theory, be fully recoverable at a later date through the deduction mechanism (Article 19), the initial payment represents a loss of working capital, as the refund may take months.

The exemption granted under Article 12 of the CIVA and the CBF changes this situation. By setting customs duties and VAT on imports to zero, the need to pre-finance the tax disappears, which is equivalent to an immediate allocation of capital amounting to 15% (plus DI) for other operational requirements. The VAT exemption on imports is therefore the most powerful tax tool for optimising the Cash Flow the initial phase of major projects.

4.2. Comparative Analysis of Fiscal Scenarios

For a large-scale project, the ability to bring in capital without immediate tax liabilities offers an unrivalled financial and risk-management advantage. The comparative table illustrates the critical difference in immediate outlay.

Comparative Analysis of the Fiscal Impact on Imports of Capital Goods (Example: 100,000 CV Escudos)

In Scenario A, the investor has to finance an additional 20,750 CVE (20,75%). In Scenario B, the exemption eliminates this gap financing, resulting in an immediate CEI equal to the asset’s acquisition cost, which translates into significant financial savings.

V. High-Impact Special Tax Regimes and Sector-Specific Incentives

The exemption from VAT and import duties on investment is not limited to the general scheme set out in Article 12 of the VAT Code, but is a key feature of broader tax incentives designed to attract Foreign Direct Investment (FDI) and support the development of priority sectors.

5.1. Contractual Incentives for Strategic Projects

Large-scale investment projects benefit from contractual arrangements set out in the CBF. These arrangements are triggered when the investment reaches a significant value (e.g. 5 million contos or more) and demonstrates a significant impact on development, such as the creation of at least 50 jobs.

The benefits granted are extensive and may last for up to 10 years, including exemption from or a reduction in the Single Income Tax (IUR), Stamp Duty, import duties and, of course, VAT. The VAT exemption in this context is generally more substantial and longer-lasting than one-off exemptions, and is a key factor in attracting capital.

5.2. Special Economic Zones (SEZs) and Technology

Companies authorised to operate in the Special Economic Technology Zones (SETZ) benefit from one of the most competitive tax regimes. In addition to a significantly reduced IRPC rate (2.5%), these companies are exempt from VAT and stamp duty on transactions relating to the raising of finance for investment purposes.

Even more advantageous for ZEET operators is the fact that the duty exemption is not limited solely to capital goods (Article 12 of the CIVA) but also extends to the import of raw materials and intermediate goods. This total exemption on the inputs The production sector further enhances tax optimisation, creating a highly favourable environment for high value-added manufacturing and service industries.

5.3. The Special Scheme for Micro and Small Enterprises (REMPE)

For micro and small enterprises (MSEs), Cape Verde has set up the Unified Special Scheme (REMPE), which represents a radical simplification of the tax system and a departure from the general VAT regime.

Eligibility for the REMPE scheme is determined by annual turnover, with micro-enterprises being those with a turnover of up to 5,000 contos and small enterprises those with a turnover of between 5,000 and 10,000 contos. Under REMPE, the Unified Special Tax (TEU), calculated at 4% of turnover, replaces VAT, IUR and other taxes.

However, the adoption of the REMPE This entails a crucial tax implication: the company loses the right to deduct the VAT (15%) incurred on its purchases and investments. This turns the input VAT into a final cost. Therefore, for capital-intensive micro, small and medium-sized enterprises (e.g., start-ups (particularly for technology companies that purchase expensive equipment) the decision to join REMPE must be carefully considered, as the loss of VAT deductibility may negate the benefit of the low TEU rate during periods of heavy investment.

VI. Compliance, Ancillary Obligations and Reimbursement Management

Efficient financial management of benefits and compliance with the CIVA are essential to avoid penalties and ensure the recovery of the outstanding tax.

6.1. Reporting Obligations and Deadlines

Taxable persons covered by the standard VAT scheme are subject to monthly reporting obligations. They must pay the tax due at the same time as submitting the Periodic Declaration (Form 106 and annexes). The deadline for filing and payment is, as a rule, by the 20th of the following month the period to which the tax relates.

