Contributed By Eric Silwamba, Jalasi & Linyama Legal Practitioners
Zambia’s legal system is based on the English legal system. This is because Zambia is a former protectorate of Britain. The English Law (Extent of Application) Act includes as part of Zambian written law, the principle of English common law and equity and automatically makes all statutes that were in force in England on or before 17 August 1911 applicable. This is also confirmed in the Constitution of Zambia Act No 2 of 2016 in its definition of written law.
The basic tenet of the Zambian legal system is the adversarial system of adjudication for civil proceedings. The jury system is not provided for under Zambian legislation. The Constitution of Zambia creates three arms of government, namely, the executive, legislature and the judiciary. Separate pieces of legislation provide for the establishment of the various courts, while the procedure for each court is promulgated by way of statutory instruments usually issued under the hand of the Chief Justice.
The cardinal pieces of legislation with respect to the constitution and jurisdiction of the courts are the Local Governments Act, the Small Claims Court Act, the Subordinates Court Act, the High Court Act, and the Supreme Court of Zambia Act. It is important to note that the Zambian constitution enjoys supremacy over all legislation and the provisions of Article 20 of the Constitution of Zambia provide for the establishment of the courts.
The legal system also provides for a number of specialised tribunals which deal with appeals from particular regulatory institutions. These include the Tax Appeals Tribunal, Competition and Consumer Protection Tribunal, Lands Tribunal, Securities Exchange Tribunal, Ratings Tribunal and Mines Tribunal.
Foreign Direct Investment (FDI) in Zambia does not generally require review or approval. However, in order to access certain tax and non-tax incentives and to acquire land rights, the Zambia Development Agency (ZDA) is the principal FDI administrative and regulatory institution. The scope of its jurisdiction, according to Section 5 (1) of the Zambia Development Agency Act No 11 of 2006, is to further the economic development of Zambia by promoting efficiency, investment and competitiveness in business, and promoting exports from Zambia.
Certain sectors or industries impose certain ownership and transfer-of-licence restrictions, such as:
The election of the new government on 24 August 2021 has had a major impact on the outlook of the economic, political and business climate. Prior to the election, the Zambian economy was facing a debt crisis having defaulted on its Euro Bond obligation in November 2020. This resulted in rapid depreciation of the national currency, the kwacha, against the US dollar and in the country reverting to double-digit inflation. This consequently increased the cost of borrowing money from the banks, resulting in the Bank of Zambia (BOZ) increasing its Monetary Policy Rate (MPR). These issues created an undesirable cocktail of macroeconomic instability in the Zambian economy.
The upcoming election also led to investor nervousness regarding public safety, personal security and fear of appropriation of investments post-election. The election of the new government, which is perceived as very pro-investor, has brought about renewed confidence in Zambia as a destination of choice in Africa for FDI.
The national budget announced on 29 October 2021 that there would be implementation of new investor-friendly tax regimes and the government subsequently entered into an agreement with the IMF for an Extended Credit Facility (ECF) for 2022–2025. This agreement with the IMF is expected to help restore macroeconomic stability and provide the foundation for inclusive economic recovery.
Typically, a transaction for the acquisition of shares, a business or assets takes the form of a private contractual sale where a party directly acquires shares in an entity. Other types of transaction include where a party acquires shares through the creation of new shares by way of allotment in an existing entity, or where an existing minority shareholder exercises a call option to acquire a majority share in an existing entity. A party may also simply acquire the assets and the business of an existing entity and transfer them into a new company. The choice of transaction is usually decided according to what will be the easiest in terms of regulations and tax efficiency. In some cases, the parties prefer to enter into heads of agreement prior to the share and purchase agreement, allotment or asset sale agreement being finally signed.
Depending on the nature of the transaction, eg, a mergers and acquisitions (M&A) agreement, a number of advisers in addition to legal advisers may be involved, including financial advisers, accountants, tax advisers and other specialised experts, who may be required at the due diligence stage.
Prior to the commencement of negotiations, the parties will usually carry out a legal, financial and tax due diligence of the target entity. The due diligence takes the form of the vendor setting up a data room in which they deposit all the information required by the potential purchaser. The typical areas that due diligence cover are: corporate, tax liabilities, litigation status, employment liabilities, review of asset register, pensions, patents and the company's existing contracts.
The timeframe largely depends on the scale and complexity of the transaction and could range from six to ten months. The timeframe may also be shorter or longer, depending on the regulatory approvals required.
A foreign investor considering FDI in Zambia should be aware that it needs regulatory approval from the Competition and Consumer Protection Commission (CCPC) with respect to mergers and acquisitions, either of shares or assets.
