Corporate Tax 2020

Last Updated January 15, 2020

Senegal

Law and Practice

Authors



Houda Law Firm was founded in 1977 in Dakar, Senegal, and consists of a 42-person staff, half of which are specialised and highly qualified lawyers and legal advisers working to assist clients, such as private companies, public entities and individuals, with all of their legal needs in Senegal and West African Economic and Monetary Union (WAEMU) member states. The firm has recently opened a branch in Abidjan, Ivory Coast, which made it the first foreign law firm from the WAEMU region established in the country. The team works on matters related to company incorporation, investment, employment law, taxation, business litigation and arbitration. The firm is in the process of finalising ISO 9000-2015 Certification.

When a corporate form is adopted, the most common form in Senegal is the "société à responsabilité limitée" (limited liability company, or LLC).

In an SARL (LLC), partners have a responsibility towards social debts limited to their contributions. The capital is divided into shares. The company may include one or more partners. There is no minimum social capital; however, the capital is divided into shares in exchange for contributions, most often in cash, made by the shareholders. The capital can be XOF1,000. It is run by a manager who represents the company with respect to third parties, subject to the powers expressly conferred on the partners. It is not mandatory to appoint an external auditor, except when the company reaches certain thresholds.

There are other forms of capital companies provided for by the Uniform Act on the law of commercial companies and the economic interest group (GIE).

The "Société Anonyme" (Public Limited Company)

This can take two forms of administration and direction:

  • the public limited company with a general director – from one to three shareholder(s); and
  • the public limited company with a board of directors – from a single shareholder to multiple shareholders.

In the second form, the SA is managed either by a chairman of the board of directors plus a chief executive officer, or by a chairman and chief executive officer (Président Directeur Général).

Its minimum capital is XOF10 million. In the event of contributions in cash to the constitution of the company, at least a quarter of the amount can be released, with the remainder within three years.

The founders must appoint a statutory auditor and a substitute.

The "Société par Actions Simplifiée" (Simplified Joint Stock Company)

The simplified joint stock company is a company established by one or more partners whose statutes freely provide the mode of operation and organisation subject to the mandatory rules provided for by the Uniform Act on the law of commercial companies and the economic interest group.

There is no minimum social capital. The company is managed by a president and possibly one or more general managers.

It is not mandatory to appoint an external auditor, except when the company reaches certain thresholds.

There are two other types of companies provided by the Uniform Act (below).

Companies in Which the Liability of the Partners is Indefinite in Relation to Social Debts

  • A “société en nom collectif” is a company in which all partners are merchants and respond indefinitely and severally to social debts.
  • A “société en commandite par actions” is one in which one or more partners coexist indefinitely and are jointly and severally liable for the debts, called "general partners", with one or more partners responsible for the social debts within the limits of their contributions, called "limited partners", whose capital is divided into shares.

The high level of risk for the founders explains why these companies are very uncommon.

For tax purposes, all entities are not taxed as separate legal entities.

Some entities are taxed as a separate legal entity. This is the case for capital companies such as the public limited company and the limited liability company. However, it should be noted that companies whose sole object is the construction or acquisition of real estate or groups of buildings with a view to dividing them in fractions intended to be allocated to the shareholders are deemed, whatever their legal form, not to have a legal personality distinct from those of their members.

By contrast, the partnership regime disregards the existence of the legal personality of the company and directly apprehends the partners. In this case, the term "transparent" society is used.

However, the tax legislator allows certain companies to opt for corporation tax. The following are covered by this option: de facto corporations, economic interest groups, partnerships, joint ventures, limited partnerships, single-member limited liability companies where the sole shareholder is a person, professional civil societies and real estate companies (Article 4 of the General Tax Code, or CGI).

In Senegal, the so-called fiscally transparent companies are:

  • companies in which the partners are indefinitely liable for social debts – real estate companies (governed by the Code of Civil and Commercial Obligations), partnerships, joint ventures, companies created de facto – are rarely used in practice for commercial activities, given the risks they generate for investors; and
  • one-person limited liability companies whose sole partner has chosen not to opt for corporation tax.

Investment companies or venture capital companies are companies for which specific tax provisions are provided for by the General Tax Code.

However, when founders wish to create such a company, they choose a form of commercial company provided for by the Uniform Act relating to the law of commercial companies and GIE, generally a public limited company.

Besides so-called transparent companies, branches and representative offices can be added. Some investment funds operating in Senegal exercise them through representative offices.

In the absence of a tax convention, Senegal applies the principle of territoriality to ascertain which state has the power to tax the profits of a company. Under this principle, profits from companies operating in Senegal are taxable. It is the establishment of the enterprise in Senegal that determines the taxation (Article 3 of CGI).

Senegal may have the right to tax in the following cases:

  • if the legal person is incorporated in Senegal where it has its residence (eg, a subsidiary);
  • if the foreign company has a permanent establishment in Senegal – this notion no longer exists in the General Tax Code, at least with regard to corporation tax, but the tax administration gives itself the discretionary power to judge its existence subject to ex post control by the judge; or
  • if, in a certain administrative doctrine, the complete cycle of operation has based a taxation in Senegal – however, this criterion, inspired by France, does not find any basis in the General Tax Code of Senegal.

