Cabo Verde - fiscal incentives in 2025
Cabo Verde's 2025 State Budget, effective 1 January, cuts the standard corporate income tax rate from 21 per cent to 20 per cent while introducing a carbon tax and expanding exemptions for health, tourism sustainability and renewable energy equipment. The fiscal package combines broad-based rate reductions with targeted sectoral incentives designed to encourage wage growth, capitalisation and environmental investments.
The reforms represent a strategic shift from general incentives toward precision instruments aimed at priority sectors. Companies increasing average salaries by at least 4.7 per cent can now deduct 200 per cent of the wage increase cost, up from 150 per cent previously.
Corporate tax rate reductions
The standard corporate income tax rate falls one percentage point to 20 per cent for 2025. This continues a progressive reduction trajectory: the rate stood at 25 per cent before 2019, dropped to 22 per cent in 2019, then to 21 per cent in January 2024.
Small and medium-sized enterprises receive deeper cuts. The rate on their first €50,000 of taxable income falls from 17 per cent to 16 per cent. Non-commercial entities including associations and foundations see their rate reduced from 21 per cent to 20 per cent alongside the standard rate.
The government plans further reductions in the medium term. Officials aim for a flat 15 per cent rate by 2026, accompanied by measures to broaden the tax base. This would place Cabo Verde's corporate tax among Africa's lowest, though implementation depends on revenue sustainability.
Wage increase incentives with 200% deduction
Companies that increase average annual base salary per employee by at least 4.7 per cent compared to the previous year can deduct 200 per cent of the salary increase cost from taxable income. The previous incentive allowed 150 per cent deduction.
The maximum annual deduction limit per employee rises to five times the guaranteed minimum monthly wage, up from four times previously. With the minimum monthly wage set at CVE19,000 for 2025, the maximum deduction reaches €4,350 per worker annually.
This creates strong fiscal incentives for wage growth. A company with 100 employees raising salaries 5 per cent from an average base of €10,000 annually generates €50,000 in additional wage costs. Under the 200 per cent deduction, the company can deduct €100,000 from taxable income, reducing tax liability by €20,000 at the 20 per cent rate. The net cost of the wage increase becomes €30,000 rather than €50,000.
The 4.7 per cent threshold tracks inflation and economic growth targets, ensuring wage increases exceed price rises. Companies meeting the threshold receive fiscal rewards; companies below it gain no benefit.
Productivity bonuses exempt from tax and social security
The budget proposes exempting productivity, performance, profit-sharing and balance sheet bonuses from personal income tax and social security contributions. The exemption caps at 6 per cent of the beneficiary's annual basic salary.
This encourages performance-based compensation structures without increasing labour costs. A worker earning €20,000 annually can receive up to €1,200 in performance bonuses tax-free. The employer pays no social security contributions on the bonus, eliminating the standard 15 per cent employer contribution.
Capitalisation incentives enhanced
All companies can now deduct an amount equal to the 12-month Euribor rate plus two percentage points applied to net increases in eligible equity. The previous formula used Euribor plus 1.5 percentage points for non-SMEs, creating different treatment by company size.
The government proposes increasing this deduction by 50 per cent in 2025, up from 30 per cent currently. With 12-month Euribor at approximately 3 per cent in early 2025, the base deduction rate becomes 5 per cent. The 50 per cent increase raises the effective rate to 7.5 per cent on eligible equity increases.
Companies making cash capital contributions to start-ups, SMEs and companies in peripheral areas can deduct up to 2 per cent of the previous year's revenue. This incentivises equity investment in undercapitalised businesses and geographically disadvantaged locations.
Health insurance expenses for employees are now deductible at 120 per cent of actual cost, representing a 20 per cent majoration. This encourages private health coverage supplementing public systems.
Sectoral exemptions for health, tourism and industry
Imports of goods for the health sector already exempt from import duty receive additional VAT exemption during 2025. This expands benefits under the Tax Benefits Code, reducing equipment costs for hospitals, clinics and medical facilities.
Tourism sustainability receives targeted support. Imports of equipment necessary for implementing a programme promoting sustainability in the tourism value chain enjoy VAT and customs duty exemptions during 2025. The programme launches this year, focusing on green infrastructure and sustainable tourism investment.
Industrial production of aggregates—mineral extraction and transformation—receives comprehensive exemptions. Imports of machinery, equipment, accessories and materials for this purpose are exempt from both import duty and VAT during 2025. The incentive applies specifically to projects on the islands of Brava, Fogo, Maio, São Nicolau and Santo Antão, targeting less-developed islands.
Transport vehicle exemptions
Heavy passenger vehicles with more than 30 seats dedicated exclusively to tourist transport are exempt from excise tax and VAT during 2025. These imports face a reduced 5 per cent import duty rate rather than standard rates.
New light passenger vehicles dedicated exclusively to taxi services receive excise tax exemption and 5 per cent import duty during 2025. Four-by-four vehicles intended for adventure tourism are exempt from excise tax for the year.
Luxury vessels including yachts and recreation or sports vessels under customs code 8903 are exempt from VAT and excise tax during 2025. This targets high-value tourism segments including yacht charters and nautical tourism.
Carbon tax introduction
The 2025 budget introduces a carbon tax designed exclusively to finance climate change mitigation and adaptation actions. The tax aims to incentivise greener business practices while generating revenue for environmental programmes.
Air and maritime transport between islands are exempt from the carbon tax. This protects inter-island connectivity essential for the archipelago's economy while applying pressure to other sectors.
