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Country Commercial Guides for FY 2000:
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CHAPTER VII: Investment Climate
Introduction
Since 1989 the economy of Cape Verde has become increasingly open. The government is committed to integrating the country into the global economy primarily through foreign investment in export-oriented activities. Cape Verde offers foreign investors major advantages in areas such as light manufacturing, tourism, fisheries, transportation and communications. In light manufacturing, for instance, foreign investors can benefit from Cape Verde's market access and underutilized quotas for Cape Verdean products sent to the European and the U.S. markets. Furthermore, Cape Verde is a peaceful country committed to its stable democratic political system and to market-based economic development.
The positive attitude of the government towards foreign investment is embodied in the legislation passed in the early 90s. The incentive package is very competitive. The latest decree which regulates foreign investment simplified the process of foreign investment authorization and made the Center for Tourism, Investment and Exports Promotion (PROMEX) operate as a one-stop-shop for foreign investors. The exports law created a set of fiscal and customs incentives designed to encourage business activities in all sectors and to direct their services and goods towards exports. The law for free zone enterprises provided a package of highly advantageous incentives for companies oriented exclusively to exports.
Openness to foreign investment. In Cape Verde, the government looks to private investment as the future engine of the country's economic growth. It seeks to attract investment that will modernize the country's economic structure and stimulate any and all business activities. Greatest interest is placed in export-oriented industries and tourism.
More recently, the government refined the laws and related regulations in order to expedite approval for new investments destined to start up new ventures or expand existing ones. In the new law all sectors of activities are now open to foreign investment. However, in keeping with the country's special features such as preferential access agreements with Europe, the ECOWAS and the U.S., low wages and the high availability of unskilled workers, and moderate tropical climate, target sectors are light manufacturing, tourism and fishing.
Foreign investment in the ongoing privatization of state-owned enterprises has been encouraged. In some instances, however, shares are reserved for Cape Verdean investors. Joint ventures with local investors are highly encouraged.
Right to private ownership and establishment. The right to private ownership and establishment is guaranteed in the constitution.
Protection of property rights. Property rights are recognized and guaranteed in several Cape Verdean laws, including the constitution. There is a legal system of recording secured interests in property, both chattel and real. There is also a legal system that protects and facilitates acquisition and disposition of all property rights. Although since 1990 Cape Verde has had copyright laws, it has not yet adhered to international agreements on intellectual property rights. It has recently signed several treaties that provide protection for intellectual property rights. Details, however, are not yet available.
Foreign-trade zones/free ports. Taken together the following five laws: the external investment law, the industrial development law, the industrial statute, the entrepot law, and the law of free-enterprises constitute a package of free zone legislation in everything but name. They constitute a strong package of incentives for export-oriented industrial firms, which permit broad flexibility of location. The free-zone enterprise law introduces a new status for enterprises that produce goods and services exclusively for export or to sell to other free-zone enterprises in Cape Verde.
Performance requirements/incentives; major taxation issues. The government does not place a premium on investments that respond to a long list of overall development objectives and offers local and foreign investors the same incentives. Instead, it favors investments that are either export-oriented or diversify geographically and technologically the country's industrial base.
Through international agreements, exporters have preferential access to the markets of Europe, West Africa and the United States. Incentives to firms that export their entire output (free-zone enterprises) are the most generous, but all firms, regardless of the location of their markets, can benefit from the following incentives:
- a 100 percent tax exemption on all dividends from any activity started with foreign capital and earned during the first 5 years of operation. After 5 years the tax rate is 10 percent. The same tax exemption applies whenever such dividends are reinvested in the same or another economic activity.
Enterprises producing goods and services exclusively for export (free-zone enterprises) also benefit from:
- Tax incentives: exemption from corporate and complementary taxes (a complementary tax is levied on all income generated in the country) on profits for the first 10 years of operation; after 10 years, the combined tax rate will be no more than 15 percent; tax holiday on dividends and profits paid to shareholders for the first 10 years of operation; after 10 years, the maximum rate will be 15 percent; lifetime exemption from indirect taxes; 2. Customs incentives: duty-free imports of equipment and materials used in the production; duty-free imports of raw materials and finished and semi-finished goods used exclusively in production; 3. Other incentives include, reduction of the regular company registration fee; exemption from declaring capital contributions (equity participation); free access to foreign currency accounts; and free recruiting of foreign workers. Export incentives apply to export and re-export operations. They do not apply to fuel or export of free-zone enterprise activities. They include:
- Tax incentives: taxes on profits (export earnings divided by total sales) are lower during the first 5 years that enterprises export or re-export. This period my be extended up to 10 years, as long as the enterprise begins producing 50 percent of its exports or re-exports in Cape Verde by the fifth year of export operations; otherwise, the tax reduction will be equal to one-half of export earnings divided by total profits; 2. Customs incentives: no duties are imposed on raw materials, finished goods, semi-finished goods, and other materials used exclusively in the production of goods and services for export.