In the case of existence of a tax convention, in general, the legal person is considered to be resident in the state in which it is subject to tax by reason of its domicile, residence, place of management or any other analogous criterion. Where a company is considered to be a resident of two or more states, it shall be deemed to be a resident of the state in which its place of effective management is situated.

The tax rates differ according to whether the legal entity is subject to corporation tax or personal income tax.

The corporate tax rate is set at 30% of taxable profit.

There is a minimum tax called the Minimum Flat Tax on Companies (IMF). It is due by all corporations or legal persons with losses or whose tax result does not allow the generation of a corporate tax higher than the amount determined by a tariff fixed by the Tax Code. The IMF is due on the turnover excluding taxes realised the year preceding the one of the taxation, at a rate of 0.5%; its amount cannot under any circumstances be less than XOF500,000 or higher than XOF5 million.

For persons and entities that have not opted to be subject to corporate tax, the personal income tax applies directly to the partner's income. Taxable income is subject to a progressive scale whose rates can range from 0% to 40%, depending on the level of income (Article 173 of the CGI).

Concerning other applicable taxes, different rates are provided, which we will see below.

Taxable profits are determined from the accounting result of the past financial year, which is why taxpayers are required to settle their accounts each year on December 31st, except in the case of transfer or cessation of activities during the year.

Taxable profit is the net profit determined according to the overall result of all types of transactions carried out by companies and legal entities, including, in particular, disposals of any assets, either at the end of the life of the company in certain predefined conditions, or during its existence.

For the purpose of determining taxable profit, the accounting profit recognised in the financial statements must be subject to extra-accountable readjustments from the net accounting profit basis:

  • to reinstate the non-deductible accounting expenses; and
  • to deduct non-taxable accounting income.

As an indication, the reinstatements to taxable profit may consist of non-deductible depreciations, excess interest on partners' current accounts, part of the share of non-deductible expenses, unjustified sums paid into a privileged tax system, non-deductible taxes, fines and penalties, etc.

With respect to extra-accountable deductions, they may be exempt capital gains, exempt profits and share products subject to the parent company and subsidiary regime.

The taxable income of the companies must be determined by applying the principle of acquired receivables and certain expenses.

No particular tax incentive of this nature is provided by the CGI. However, the General Tax Code provides a number of tax incentives for approved companies in the investment codes or other specific regulations (Articles 229, 232 and 249 of the CGI).

Various tax incentives are provided by the General Tax Code, depending on the area of activity, namely: mining, oil and gas, real estate promotion, investment in solar or wind energy, the export of goods and services, etc.

Special incentive schemes are provided for specific industries, in particular, the following.

  • In the field of solar and wind energy.
    1. The tax reduction on industrial and commercial profits, on the profits of the non-commercial professions and on the profits of the farm, in the case of investment in the field of the use of solar or wind energy. The investments must relate to installations intended for the implementation of solar or wind energy; in particular, water heaters, pumping stations, electric generators and associated receivers. This system only concerns individuals and some fiscally transparent companies.
  • In the field of renewable energies.
    1. The tax reduction for the promotion of renewable energies, which concerns companies that manufacture locally and exclusively certain goods intended for the production of renewable energies. Such companies are allowed to deduct 30% of their taxable profit for the calculation of the corporate tax they are liable for.
    2. The Value Added Tax (VAT) exemption for deliveries of certain equipment intended for the production of renewable energies as well as the delivery of renewable energy by their producers.
    3. The exemption from VAT (until 31 December 2021) of deliveries and imports of agricultural equipment, agricultural facilities and services.
    4. Natural or legal persons who have carried out a revaluation of their balance sheet, under conditions provided for by the CGI, may benefit from tax assistance deductible from their taxable income equal to 15% of the net investments made in the five years following the revaluation.
    5. Investment tax credit for companies that make investments of at least XOF100,000,000 in sectors covered by the CGI, etc. The tax credit can range from 30% to 40% of the amount of the investment but remains capped at 50% of the taxable profit.
    6. The so-called exempt companies benefit from certain tax and customs benefits according to the 2017-07 law of 6 January 2017, which has an incentive system applicable in the special economic zones, notably a corporate tax rate of 15% instead of 30%, an exemption of all duties and taxes collected at the customs cordon subject to a few exceptions and an exemption from certain taxes listed in Article 9 of the said law.
    7. Other tax incentives are subject to other specific regulations, namely the mining code, the petroleum code and other derogations.

As far as financing activities are concerned, the holding company can be an interesting structure with regard to its tax regime. The code defines it as a public limited company, a limited liability company under Senegalese law for which the conditions set out in Article 21 et seq of the CGI are fulfilled. When these conditions are met, the tax regime applicable to parent companies and subsidiaries applies automatically to the holding company. See 6.3 Taxation on Dividends from Foreign Subsidiaries.

With regard to the taxation of interest on current accounts provided for in Article 101 of the General Tax Code and paid by the said holding company, according to Articles 173.2 and 208 of the General Tax Code, subject to the provisions of tax treaties, they must be subject to a withholding tax of 8% that may result in an imputation in accordance with the provisions of Article 209 of the Tax Code.

The Code also provides for a capital gains tax deferral regime arising from the disposal of fixed assets in the course of operations. To benefit from this regime, the taxpayer must undertake to reinvest in non-financial fixed assets in companies established in Senegal that he owns, before the expiry of a period of three years, the amount of the value added to the cost price of the assets sold (Article 19 of the Tax Code).