Additionally, the payment of Property Transfer Tax (PTT) may be applicable, depending on whether the M&A is an acquisition of shares, a business or asset.
In relation to mines, banks and insurance companies, there are additional statutory notification requirements with respect to change of ownership of a licence. There is also change-of-control notification, which is required with respect to the transfer of environmental licences.
Corporate governance in Zambia is particularly provided for under Part VII of the Companies Act, for both private and public companies. The provisions therein provide for the appointment of a company secretary and what their responsibilities will be, and the appointment of directors, as well as their powers, duties and limitations. The Companies Act also lists reporting requirements as well as the particular records that should be kept at the company's registered office.
For companies that have been listed on the Lusaka Stock Exchange ("LuSE"), there is a code of corporate governance. The LuSE corporate governance code includes principles to which listed companies need to adhere, on either a "comply or explain" basis. The Governance Code presents guidelines and principles of corporate governance.
More recently, the government made amendments to the Trust Restrictions Act, as read together with the (Land) (Perpetual Succession) (Amendment) Act No 11 of 2020, to introduce beneficial ownership or interest disclosure provisions.
Minority shareholders have a measure of protection under the Companies Act. Section 134 of the Companies Act expressly provides for remedies against minority shareholder oppression on takeover. The Companies Act gives shareholders a right to bring an action against a director where there is negligence, breach of statutory duty or illegal action. A shareholder under Section 335 of the Companies Act can also bring an action against the company for breach of a duty owed by the company to the shareholder. These remedies also include interim reliefs, such as injunctions, to prevent a director from engaging in conduct that contravenes the directors' duties under the Companies Act and the articles of association. The option of derivative action is also present, subject to a court granting relief. The Companies Act also provides every shareholder with the right to inspect the books of a company.
Furthermore, shareholders' agreements can provide extra protection with regard to the rights of minority shareholders.
The liability of shareholders in both private and public limited companies is limited to the amount unpaid on their shares.
The Companies Act provides that every company must prepare its audited statements and the same should be submitted to the registrar of companies at the Patents and Companies Registration Agency (PACRA). This should be accompanied by the company's annual return. Failure by any company to submit its annual return and financial reports at the end of each financial year is an offence and is punishable by a fine if convicted. The law extends criminal liability for failure to submit annual returns and financial reports to each officer of the company in default (in most cases, the directors).
Companies registered as foreign companies must submit a financial statement in relation to that company's operations and assets in Zambia within three months of the end of the financial year. The Act requires that the financial accounts comply with the standards set out for financial accounts relating to companies incorporated in Zambia.
For public listed companies there are additional reporting requirements under the Securities Act No 41 of 2016 and the Lusaka Stock Exchange Rules.
The capital market is still developing in Zambia. It is regulated by the Securities Exchange Commission (SEC), the decisions of which can be appealed to the Securities Exchange Tribunal. There is currently only one licensed stock exchange in Zambia licensed by the Securities Exchange Act. The LuSE has two types of listed companies. These are known as "quoted companies" and "listed companies".
The LuSE operates the Central Share Depository which is the warehouse for records of all instruments traded on the stock exchange. Typical transactions on the LuSE are initial public offerings and listing of debt securities. It is typical for listed debt securities to first be registered with the SEC. Once the debt securities are offered and brought to the open market there is a formal listing application, after which the securities are listed on the Lusaka Stock Exchange Debt Securities Tier. As is the case with initial public offerings, debt securities are also listed. Debt securities may only be quoted. In other words, the issuer only needs to register the debt securities but does not need to formally apply to list them on the stock exchange and as such they merely remain quoted.
The listed market is further divided into the main market and alternative market.
Trading is done only by licensed brokers.
There is no property gains tax. However, there is withholding tax on any declaration of a dividend. There is also no PTT for shares traded as listed shares. This exchange does not apply to quotes, shares or securities.
The Securities Act No 41 of 2016 is the general legislation that regulates securities. There are several regulations made under the Act which include:
Foreign investment funds will be regulated if they are going to be offered to members of the public. A foreign-based investment scheme has to apply to the SEC to be granted authorisation to operate a foreign-based investment fund. The pre-condition of the SEC is that if a scheme is managed outside Zambia and offers adequate protection to the participants, the scheme must have an agent in Zambia. The Securities Act prohibits any person from entering into any agreement with the view of acquiring, disposing of or subscribing for shares, units or other securities representing an interest in a collective investment scheme or the establishment and operation of a venture capital fund. Any person who structures such a fund with approval from the SEC is committing an offence. Another regulator, in addition to the Securities Act, is the Securities Investment Scheme. The SEC allows an application to be made by a foreign-based investment scheme.