The following incentives apply to enterprises, except free-zone enterprises, involved in a specific sector:
Industry: exemption from corporate and complementary taxes during the first 3 years of operation; tax deduction for profits reinvested in the same or different industrial activity; tax deduction for expenses incurred in training of local work force; tariff exemptions on construction material and capital equipment imported to start up new industrial activities; tariff exemptions on raw material and other inputs imported for production during the first 2 years of operation, with progressively higher customs duties (25, 50, and 75 percent) in the following 3 years of operation.
Tourism: exemption from real estate transfer and property taxes; exemption from rental taxes and taxes on business profits for 5 years from the date operations begin, except for taxes on services and transfer of public goods; 50 percent discount on (1) the taxes just mentioned and (2) complementary taxes on profits for the 10 years following the first five;
Tax deduction on profits reinvested in other tourist or industrial activities; tax deduction for expenses incurred in training the local work force; duty-free imports of construction material, machinery, cruise ships, and all other material required for installation of tourist facilities.
Fisheries: fully equipped fishing vessels are exempt from all duties, import taxes and the customs service tax; engines, spare parts, devices and other material used to construct fishing vessels are exempt from import duties and consumption tax; machines, material tools and equipment used in fishing activities benefit from the same incentives mentioned above; fuel for fishing vessels, fish processing plants and seafood warehouse installations are exempt from consumption and customs service taxes.
Cape Verde has recently signed with Portugal a double taxation avoidance treaty.
Transparency of the regulatory system. The current Cape Verdean government has taken a number of steps to improve the climate for foreign investment and to encourage a more transparent and competitive economic environment. The basic Cape Verdean legislation affecting foreign investment is contained in the external investment law and the law of industrial development. These laws establish the principal of equal treatment for foreign investment, affirm the government's commitment to a dynamic business environment and the industrial development statute to regulate the granting of incentives and a simplified investment approval process.
Recently approved laws on the promotion of exports, on incentives to exports and on free-zone enterprises stress the commitment of the government to encourage investment in export-oriented industries.
Bureaucratic procedures have been simplified in a number of cases. The investment approval process has been greatly expedited with the recent revision of the external investment code. The Center for Tourism, Investment and Export Promotion, PROMEX, has become a one-stop shop for external investors. In general, external investment operations are subject to prior authorization from the minister in charge of economic affairs. An application is submitted to PROMEX, and within thirty days the investor should get a reply. If government action is not forthcoming, within 30 days, approval is automatic.
In order to benefit from incentives regarding capital transfers, external investment operations must be registered at the Bank of Cape Verde.
Corruption: Corruption is criminally punished. Cape Verde has laws, regulations and penalties to combat corruption. Giving or accepting a bribe is a criminal act and conviction could result in up to 8 years in prison.
To combat corruption effectively, the Cape Verdean government established the high authority against corruption. Other institutions in charge of combating corruption include the judiciary police, the prosecuting counsel and the courts.
There is no indication that corruption has been an issue.
Labor: With unemployment rate running at about 28.3 percent (1998), creating jobs is one of the fundamental concerns of the Cape Verdean government. It therefore proposes to stimulate national production and foreign investments to create jobs and promote entrepreneurial initiatives.
While unskilled labor represents some 30 to 40 percent of total labor force and is readily available, technical, managerial and professional talent is more difficult to find.
Labor laws are relatively generous to employees and the recent revision of the labor code made labor contracts more flexible.
There are no local minimum wages in Cape Verde. Minimum wages and wages in general are established according to the policy of each firm. The cost, productivity, and availability of labor is favorable. Prevailing wages, although not among the world's lowest, are competitive at under USD 0.70 per hour.
Relations with the ILO have been good although recently labor unions opposing the ruling party have been bringing complaints before the ILO governing board involving the workers' right to go on strike.
Efficiency of capital markets and portfolio investment. There is no capital market as yet in Cape Verde. The World Bank has been assisting the government of Cape Verde in restructuring the financial sector. The first step in this process was the division of the Bank of Cape Verde into a central and a commercial bank.
The Stock Market of Cape Verde (BVC) was launched in March, 1999, but it is only expected to begin operations some time before the end of the year, and some six companies are to be listed.