Senegalese tax law allows companies or legal entities subject to corporation tax to carry forward losses. In the event of a deficit incurred during a financial year, this deficit is deducted from the profit made during the following year. If this profit is not sufficient so that the deduction can be fully made, the excess of the deficit is carried over successively to the following financial years until the third financial year following the loss-making period (Article 16 of the CGI). However, depreciations recorded in a deficit period are not subject to this limitation.

The concept of "carry-back" does not exist in Senegalese tax law. The mechanism of compensation between capital loss and capital gain and vice versa also does not exist in Senegalese tax law.

The deduction of interest by local companies is limited by Senegalese tax legislation. This limitation is attached to the rate and the amount.

  • Rate – the rate of interest paid to shareholders, partners or other persons with whom the company has a non-arm's length control, on the basis of the amounts they directly leave or make available, or through intermediaries, to the company in addition to their share of capital, whatever the form of the company, cannot exceed the rate of advances of the issuing institution (BCEAO) plus three points.
  • Amount – interest paid to legal persons is not allowed as a deduction in the case of:
    1. remunerated amounts made available that exceed one-and-a-half times the share capital and;
    2. if, at the same time, it exceeds 15% of profit from ordinary activities plus interest, depreciations and provisions are taken into account for determining the same result.

Interest is only deductible if the capital is fully paid up. Also, the deduction of interest paid to persons is limited to the remuneration of the sums made available by said persons that do not exceed the amount of the share capital; this limitation does not apply to interest paid by companies not subject to corporation tax to their associates who are subject to a tax on income in Senegal because of these interests.

The total amount of deductible net interest owed annually to all debts incurred by an enterprise member of a group of companies does not exceed 15% of ordinary activity income plus interest, and deprecations and provisions taken into account for the determination of this same result. But this limitation does not apply if the company provides evidence that the net interest expense ratio of the group of companies is greater than or equal to its own net interest charge ratio.

Certain adjustments are made in relation to the limitation about the amount of interest paid or owed by financial institutions or by insurance companies covered by the CIMA code, companies that are members of a group of companies composed solely of those resident in Senegal.

Under Organisation pour l'Harmonisation en Afrique du Droit des Affaires (Organisation for the Harmonisation of Business Law in Africa, or OHADA) accounting law, any entity that has its registered office or principal activity in one of the OHADA contracting states and that controls one or more entities in an exclusive or joint manner has the obligation to establish consolidated financial statements of all of its entities (see Article 74 et seq of the Uniform Act on Accounting Law and Financial Reporting (AUDC) of 26 January 2017).

However, from a tax perspective, in Senegal, consolidated tax groupings do not exist. For the handling of tax losses, the principle of territoriality, which is a double-edged sword, is applied.

Thus, in Senegal, only the losses from companies run in Senegal are deductible. Horizontal compensation of losses between independent entities is not allowed. The only exception to this rule – which is not really an exception because it is clearly a three-year delay – is the deduction for study and prospecting expenses incurred for the installation of equipment abroad of a sales establishment, an information office as well as financial charges.

The company that sells the shares, collecting incomes that are included in its taxable profits, is subject to corporation tax. As a reminder, the taxable profit is the net profit determined according to the overall result of transactions of any kind made by the companies, including, in particular, disposals of assets.

In the case of a locked-in asset, the company may request the application of a re-investment plan in order to obtain a deferral of taxation. For foreign legal entities, see 6.7 Taxation on Gain on the Sale of Shares in Non-local Affiliates and 5.3Capital Gains of Non-residents.

Otherwise, disposals of securities issued by companies located in Senegal or abroad and holding, directly or indirectly, interest on the rights attached to mining or hydrocarbon titles in Senegal are subject to transfer duties at the rate of 5% under the same conditions that the transfer of rights relating to mining or hydrocarbon titles (Law 2019-13 relating to the amending finance law for the year 2019). If the title does not relate to mining or hydrocarbon titles, the registration is made at a rate of 1% (Article 472 of the CGI).

The company may be subject to certain transaction taxes, most of which are paid in the form of withholding, as described below:

  • VAT is due on the supply of goods, the provision of services for consideration and imports, at a rate of 18%;
  • non-commercial benefits – this is a deduction from the remuneration paid by a debtor established in Senegal to legal persons or corporations subject to income tax or corporation tax, which do not have a permanent professional installation in Senegal, at a rate of 25% of the net amount of the sum paid with a deduction of 20% on the gross receipts; and
  • withholding on amounts paid to third parties – this is a deduction that the company must make on the sums it pays to persons residing in Senegal, as compensation for benefits of any kind provided or used in Senegal, at a rate of 5%.

Note that withholding taxes are supposed to be borne by the beneficiary of the payments and not the debtor.

  • Right of registration and stamps – a certain number of acts concerning the company must obligatorily be registered. The applicable fees vary accordingly to the nature of the act (1% to 10% for proportional rights). Sometimes, a simple fixed fee is also applicable; this is not a withholding tax.

Other taxes may also be due from companies, as detailed below.