The carbon tax represents new revenue generation at a time when the government is reducing corporate tax rates. Public debt stood at 110 per cent of GDP in 2024, requiring fiscal consolidation. The carbon tax partially offsets corporate rate reductions while advancing environmental policy.
Financial market incentives extended
Income from bonds or similar products—excluding public debt—listed on the Cabo Verde Stock Exchange continues to benefit from a 5 per cent corporate tax flat rate through 31 December 2025. Dividends from listed shares remain exempt from corporate tax through year-end.
These provisions encourage capital market development and equity listings. The stock exchange remains small but the government views capital market depth as essential for financing growth without excessive bank lending or foreign debt.
Customs rationalisation and minimum duties
The budget introduces a minimum 5 per cent import duty rate for investment projects benefiting from contractual benefits negotiated or submitted after the law's entry into force. Previously, some contractual arrangements eliminated import duties entirely.
This rationalisation prevents complete duty elimination while maintaining preferential treatment. Projects still receive substantial benefits—5 per cent versus standard rates ranging from 5 per cent to 50 per cent depending on product category—but contribute baseline customs revenue.
Excise tax increases on unhealthy products
Excise taxes rise on imported alcoholic drinks, sugary drinks, sweet products and cigarettes. The specific tax on a pack of cigarettes increases from CVE120 to CVE150, a 25 per cent rise.
These increases target public health objectives while generating revenue. They also create price disadvantages for imports versus domestic production, encouraging local manufacturing where feasible.
VAT streamlining and rate adjustments
The budget proposes eliminating the reduced VAT rate for residential properties exceeding the value threshold compatible with government social housing policies. This streamlines VAT administration and focuses housing subsidies on genuinely affordable properties.
An intermediate vehicle tax rate of 25 per cent is proposed for specific plug-in hybrid passenger cars registered in another EU member state between 1 January 2015 and 31 December 2020. This creates differentiated treatment based on vehicle age and environmental performance.
Agricultural exemptions extended
The VAT exemption for supply of fertilisers, soil improvers, animal feeds and glass bottles used in agricultural production extends through 31 December 2025. This supports agricultural production on islands with limited arable land and chronic water scarcity.
Cabo Verde imports 75 per cent of its food. Agricultural production faces structural constraints including low rainfall, limited irrigable land and high input costs. The VAT exemption reduces production costs for farmers competing against imports.
Micro-enterprise regime adjustments
The special regime governing micro and small enterprises (REMPE) was adjusted to maintain financial incentives and support for three years after a company leaves the regime. This creates a transition period preventing cliff effects when enterprises grow beyond micro-enterprise thresholds.
Revocations and base-broadening
The incentive providing a 30 per cent increased deduction on electricity and water costs has been revoked. This removes a general subsidy as the government shifts toward targeted sectoral support.
The revocation affects all businesses previously claiming the deduction. With electricity costs high in Cabo Verde due to fossil fuel dependence, this increases operating expenses unless offset by efficiency improvements or renewable energy adoption.
The strategic logic
The 2025 fiscal package combines rate reductions with revenue diversification and targeted incentives. The corporate tax cut from 21 per cent to 20 per cent reduces business costs broadly. The carbon tax introduces new revenue while advancing environmental goals. Sectoral exemptions direct investment toward health, sustainable tourism, renewable energy and disadvantaged islands.
The wage increase incentive addresses labour market dynamics. Tourism sector recovery has created labour demand but wage growth has lagged productivity gains. The 200 per cent deduction incentivises companies to share growth with workers while maintaining competitiveness through tax relief.
The capitalisation incentive tackles a structural problem. Cape Verdean businesses rely heavily on debt financing, creating vulnerability to interest rate changes and credit cycles. The enhanced equity deduction encourages retained earnings and equity investment rather than leverage.
Implementation challenges
The effectiveness depends on enforcement capacity and company response. The wage increase deduction requires verification of salary changes and employee counts. Tax authorities must audit claims to prevent abuse while processing legitimate deductions promptly.
The carbon tax needs implementing regulations specifying rates, coverage and exemption mechanisms. Without clear rules, companies cannot calculate costs or adjust operations. The exclusive dedication to climate financing requires separate accounting to ensure revenues fund stated purposes.
Sectoral exemptions create classification questions. What equipment qualifies for the tourism sustainability programme? Which projects count as industrial aggregate production? Administrative discretion in applying exemptions can create uncertainty or favouritism.
The minimum 5 per cent import duty for contractual benefits affects projects in negotiation or planning. Companies expecting full duty exemption must recalculate project economics. This may reduce investment returns or require renegotiation of agreements.
Competitive positioning
The 20 per cent corporate rate places Cabo Verde in the middle range for Africa. Mauritius charges 15 per cent. South Africa charges 27 per cent. Kenya charges 30 per cent. The planned reduction to 15 per cent by 2026 would match Mauritius, Africa's leading financial centre.
The sectoral exemptions target strategic priorities. Sustainable tourism aligns with environmental vulnerability and tourism dependence. Health sector support addresses infrastructure gaps. Industrial production incentives on less-developed islands promote geographic equity.
The carbon tax introduction while reducing corporate rates shows policy sophistication. Rather than choosing between business competitiveness and environmental goals, the government pursues both through differentiated instruments.
Whether this fiscal architecture attracts investment and accelerates growth depends on factors beyond tax policy. Infrastructure quality, labour skills, market access and regulatory efficiency all matter. The fiscal package removes barriers and provides incentives. Whether companies respond depends on their strategic calculations and risk appetite. The tools are sharp. The question is whether they cut deep enough to reshape economic outcomes.