The Special Regime for Micro and Small Enterprises (REMPE) in Cape Verde: Simplification Advantages, Ancillary Duties and the VAT Deduction Trade-off in the B2B Sector

Introduction and regulatory framework of the Special Scheme

O Special Regime for Micro and Small Enterprises (REMPE), approved by the Law No. 70/VIII/2014, of 26 August, represents a key milestone in Cape Verde’s economic policy. Its main aim is to promote competitiveness, productivity and, crucially, the formalisation and the development of Cape Verdean micro and small enterprises (MSEs).   

This scheme establishes a simplified tax system, sparing micro-enterprises (MPEs) from the complexities of the standard Single Income Tax (IUR/IRPC) regime and Value Added Tax (VAT), replacing multiple taxes with a single, low-cost tax. The REMPE is therefore a legal and fiscal instrument designed to reduce the barriers to compliance and to promote formal entrepreneurship across the archipelago.   

Eligibility criteria and structure of the Unified Special Tax (TEU)

Membership of REMPE is voluntary (for companies that meet the requirements) and depends entirely on the business unit’s annual gross turnover and the number of employees.   

1. Definition of Micro and Small Enterprises

Law No. 70/VIII/2014 sets out clear criteria for classification:

• Micro-enterprise: a company employing up to five staff members and/or has an annual gross turnover not exceeding 5.000.000$00 (five million escudos, or 5,000 contos).
• Small Business: a company employing between six and ten workers and/or has an annual gross turnover in excess of 5.000.000$00 and less than 10.000.000$00 (ten million escudos, or 10,000 contos).

Companies whose share capital is held by a natural person who is already a partner in another company not classified as a micro-enterprise are excluded from the special scheme.

2. The Special Unified Tax (TEU)

The major tax benefit of REMPE lies in the Special Unified Tax (TEU), which replaces the Single Income Tax (IUR/IRPC), Value Added Tax (VAT) and Stamp Duty (among others).   

Its calculation structure is remarkably simple:

• Base Rate: The TEU is calculated at a fixed rate of 4% as a percentage of gross sales for the relevant period.   
• Minimum Amount (Micro-enterprises): micro-enterprises with a turnover not exceeding 1.000.000$00 (one million escudos, or 1,000 contos) pay a minimum fixed amount of 30.000$00 (thirty thousand escudos) per year.
• Initial Incentives: For newly incorporated companies, the scheme provides for reductions in the TEU rate: 30% for micro-enterprises in the first two years, and 30% in the first year and 20% in the second year for small enterprises.   

This tax simplification, which is levied on turnover rather than on taxable profit (as under the organised accounting regime), ensures predictability and drastically reduces the need for complex tax planning.   

Incidental obligations and administrative simplification

The specific nature of REMPE entails a significant simplification of ancillary obligations, thereby reducing the costs of compliance administrative and accounting.

1. Exemption from the requirement to keep organised accounts

Companies covered by REMPE are not required to keep organised accounts in accordance with the Accounting and Financial Reporting Standards System (SNCRF). Consequently, these companies are also not required to appoint a chartered accountant (TOC) to record and certify their financial information. This is a major incentive for micro-entrepreneurs, who can thus avoid the fixed costs associated with formal bookkeeping.   

2. Registration and payment obligations

The exemption from the requirement to keep organised accounts does not, however, remove the obligation to keep records and to fulfil periodic tax obligations. Micro-enterprises must :   

• Document registration: record all invoices, receipts, payment slips or return notes relating to goods or services purchased, within 30 days from the date of receipt.   
• Quarterly payment: the declaration and payment of the TEU must be carried out quarterly, using Form 107 (available on the citizen portal).   
• Deadlines: Quarterly payments must be made:
  • First quarter: By the last working day of April.
  • Second quarter: By the last working day of July.
  • 3rd Quarter: By the last working day of October.
  • 4th Quarter: By the last working day of January of the following year.

Quarterly payments must be accompanied by purchase and sales ledgers, ensuring basic monitoring of economic activity, even in the absence of a formal accounting system.   

O Trade-off B2B: Exclusion of VAT deduction and the impact on the business sector

The greatest complexity of REMPE lies in its impact on transactions Business-to-Business (B2B), resulting from the replacement of VAT with the TEU. This is the tax cost simplification, and the main factor to be taken into account when deciding whether to join the scheme.

1. Loss of the right to deduct input VAT

The companies covered by REMPE are excluded from the right to a deduction of the input VAT on their purchases. The VAT at 15% (standard rate) paid on inputs (raw materials, services, equipment) ceases to be a neutral tax and becomes a final cost for SMEs.

For micro-enterprises with high capital investment (fixed assets) or VAT-intensive operating expenses, this loss of neutrality may negate the benefit of the TEU’s 4% rate, making the organised accounting scheme more advantageous, as the latter allows for the deduction of all operating expenses, including VAT.   

2. Non-pass-through for the purchaser (B2B) – Article 18 of the CIVA

The most significant consequence for the B2B market is that invoices issued by REMPE companies do not entitle the purchaser to deduct VAT.

This rule stems from the fact that the TEU (4%) replaces VAT (15%). Invoices issued by the MPE must contain the express wording «Unified Special Tax».

• Impact on the buyer: A company operating under the standard scheme (subject to VAT at 15%) which purchases goods or services from a REMPE supplier may not use the TEU paid to offset its own VAT liability.
• Price differentiation: Under the standard scheme, the VAT paid to the supplier is recovered (neutral). When purchasing from a REMPE company, the VAT is zero, but the purchaser loses the tax credit, which means that the final cost of the purchase for the B2B purchaser is 15% higher, resulting in a potential disincentive for large companies to contract REMPE suppliers, thereby affecting competitiveness in the sector.

Conclusions and strategic recommendations

REMPE, established by the Law No. 70/VIII/2014, is a tax simplification scheme of inestimable value for the formalisation of micro and small enterprises. Its low, flat-rate tax (4% on sales) and the exemption from keeping organised accounts are decisive factors in reducing the costs of compliance.

1. Decision matrix: REMPE vs. Organised Accounting

The decision to opt for REMPE (rather than the Organised Accounting and IRPC/VAT scheme) should be guided by the following tax risk matrix:

1. Selection of the REMPE (4% TEU): recommended for companies with Low Operating Costs and/or Focus on End Customers (B2C). The low level of VAT expenditure and the fact that it is not dependent on input VAT credit maximise the benefit of the 4% rate on gross revenue.   
2. Choice of Organised Accounting (IRPC/VAT): recommended for companies with High Capital Investment (high costs of purchasing equipment subject to VAT) or Focus on the B2B Sector (Major Clients). The need to deduct input VAT and the right of its customers to deduct output VAT offsets the higher nominal IRPC rate (21.42%).   

2. Compliance recommendations

The REMPE entrepreneur must strictly fulfil their ancillary obligations in order to remain within the scheme :   

• Deadline management: compliance with the quarterly deadlines for filing and paying the TEU (April, July, October, January).   
• Accuracy in invoicing: the inclusion of the words «Unified Special Tax» on invoices to inform the purchaser that the VAT is not deductible.   
• Limit monitoring: Turnover must be monitored to ensure it does not exceed the annual limit of 10,000,000$00; failure to do so will result in automatic exclusion from the general scheme.

Tax optimisation in Cape Verde begins with correctly classifying the business. For micro and small enterprises (MSEs), the REMPE scheme offers a safe haven of simplification, but adopting it requires accepting the cost of non-deductible VAT, both for the business owner and their business partners.

Contact S&D to book an accounting and tax review meeting.