  • The "local economic contribution" is due from any person who exercises in Senegal a trade, an industry or a profession and is subjected to a system of taxation of the real benefits. It is made up, on the one hand, of a contribution on the value of professional premises, which is 15% for premises rented or occupied free of charge, and 20% for premises, land and facilities recorded on the assets side of the balance sheet. On the other hand, it involves a value added contribution of 1% of the added value generated during the previous financial year.
  • Lump Sum Minimum Tax on Companies (see 1.4Tax Rates).
  • Withholding tax on wages (VRS) is the deduction the company must make on the wages it pays to its employees. The rate can vary from 0% to 40%.
  • Withholding tax on receivables, deposits and suretyship (IRC) income at the rate of 16%, barring exceptions.
  • Withholding tax on income from shares (IRVM) – applies to income distributed by legal persons liable to corporation tax within the meaning of the CGI; the rate is 10%. See also 4.1Withholding Taxes.
  • The Lump Sum Contribution Supported by the Employers (CFCE) – at a rate of 3% on the gross amount of the wages paid by the company.

In most cases, activities are not carried out by setting up companies but informally or by natural persons registered as traders.

Since the entry into force of the new Uniform Act concerning the law of commercial companies and the economic interest group, which reduced the minimum amount of share capital for a limited liability company from XOF1 million to no minimum capital, the number of incorporations has nevertheless increased.

Division of tax base between corporations and non-corporate businesses is not generally a problem that occurs. Persons subject to corporation tax are listed in Article 4 of the General Tax Code as well as those who may opt for this tax; the rest of the taxpayers are, in principle, subject to personal income tax.

The income tax rate can range from 0% to 40% and depends on the number of dependent children and the level of income, while the corporate tax rate is 30%. Thus, in general, the submission to income tax is not more advantageous to the point of causing tax abuse by individuals.

In Senegal, there are no tax rules in respect of this matter.

Dividends received by individuals are subject to personal income tax in the category of income from shares (Article 85 of the CGI). This is a withholding tax in full discharge that the person paying dividends should also pay.

It should be noted that the mechanism for the taxation of personal income consists firstly in treating each income according to its category, and secondly in bringing all these categories together under the overall net income to be subjected to a second treatment. The overall net income is composed of the following categorical revenues:

  • land revenue;
  • industrial and commercial benefits;
  • non-commercial profits and similar incomes;
  • income from movable capital;
  • salaries, wages, allowances, emoluments, benefits in kind, pensions and life annuities; and
  • benefits of the agricultural operation.

Capital gains arising from the sale of shares in closely held corporations are considered as a non-commercial profit and, as such, are imposed on the income tax on individuals.

However, under Article 259.2, when a person having the status of partner, shareholder or holder of a beneficiary unit transfers to a third party during the life of the company, all or part of his social rights assets, the excess of the sale price or the value at the disposal, if the latter is greater than the first, of the acquisition price of these rights or their value five years before the date of the transfer is taxed at the rate of 25% for one-third of its amount. The same is true of capital gains resulting from the redemption of units of mutual funds or their dissolution.

Also exempted from the personal income tax are capital gains realised on transfers of title, in the context of the management of a common investment fund or any other form of collective investment approved by the Minister of Finance.

Income from stock market transactions carried out on a regular or speculative basis by individuals is considered as profit of non-commercial professions and therefore subject to personal income tax. Where applicable, the tax is established on the sale price of the shares, less actual acquisition or disposal costs directly justified or assessed at a flat rate of 2% of the purchase price (Article 257 of the CGI).

In the absence of a tax convention, interest, dividends and royalties are subject to withholding tax at the normal rate, except for exemption.

For the interest, there is in Senegalese tax law a withholding tax called IRC (withholding tax on interest on receivables, deposits and suretyships). See 2.9 Incorporated Businesses and Notable Taxes for transactions subject to this deduction.

However, the CGI provides for a number of exemptions; those most used by taxpayers are referred to in Section 104 of the CGI. Under this section, the IRC deduction is not applicable to interest, arrears and all other current account revenue from an industrial, commercial, agricultural or mining occupation, subject to the twofold condition that:

  • the contractors have the status of industrial, commercial, agricultural or mining; and
  • the transactions entered in the current account relate exclusively to the industry, the trade or the exploitation of both parties.

The foregoing provisions shall be applied only to contractors whose current account income is taxable in Senegal in respect of industrial and commercial profits.

The rate of the IRC withholding tax is 16%. A reduced rate of 8% is applied to interest and other current account receipts of banks, a holding company meeting the conditions of Article 23 of the CGI and other similar bodies.

For dividends, the withholding tax on shares income (IRVM) applies. It applies to income distributed by legal entities subject to corporate income tax according to the General Tax Code.

It is important to note that the following are also considered as distributed income:

  • all profits or products that are not set aside or incorporated into capital; and
  • all sums or securities made available to partners, shareholders, or unit-holders and not deducted from profits.

Legal entities subject to corporate income tax and distributing such income must carry out the withholding tax at a rate of 10% and transfer it to the Public Treasury.

However, where the parent company/subsidiary tax regime is applicable, distributed dividends by the parent company are not subject to withholding tax to the extent of the net amount of the shares or interest shares received from the subsidiary. 

It should also be noted that products redistributed by mutual funds and constituting securities income are exempt from withholding tax, provided that they have actually borne the withholding.