The financial sector comprises four commercial banks (two foreign-owned), two insurance companies and a venture capital company created to promote the development of private sector.
Bank credit is available to foreign investors under the same conditions as those for national investors. The private sector has access to some credit instruments such as loans, letters of credit and lines of credit. The legal guidelines for accounting systems are clear but are not totally consistent with international norms.
Portfolio investment in Cape Verde is extremely limited and depends on the limited ability of the Bank of Cape Verde. Even social security funds are kept in non-interest bearing accounts because the bank of Cape Verde is unable to effectively lend and guarantee the proper interest return to the accounts.
Conversion and transfer policies. The government gives foreign investors important guarantees such as privately managed foreign currency accounts which can be credited only in foreign currency from abroad or from other foreign accounts in Cape Verde and undisputed repatriation of dividends, profits and capital from foreign investment operations.
The regulatory legislation specifies that for the initial five years of operation, dividends may be freely expatriated without tax, and that for the next fifteen years dividends may be expatriated with a flat tax of ten percent. Incentives for outward investment in developing countries are not included in the legislation but they have been provided on an "ad hoc" basis.
Current law provides that upon request to the Bank of Cape Verde, revenue/profits, capital gains, and loan repayments may be transferred overseas within 60, 90, and 30 days, respectively. The Bank of Cape Verde will pay interest on all transfers with waiting periods of more than 30 days, starting on the 31st day. Timely transfers may not always be possible when requests cover large sums and affect Cape Verde's balance of payments; in such instances, the government will order that the transfer be made in installments, generally every three months over a period of no longer than two years.
The estimated annual U.S. dollar value of local currency likely to be used by the embassy is 1.1 million at the official exchange rate. Significant devaluation is not likely to occur over the next year.
Expropriation and compensation: In the event of expropriation, or acquisition of privately owned property by the government for the public's interest, the government will compensate the owner fairly, on the basis of prevailing market prices, or the actual market value of the property on the day of expropriation. Compensation will be prompt and may be repatriated at the exchange rate in effect on the day of expropriation.
The embassy is not aware of any specific case of expropriation of private property by the government in the recent past and given the almost complete repudiation by the voters of the former ruling party and its one-party system with total control of the economy, it is very unlikely that any government would consider confiscation of private property as a policy.
Dispute settlement: Disputes between foreign investors and the government will be settled either through a single referee or an arbitration commission. Referees may be foreigners. If so, they may not have the same nationality as the parties involved in the dispute. Should there be difficulty in reaching an agreement over the nomination of the referees, referees may be appointed by a recognized national body or international organization, with the ultimate authority being the International Center of Settlement of Investment Disputes (ICSID). Generally, the arbitration will be carried out in Cape Verde and in Portuguese, unless another site and language is requested and agreed upon by both parties. The decision of the single referee or the arbitration committee is final and cannot be appealed.
The embassy is not aware of any foreign investment disputes over the past few years.
Cape Verde has a functioning judiciary which appears to operate independently and free of undue influence.
Political violence: One of Cape Verde's strengths lies in its political and social stability. In recent years, however, there have been some cases in which labor unions opposing the ruling party have promoted strikes which have in general been peaceful.
Bilateral investment agreements: Cape Verde has bilateral investment agreements with Austria, Germany, Holland, Portugal, Switzerland, Italy, China and Angola.
OPIC and MIGA: Cape Verde is a member of the Multilateral Investment Guarantee Agency (MIGA) and it benefits from the loan guarantee program of the Overseas Private Investment Corporation (OPIC).
Foreign direct investment: Foreign direct investment (FDI) in Cape Verde has been increasing steadily over the last few years. Since the launching of the economic reforms in 1993, nearly 109 investment projects with a total capital of $416 million have been licensed. Most foreign direct investment is concentrated in tourism (54 percent) followed by manufacturing (15.5 percent). Italy, Portugal, Spain and Hong Kong are the main sources of current investment.
In 1998, foreign direct investment rose sharply to $233 million, from $59 million in 1997. Most of it was concentrated on tourism (74 percent). Some of the already established foreign investment companies, namely the 100 percent exporting ones in light manufacturing are now implementing expansion projects thus promising significant increases in exports generated by foreign investment.
Major foreign investors: Most important foreign investors have come from Portugal and other European countries, namely Italy and Spain. Asian investors from Hong Kong are also present, and they have been one of the major targets of the Cape Verdean foreign investment promotion agency. Italian investors are the leaders in the tourism sector, while the Portuguese dominate light manufacturing. PROMEX is planning to launch more aggressive promotion in the United States in the coming years.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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