It is essential to note that the requirement to submit the Model 106 persists even if there are no taxable transactions during the period. This rigidity imposes a cost of compliance fixed, requiring investors to maintain ongoing financial management, even during periods of inactivity or initial investment, in order to avoid penalties for late payment or interest on outstanding amounts.

6.2. Reimbursement and Support Scheme for Non-Residents

The right to a refund arises when input VAT (deductible) exceeds output VAT. Cape Verdean legislation provides for specific mechanisms to guarantee this right.

A Law No. 34/2003 establishes a scheme for the refund of VAT incurred within the national territory by taxable persons not established in Cape Verde. This legislation is vital for Foreign Direct Investment (FDI), as it enables foreign entities to reclaim VAT paid on goods and services purchased (or imported) in Cape Verde, provided that such goods and services are intended for transactions which, if carried out by a domestic taxable person, would confer the right to a deduction (e.g., goods used for export purposes).

For investors, the tax structuring must therefore take account of Law No. 34/2003 to ensure complete tax neutrality, by recovering the VAT paid on expenses relating to start-up (e.g. consultancy, technical studies) which do not typically qualify for the direct exemption under Article 12 of the CIVA.

6.3. Penalties and Tax-Customs Integration

Failure to comply with the standards of the VAT may result in severe penalties, including fines and interest on outstanding amounts. Furthermore, the legislation establishes a close link between the VAT regime and the customs regime. Breaches of the VAT Regulations constitute a customs tax offence and are punishable under the relevant Customs Tax Offences Act.

This integration means that any failure of compliance, particularly with regard to compliance with the obligations relating to the allocation of goods exempt from VAT (Article 12) and DI (CBF), may result in penalties in both areas, with the risk of tax enforcement proceedings being initiated.

VII. Conclusions and Strategic Fiscal Recommendations

The Value Added Tax system in Cape Verde, established by Law No. 21/VI/2003, is a modern and effective tax system, characterised by a standard rate of 15% and a flexible structure of rates and exemptions that serve economic and social policy objectives.

Technical analysis confirms that the most effective mechanism for optimising the Effective Cost of Investment (ECI) is the strategic combination of VAT exemption (Article 12 of the CIVA) with the Exemption from import duties (CBF). This synergy eliminates the need to finance 15% (plus DI) of the imported capital, ensuring maximum preservation of the cash flow in the initial phase of the project, which is its main operational advantage.

Based on this analysis, the following strategic recommendations are put forward for investors:

1. Priority for registration with the CBF: The investment must be structured in such a way as to qualify for recognition and certification under the Tax Benefits Code (CBF) or under Special Schemes (such as the ZEET). Obtaining exemption from import duties (DI) is the functional prerequisite for securing VAT exemption on the import of capital goods (Article 12 of the VAT Act).
2. Monitoring of Sectoral Schemes: Investors in priority sectors, such as tourism, must take into account the fact that reduced rates (e.g., 10%) result in a structural tax credit. Financial planning must incorporate robust processes for the management and swift recovery of refund claims.
3. Assessment of the Deduction Scheme (Article 20): Investors should budget for the 15% VAT as a final, non-recoverable cost when acquiring passenger vehicles and other assets listed in the exclusions from deduction under Article 20, as the tax undermines the neutrality of these assets.
4. Active Reimbursement Management for Start-up: Input VAT on pre-operational expenditure (e.g. consultancy, services) that does not qualify for the import exemption under Article 12, must be actively recovered through the standard deduction or, in the case of non-residents, by using the specific scheme under Law No. 34/2003, thereby ensuring the complete tax neutrality of the investment.
5. Rigor in the Compliance Customs officer: Given that VAT offences are treated in the same way as customs offences, it is essential that investors maintain a rigorous record of exempt goods and their allocation. The misappropriation or early sale of exempt assets must be avoided, as this will result in the immediate recovery of the evaded tax, interest and severe tax and customs penalties.
   
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