For tax withholding on royalties – also called "BNC holdback" – they must be operated by debtors established in Senegal, on the amounts paid to persons or companies under income tax or corporate income tax, which have no permanent professional installation in Senegal. The withholding is general in the absence of a tax convention and concerns the remuneration of services of any kind provided or used in Senegal. It covers the activities carried out in Senegal in the exercise of the professions mentioned in Article 156 of the above-mentioned code and the products collected by the inventors or under copyright and any other products derived from industrial or commercial property and rights assimilated.

The rate of the above withholding tax is 25% of the net amount of the taxable amounts paid to individuals and companies, knowing that this net amount is determined by applying a 20% deduction to the gross cash receipt.

The primary tax treaty countries used by investors for investing in shares or debts of local companies are, generally, the Republic of Mauritius and France.

It is important to note that the tax treaty between Senegal and the Republic of Mauritius was denounced by Senegal in the course of 2019. Thus, in principle, the Convention will apply for the last time:

  • in Mauritius, the income tax for the fiscal year beginning on or after 1 July 2019; and
  • in Senegal, (i) in respect of tax withheld at the source on amounts paid or credited to non-residents, as from 1 January 2020; or (ii) in respect of other taxes, for taxation years beginning on or after 1 January 2020.

The tax authorities are effectively controlling the use of treaty country entities by non-treaty country residents.

An application of this practice is the use of the concept of "beneficial owner" or the definition of the concept of "resident" given in the tax treaties concluded by Senegal. However, in practice, this is a control that is very difficult to implement, despite interstate co-operation.

From practical experience, most of the transfer pricing issues that arise between the tax administration and foreign investors concern turnkey markets. The tax administration often challenges the distribution of the revenues and expenses that must be attached to the permanent establishment in Senegal and the market price allocation key between the foreign company and the local entity it creates for this purpose.

Another problem – related to transfer pricing, and often subject to tax recovery for foreign companies in Senegal with local entities – concerns intangible assets, including the transfer or grant of trade marks or patents. The tax administration sometimes sees a renunciation of products, therefore abnormal acts of management for the local subsidiary, with sometimes an increase of charge.

The General Tax Code contains provisions that allow the administration to oppose the unbalanced distribution of charges by foreign companies with local entities in Senegal (Article 8, 31 bis 610, 638 of the CGI).

Thus, in Letter No 280 DGID/DLEC/BC of 15 July 2011, the assumption by a local entity of costs incurred by the group in the absence of a reasonable allocation key set in advance by the group was duly contested.

It should be noted that the questioning of these agreements is becoming increasingly frequent.

Moreover, Article 638 requires the legal person established in Senegal to keep at the disposal of the tax administration, on the date of the undertaking of the accounting audit, the documentation enabling the price-charging policy to be justified in connection with transactions of any kind with related companies.

The transfer pricing provisions are similar to those of the OECD, as they were inspired by the work undertaken by the latter.

Article 17 authorises the administration to readjust the profits when it discovers an abnormal transfer of the latter abroad. However, before any tax adjustment, it is recommended for taxpayers to approach the tax administration for an approval of their transfer prices. The method of determination of the price charged by the taxpayer must be sufficiently justified and documented according to the nature of the activity.

Concerning the MAPS operations, no difficulty of application has thus far been raised.

Branches are, in general, subject to the same taxes as subsidiaries. Regarding corporate income tax, no differentiation of rates is made.

However, there is a difference in the withholding tax on securities income. As pointed out, in the case of subsidiaries, a 10% withholding tax applies, except in the presence of a derogatory regime such as the parent-subsidiary regime. On the other hand, with regard to foreign legal persons, the code provides for a presumption of distribution of profits that may result in the application of a 20% withholding tax. Indeed, Article 204 of the General Tax Code provides that, subject to the provisions of the international conventions, the fraction equal to half of the profits made in Senegal by the foreign legal persons referred to in Article 84 and that have not been reinvested in this country is deemed to be distributed in respect of each financial year to partners not having their tax domicile or registered office in Senegal.

Also, in relation to the deductible expenses of the profits, a branch that exercises an activity in Senegal but whose headquarters is abroad can deduct from its profits in Senegal a share of the expenses of its headquarters; this is subject to the international tax conventions, prorated of the total turnover of these same companies without being able to exceed 20% of the accounting profit achieved in Senegal before deduction of the said quota. For the subsidiaries, the basic principle remains applicable; ie, only those expenses incurred in the direct interest of the company or related to its normal management are deductible.

Moreover, in areas such as the European Union, a permanent establishment (for example, a branch) holding shares in another company and fulfilling the conditions of the parent-subsidiary plan may benefit from the exemption provided for this purpose. In the West African Economic and Monetary Union (WAEMU) and Senegal, this scheme is reserved solely for the relationship between the parent company and its subsidiary.

Share capital gains made by foreign companies are taxed in Senegal on corporate income tax at the time of registration of the deed or, in the absence of registration, in the month following the transfer (Article 4.2.5 and Article 31.6 of the GTC).

Under the new Article 4.II.5 of the General Tax Code amended by the Amending Finance Act for the year 2019, legal entities domiciled abroad are also subject to corporate income tax when they receive property income in Senegal or capital gains from the sale of real estate located in Senegal or related rights, or realise capital gains as a result of transfers of securities or social rights held in companies incorporated under Senegalese law.

The same applies to capital gains resulting from the sale of corporate rights realised abroad relating directly or indirectly to mining or hydrocarbon securities in Senegal.