Zambia has a merger control regime and the body responsible for this is the CCPC. The Competition Act provides that a merger occurs when an enterprise directly or indirectly acquires or establishes direct or indirect control over the whole or part of the business of another enterprise, or when two or more enterprises mutually agree to adopt arrangements for common ownership or control over the whole or part of their respective businesses. Accordingly, a merger may be achieved where:
The Competition Act provides that a person controls an enterprise if they meet the following change-of-control criteria. The person:
The prescribed threshold for merger notification is met when the combined turnover or assets, whichever is higher, of the merging parties in Zambia is at least ZMW15 million.
A merger is reviewable by the CCPC if it meets the prescribed threshold or other criteria (as provided in the Competition Act and the Commission Merger Guidelines 2015). Where the prescribed threshold has not been met, despite the transaction amounting to a merger, it is not notifiable.
The requirements of the CCPC are in the notification form, which asks for specific details about the business, why the merger is being carried out, how the merger will help the Zambian market, etc, as well as details of beneficial ownership, etc. The idea is to ensure that the merger will not harm the market.
The other aspect is that the CCPC is the starting point and it can come back to impose a penalty whenever it finds out that procedure has not been followed. However, the Zambia Revenue Authority (ZRA) and PACRA have recently been taking due diligence more seriously, as a result of which, the ZRA will not process the PTT on a transaction until it knows that the transaction has been cleared by the CCPC, and before PACRA will lodge a transaction it needs to know that the PTT obligations have been settled.
Failure to follow the correct channels could therefore frustrate the entire transaction.
See 6.3 Remedies and Commitments.
This does not apply in Zambia.
This does not apply in Zambia.
This does not apply in Zambia.
This does not apply in Zambia.
Zambia's legislation does not expressly preclude any FDI in a particular area. However, the following sectors or industries impose certain foreign ownership restrictions on acquisition and disposal of interest, as well as on transfer of licence:
The ZRA is the corporate body responsible for implementing tax laws. The principal taxes that a business must pay include:
An entity that derives its income from Zambia, or from a source deemed to be income from Zambia, is required to file income tax returns. These take two forms: provisional income tax returns and annual income tax returns.
Companies are generally taxed at a corporate rate of 35% on profits. However, companies operating in certain sectors have a different corporate tax rate. The agricultural sector and non-traditional exports are taxed at 15%. Telecommunications companies with an income exceeding ZMW250,000 are taxed at 40%, the highest corporate tax rate applied in Zambia. Companies listed on the LuSE also pay the incentive tax rate of 33% on profits. There are no differences in the manner in which a local subsidiary and a local branch of a non-resident may be taxed. However, profit repatriated to the foreign parent company is subject to a 20% withholding tax. If the foreign parent company is located in a country with which Zambia has a double-taxation treaty, the relevant provisions of the treaty regulating profit attribution will apply.
All dividend income from non-Zambian sources of a Zambian resident company is subject to corporate income tax as a separate source. Where the dividend income received is from another Zambian resident company, the withholding tax deducted on the payment of the dividend should represent the "final tax", and the Zambian resident company receiving the dividend is not subject to an additional corporate income tax liability.
Non-resident shareholders are subject to a 20% withholding tax on the payment of dividends in Zambia, unless otherwise determined by a relevant double-taxation treaty.
Dividends are payable at the discretion of the board of directors, as long as the company is solvent. There is no compulsory dividend payment and no capital tax payable on the minimum share capital of the company. There is no investment tax on minimum share capital. The only statutory fee payable on minimum capital is when a company’s share capital is increased; this carries a fee of 2.5% of the increased share capital plus ZMW175.
Dividend payments are not tax-deductible.
Tax planning methods include use of related third-party entities. This is subject to arm's length transaction benchmarking in accordance with Zambian law on transfer pricing. Other strategies include setting up of holding companies in countries with favourable double-taxation treaties with Zambia. Last, but not least, the contribution can be included in existing entities as equity to take advantage of PTT exemptions. Another option is investing in Multi-facility Economic Zones (MFEZ) which now offer concession corporate tax rates for those FDI companies that export 50% of their product. These rates are as follows:
There is no capital gains tax in Zambia. However, there is PTT which is charged on the realisable value of the property being transferred.