In addition, in the case of formal registration, a registration fee of 1% on the market value of the shares is due (or of 1% of the stipulated price, if higher). Concerning the registration fees on transfers of ownership or enjoyment of rights attached to mining or petroleum titles, the rate is 5%.

On the other hand, the code provides for a substantial exemption of the holding company's products. In fact, the parent subsidiary regime applies as of right to Senegalese holding companies incorporated in the form of a joint stock company, or a limited liability company of which at least two-thirds of the fixed assets consist of participations that meet a number of conditions. However, the benefit of this regime assumes that the holding company is a company incorporated under Senegalese law; see 1.3 Determining Residence.

The tax treaties signed by Senegal generally remedy this double taxation by granting the power to impose on the contracting state of which the transferor is a resident, unless the shares are part of the assets of a permanent establishment that the foreign seller holds in Senegal.

There is no provision in Senegalese tax law for a change of control that may lead to a higher taxation of a foreign holding company compared to a company governed by national law.

Tax forms are available from tax authorities for determining taxpayer income.

The deduction of expenses is subject to the conditions of Article 8.II of the CGI. Under this article, the profit is established after deduction of all expenses fulfilling the following conditions:

  • that it be exposed in the direct interest of the company or be attached to the normal management of the company;
  • that it corresponds to an actual charge and is supported by sufficient justification;
  • that it results in a decrease in the net assets of the company;
  • that it be included in the expenses of the year in which they were incurred; and
  • that it contributes to the formation of a non-tax-exempt product based on profit.

As a result, management and administration fees are only deductible if the above conditions are met. For this purpose, a fair distribution key can help to convince the administration, which has a wide margin of appreciation in this area. The deduction is more permissible when the costs are re-invoiced by the parent company and not a subsidiary of the group.

In the case of a permanent establishment, Article 17 al.2 of the GTC prohibits the deduction of sums paid or due, other than for the reimbursement of expenses incurred, by the permanent establishment in the central office or at any of its offices as a royalty, honorarium or other similar payments or as commissions for specified services rendered or for a management activity, or as interest on money lent to the permanent establishment, except in the case of a banking business.

See 2.5 Imposed Limits on Deduction of Interest.

According to the principle of territoriality provided in Article 3 of the CGI, "corporate income tax is due on the basis of the profits made in Senegal. Profits from businesses operated in Senegal are deemed to be carried out in Senegal.” As a result, the foreign income of a Senegalese company is exempt from corporate income tax in Senegal because it is not achieved in Senegal.

The downside of the aforementioned territoriality principle is that expenses related to products made abroad are not deductible from profits made in Senegal. Also, under Article 8.II of the CGI, the expenses, to be deductible, must be exposed in the direct interest of the company or be attached to the normal management of the company subject to tax in Senegal.

In principle, the dividends of foreign subsidiaries of a Senegalese company are subject to the parent companies subsidiaries regime.

To benefit from this regime, certain conditions must be fulfilled; see 2.3 Other Special Incentives.

When these conditions are met, dividends received from a foreign subsidiary are deducted from total net income after deducting a proportionate share of the fees and expenses set at 5% of gross dividend income. However, the proportionate share must not exceed, for each tax period, the total amount of expenses and expenses of any kind incurred by the parent company during the said period.

Intangible assets owned by local companies and used by foreign subsidiaries in their activities must be remunerated for the benefit of the former. At the very least, the local company has to prove a sufficient interest that it derives from the making available of the assets to another independent company.

Failing this, the tax administration considers the transaction to be an abnormal management act and proceeds to readjust the taxable profit.

There is no specific provision in the Senegalese tax system for "controlled foreign companies" (CFC or SEC). However, other anti-abuse rules exist and are sometimes used by the tax authorities to offset this type of profit transfer. This is the case, for example, for Article 17 of the CGI, which provides that "for the establishment of the corporate income tax payable by companies that are dependent or who have control of companies located outside Senegal, profits indirectly transferred to the latter either by increasing or decreasing purchase or selling prices, or by under-capitalisation, or by any other means, are incorporated in the results recorded in the accounts".

Other provisions of this type appear in the CGI and are intended, in particular, to limit the deductibility of amounts paid to individuals or legal entities established in countries where they are subject to privileged tax regimes or in a non-cooperative country. In these types of situations, the debtor will have to produce the evidence that the expenses correspond to actual transactions and that they are not abnormal or exaggerated.

The same applies to all payments made to an account held in a financial institution established in one of the non-cooperative or tax haven states or territories.

In Senegal, there are no rules related to the substance of non-local affiliates.

A local business that realises a gain on the sale of shares of non-local subsidiaries is subject to corporation tax on the proceeds received.

The applicable regime depends on the fact that the surplus value is realised during its social life or at the end of exploitation.

For capital gains realised in the course of operations, when the shares correspond to fixed assets, the transferor may benefit from a staggered tax. However, for this, the taxpayer must make the commitment to reinvest in non-financial fixed assets in the companies established in Senegal of which he has the property – before the expiry of a period of three years from the closing of this exercise – an amount equal to the amount of these capital gains added to the cost price of the items sold.

Regarding capital gains realised on shares considered as fixed assets at the end of the operation or in the event of a partial sale of the business, they are included in the taxable profits for one-third of their amount. However, when the transfer or cessation occurs less than five years after the creation of the company, the capital gain is retained in the profits of the company for half of its amount.

When it is not a fixed asset, taxation is made at the normal rate of corporation tax at the same time as the other profits.

The declaration must be made within 30 days.

In addition, the act of transfer of shares must be subject to a registration fee of 1% on the market value of the shares (or on the stipulated price, if it is higher).

The General Tax Code contains numerous anti-tax avoidance provisions, as detailed below.

Transfer Price and Readjustment

Article 17.1 is the bedrock of the scheme to combat the indirect transfer of profits. It allows the administration to readjust the profits of an enterprise established in Senegal when it finds that part of these profits have been abnormally transferred to dependent entities residing in other states, often with lower taxation.

Thus, for the establishment of corporation tax owed by companies that are dependent or that have control of companies located outside Senegal, the profits indirectly transferred to them by raising or lowering purchase or sale, either by under-capitalisation or by any other means, are incorporated in the results recorded in the accounts.

Transfer Price and Payment Ban from the Permanent Establishment to the Head Office

Article 17.2 of the CGI confirms the tax impossibility for a permanent establishment to pay for its head office. This means that the legislature considers that there is only one entity between the foreign head office and its permanent establishment in Senegal. Thus, it excludes, for the deduction of corporation tax expenses of the permanent establishment, sums paid or owed, other than the reimbursement of expenses incurred, by the permanent establishment at the head office of the permanent establishment, the legal person or any of its offices, as royalties, fees, or other similar payments, for the use of patents or other rights, or as commissions for specific services rendered or for a management activity or except in the case of a banking enterprise, as interest on money lent to the permanent establishment.

Obligation of Documentation

Article 31 bis, 31 ter and 638 of the General Tax Code establish a documentation requirement to allow the tax administration to control prices charged in the context of transactions of any kind carried out with foreign companies.

Two types of declarations must be distinguished.

Declaration on the company, its transactions and the group

The transfer price documentation applies to a specific category of taxpayers but also its content is well defined.

  • Targeted businesses – the obligation of documentation applies to the legal person established in Senegal if:
    1. it has an annual turnover excluding tax or a gross asset of at least XOF5 billion; or
    2. it holds at the end of the financial year, directly or indirectly, more than half of the capital or voting rights of a company established or incorporated in or outside Senegal, fulfilling the condition mentioned in (a); or
    3. more than half of its capital or voting rights is held at the end of the financial year, directly or indirectly, by a company fulfilling the condition mentioned in (a).
  • Contents of the documentation – at the same time as the declaration of result, which must take place no later than April 30th each year, the aforementioned legal person must subscribe to a declaration containing the following information.
    1. General information on the related corporate group:
      1. a general description of the activity deployed, including changes during the year;
      2. a list of the main intangible assets held by one or more related companies and used by the reporting enterprise as well as the state or jurisdiction of the company owning the assets; and
      3. a general description of the group's transfer pricing policy and changes during the year.
    2. Specific information concerning the reporting company:
      1. a description of the activity deployed, showing the changes that occurred during the year;
      2. a summary of transactions with related companies;
      3. information on loans and borrowings with related companies; and
      4. information on transactions with related companies that are the subject of prior price agreements or tax rulings concluded with another state or jurisdiction.
  • Additional documentation – when transactions of all types are carried out with one or more related companies, established in a non-cooperative state or territory, the required documentation also includes, for each of these related companies, additional documentation, including all the documents that are required of companies subject to corporation tax, including the balance sheet and the income statement.

Country-by country declaration

Senegal is making significant efforts to improve tax transparency. Law 2018-10 of 30 March 2018 introduced into the General Tax Code the country-by-country reporting requirement, which is one of the OECD's recommendations to eradicate transfer pricing.

Thus, in accordance with Article 31 ter of the CGI, a declaration containing the country-by-country breakdown of the group's profits and the economic, accounting and tax aggregates, as well as information on the location and activity of the constituent entities, is subscribed in dematerialised form, within 12 months following the end of the financial year, by legal entities established in Senegal that meet the following criteria:

  • they prepare consolidated accounts;
  • they hold or control, directly or indirectly, one or more legal entities established outside Senegal or have branches there;
  • they achieve a consolidated annual turnover, excluding taxes, greater than or equal to XOF491 billion in the year preceding that to which the declaration relates; and
  • they are not held by a legal entity or entities located in Senegal and required to file this declaration, or established outside Senegal and required to file a similar declaration pursuant to foreign regulations.

This same declaration is required of legal persons established in Senegal and held or controlled by a legal person established in a state or territory that has not signed with Senegal an agreement allowing automatic exchange of declarations country-by-country; a list of these states will have to be decided by the Minister of Finance.

The Limitation of Sums Paid into a Privileged Tax System

Senegal also has in its General Tax Code a mechanism allowing the tax administration to reject the deduction, from the corporation tax, of sums paid by natural or legal persons domiciled or established in Senegal to natural persons or corporations domiciled or established in a foreign state or territory outside Senegal and subject to a privileged tax regime, or a non-cooperative country. In this case, in order to be able to deduct the expenses in question, the debtor must prove that they correspond to real transactions and that they are not abnormal or exaggerated (see Article 18 of the CGI).

The covered expenses concern the interest, arrears and other products of the bonds, the receivables deposits and securities, the royalties of cession or concession of the licences of exploitation, patents, trade marks, processes or formulas of manufacture and other rights analogous or payment for services.