The Property Transfer Tax Act Chapter 340 defines “property” as:
The rate of tax is:
PTT at a rate of 5% of the realised value is also payable on the transfer of any shares in a non-resident holding company that holds at least 10% of the issued shares in a company incorporated in Zambia. The realised value for the transfer of shares in a non-resident company is limited to the value of the effective shareholding in the Zambian entity. "Effective shareholding" is defined as the extent of control or ownership in a company incorporated in Zambia by the company incorporated outside Zambia, expressed as a percentage.
In Zambia, there are predominant anti-avoidance provisions. That is, if the commissioner-general of the ZRA has reasonable grounds to believe that the main purpose or one of the main purposes of any transaction is the avoidance of – or reduction of liability for – tax for any charge year, or that the main benefit that might have been expected to accrue from the transaction within the three years immediately following the completion thereof was the avoidance – or reduction of liability for – tax, the commissioner-general may, if this is determined to be just and reasonable, direct that such adjustments be made regarding liability for tax as are considered appropriate to counteract the avoidance or reduction of liability for tax that would otherwise be effected by the transaction.
The primary legislation governing employment relationships in Zambia is the Employment Act No 3 of 2019. It provides a framework that governs all employment relationships, contains mandatory terms that every employment contract must satisfy, and specifies how to enforce employee rights.
Other notable legislation governing employment relationships includes the Industrial and Labour Relations Act.
The concept of formalised representations under Zambian law is recognised by the existence of trade unions. Section 5(1)(b) of the Industrial and Labour Relations Act is clear that an employee has the right to be a member of a trade union of that employee’s choice. An employee also has the right to choose whether or not to join a union. It is therefore not mandatory for employees to be represented and employees are only represented if they choose to be members of a trade union. Where an employee is represented by a trade union, it is mandatory that the employee is consulted with respect to the conclusion or extension of collective agreements, in relation to collective redundancies and transfers to another employer.
An employee’s compensation is in the form of cash, pension/retirement benefits and statutory benefits, as provided for under the employee’s contract of employment.
In an acquisition or change of control, the employer must first obtain consent from the employees and authorisation from the labour commissioner before transferring any employees to the new employer. In the event that the employee does not consent to the transfer, the employee’s contract of employment will be terminated and the employee will be entitled to severance pay.
Before endorsing a contract of employment to which the employee has consented, the Labour Commission must ensure that the employer and employee have entered into an agreement to either carry forward the employee’s liabilities or to pay the employee any outstanding liabilities due to the employee prior to the transfer of that employee’s contract of employment.
The Supreme Court of Zambia stated that a change in ownership of shares cannot result in the corporate entity becoming a new employer; it will still be the same employer and will be bound by the contracts of employment.
Employees are not mandated to transfer their contracts. Any transfer of an employee’s contract requires consent from that employee.
Where an employee does not consent to the transfer, that employee’s contract will be terminated immediately and the employee will be entitled to severance pay.
See 10.2 Employee Compensation, save to emphasise that consent is always required from the employee. For unionised employees, a collective agreement should be signed with the trade union and consent should be obtained from the Labour Commission.
This does not apply in Zambia.
Zambia is considered to provide strong intellectual property protection. However, it is debated that the protection of trade marks has limitations such as the issue of the Zambian trade mark law not recognising service marks in the Nice classification Zambia from classes 35 to 45. Trade mark proprietors seeking to register trade marks in respect of services have to register their trade marks in the goods class that is most closely associated with the relevant services.
A further limitation in the current Trademarks Act is that it does not enable the proprietor of a registered trade mark to rely on a trademark registration to prohibit use of an identical/confusingly similar mark in relation to goods not covered by the said registration, even where the goods may be considered similar. There is also no express protection for unregistered trade mark proprietors in the Trademarks Act against infringers that register the trade mark, despite the unregistered proprietor showing evidence of previous use of the trade mark commercially.
Section 16 of the Trademarks Act provides that it is not lawful to register as a trade mark or part of a trade mark any matter the use of which would be likely to deceive or cause confusion, or be contrary to the law or morality, or any scandalous design.
A patent can be the subject of a compulsory licence. Section 99 of the Patents Act provides that a person may, after three years from the date of the granting of a patent, apply to the minister for the granting of a compulsory licence on any of the following grounds:
This type of licence is not very common and there have been no compulsory licences for the past five years in Zambia.
There are laws which limit the terms upon which parties may agree a patent licence. For example, the terms of the license may not have unjustified restrictions or be prejudicial to the economic interest of the country.
Section 97(1) of the Patents Act provides that the registrar may refuse to register a licence contract which imposes unjustified restrictions on the licensee or is prejudicial to the economic interest of the country.
Zambia currently has the following data protection and data privacy laws and regulations in place:
These laws do not, however, have an extraterritorial scope.
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