The same applies to any payment made to an account held in a financial institution established in a non-cooperative or privileged state or territory.

Persons are considered to be subject to a preferential tax regime in the state or territory in question if they are not taxable there or if they are subject to taxes on profits or income that would have been liable to conditions of common law in Senegal, had they been domiciled or established there.

States and territories that do not comply with international standards for transparency and the exchange of information in the tax field are considered as non-cooperative, so as to promote the administrative assistance necessary for the application of the legislation. The list of so-called non-cooperative states shall be fixed by decision of the Minister of Finance.

The Limitation of the Deductibility of Financial Charges

Please see 2.5 Imposed Limits on Deduction of Interest.

High Taxation of Non-identified Persons

Corporations and limited liability companies that, directly or indirectly, pay to persons whose identity they do not disclose, commissions, brokerage, commercial or non-commercial rebates, bonuses and any other remuneration are subject to income tax on the basis of the total amount of these sums. A tax rate of 40% without deduction is applied to these amounts paid.

Abuse of Rights

Article 610 of the CGI is a general anti-abuse provision often used by the administration to re-qualify agreements made between taxpayers. Under this article, the qualifications given by the persons subject to the operations and acts they carry out are not opposable to the tax administration, which has the right to give them back their true qualification.

Additionally, any transactions, concluded in the form of a contract or any legal act and concealing or disguising a realisation or a transfer of profits or income, carried out directly or by intermediaries are not opposable to the tax administration. This is also the case for acts giving rise to lower registration fees or to avoid in whole or in part the payment of turnover taxes.

Note that in the case of abuse of rights and in the case of swindling, concealment or bad faith in the declaration, payment or repayment of any taxes, duties and taxes or fees, the applicable penalty is 50%.

The Theory of the Abnormal Act of Management

Please see 4.4 Transfer Pricing Issues.

The tax legislator has provided for a system of monitoring taxpayers' compliance with their tax obligations, which is summarised as follows.

  • Request for information and justification – the tax administration may ask the taxpayer, verbally or in writing, for all the information, justifications or clarifications that it deems useful.
  • Right of communication – the tax administration has the right to obtain communication of all titles, documents of receipts, expenses and accounts, of any policy concerning insurance in progress or renewed by tacit renewal or come to expiry, books, titles, registers, ancillary documents, and any other document that may be used for the control of the tax, whatever their medium, when their preservation is obligatory.
  • Right of access – in order to investigate and find violations of tax laws, tax and sworn estate agents may make visits to any place, even private, where the documents, objects or goods relating to these offences as well as property and assets derived directly or indirectly from them that are likely to be held and proceed to their seizure, regardless of the medium; such agents are accompanied by a judicial police officer.
  • Right of inquiry – in order to investigate violations of the billing rules, sworn tax agents have the right to collect information or justifications on the basis of documents or summons.
  • Documentary control – it is the task of the tax administration to check on the spot the statements that are filed by the taxpayer in order to verify their accuracy and sincerity. The control may also be based on the other documents filed for the establishment of taxes, duties and fees. In the context of this control, the tax authorities must not ask for details of the accounts, such as invoices, payslips and cash notes.
  • On-the-spot control – the administration can take an unexpected control of the physical elements of the exploitation, the existence or the state of accounting documents. It can also have an on-the-spot accounting check carried out on the accounts and the documents held by the taxpayers, and control the taxes, duties and royalties.

Periodicity of Controls

When the audit of the accounting for a specified period is completed, the tax administration cannot carry out a new on-site audit for the same period on the taxes, duties and fees that have been the subject of the preceding completed audit.

However, in the event of discovery of a new element or document subsequent to the on-the-spot check, the tax administration is entitled to initiate a new verification procedure or to issue rights reminders relating to the period already verified. Also, this prohibition on renewing an audit does not apply where only part of the activity of the person liable, or an aspect of that activity, has been verified or where an automatic taxation has followed a refusal by the taxpayer to submit requested documents.

Period of Resumption of Administration

The tax administration has a period of four years from the date of the infringement to establish and sanction the failings committed by taxpayers and taxable persons. This four-year period is not applicable in the event of an error made either on the nature of the tax applicable or on the place of taxation, where the taxpayer is engaged in a covert activity, in the event of omissions or shortcomings of the tax imposed by a court proceeding or a litigation claim. It is the same in the case of a request for information to another state.

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There are no other general comments in this jurisdiction.

Houda Law Firm

66 boulevard de la République
Immeuble Seydou Nourou Tall, 1st Floor
BP11417 Dakar
Senegal

+ 221 33 821 47 22

+ 221 33 821 45 43

houda@avocatshouda.com www.avocatshouda.com
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Law and Practice

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Houda Law Firm was founded in 1977 in Dakar, Senegal, and consists of a 42-person staff, half of which are specialised and highly qualified lawyers and legal advisers working to assist clients, such as private companies, public entities and individuals, with all of their legal needs in Senegal and West African Economic and Monetary Union (WAEMU) member states. The firm has recently opened a branch in Abidjan, Ivory Coast, which made it the first foreign law firm from the WAEMU region established in the country. The team works on matters related to company incorporation, investment, employment law, taxation, business litigation and arbitration. The firm is in the process of finalising ISO 9000-2015 Certification.

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