Businesses in Zambia generally adopt a corporate form. There are two main alternative forms of corporate structures – public companies and private companies, which could be structured into any of the following categories:
Except for partnerships, these are all taxed as separate legal entities.
The key differences are as follows:
Irrespective of the category, all companies are taxed similarly. However, business names (partnerships and sole proprietorships) are taxed differently from companies.
A private company limited by shares is commonly used. Investment entities, including private equity and hedge funds, prefer the route of a private company limited by shares, for the following reasons:
The test used for determining the residence of incorporated entities as well as transparent entities is whether the management and control of the entity’s business or affairs are within Zambia.
Incorporated businesses are subject to corporation tax, which is currently 35%. The tax rate for partnerships/business names or sole proprietorships is the rate of tax charged on individuals. The current top tax rate is 37.5% for any annual income in excess of ZMW72,000 (USD6,000) (on the basis of today’s exchange rate of ZMW14 to USD1).
Taxable profits are calculated after deducting any losses and expenditure (other than those of a capital nature) incurred in a charge year wholly and exclusively for the business, and/or any expense that may be allowable in terms of the Zambian Income Tax Act Chapter 323 of the Laws of Zambia (“the Income Tax Act”).
Taxable profits are based on the accounting profits realised after taking into account revenue expenses wholly and exclusively incurred in earning revenue.
Capital allowances and profits are taxed on an accrual basis.
The “deduction for research” is an incentive under the Income Tax Act, which applies to expenditure (not of a capital nature) incurred by a business in a charge year on experiments or research relating to the business.
There are no special tax incentives accorded to businesses in the financial services sector.
For mining operations or businesses in electricity generation, losses made may be carried on from year to year, up to a maximum period of ten years. For any other business, the losses made can only be carried forward for a maximum period of up to five years.
Generally, there are no limits imposed generally on the deduction of interest by local corporations.
Consolidated tax grouping is not permitted, so groups of companies cannot utilise separate company losses.
There is no capital gains tax in Zambia. However, if a company sells shares that it owns in another company, the selling company (“vendor”) will be liable to pay property transfer tax in accordance with the Property Transfer Tax Act, Chapter 340 of the Laws of Zambia (“the Property Transfer Tax Act”) at the rate of 5% of the realised value of the shares. The realised value is determined as the price at which the share could have been reasonably sold on the open market at the time of transfer as determined by the Commissioner General of the Zambia Revenue Authority or its nominal value, whichever is greater.
If an incorporated business is selling land, it will be required as vendor to pay property transfer tax on the sale of that land. According to the Property Transfer Tax Act, this should be at the rate of 5%.
Mining companies are required to pay the following:
Closely held businesses mostly operate in corporate form.
The local rules and legislation that govern professionals do not allow them to practise as corporate entities to the extent that they are separate and distinct entities from their practice.
There are no rules that prevent closely held corporations from accumulating earnings for investment purposes.
A company that declares and pays dividends will have to deduct withholding tax at the rate of 20% and obtain a withholding tax certificate. The withholding tax will be treated as an advance payment by the individual shareholder to the extent that, when the aggregate income of the shareholder is calculated in a charge year after the submission of the annual tax return, the withholding tax will be treated as a credit towards the final tax liability.
If an individual shareholder sells shares in a corporation, property transfer tax will apply, at the rate of 5%.
Dividends on shares in publicly traded companies are subject to withholding tax at the rate of 20%. The sale of shares in a publicly traded company is not subject to any tax under the Property Transfer Tax Act.
In the absence of income tax treaties, the law in Zambia provides for withholding tax on interest, dividends and royalties on all income earned or deemed to be from a source within the Republic. The withholding tax on interest, dividends and royalties is charged at a rate of 15% for residents and 20% for non-residents.
In the absence of income tax treaties, there is no relief.
The primary tax treaty countries used by foreign investors to make investments in local corporate stock or debt are as follows:
Local tax authorities do not challenge the use of treaty country entities by non-treaty country residents.
The biggest transfer pricing issue for inbound investors who operate through local corporations or subsidiaries is whether the loans granted by the investors to their associated local corporations, or whether the goods supplied and/or services rendered by the investors to the local subsidiary’s, are on an “arm’s-length basis".
Local tax authorities challenge the use of related party limited risk distribution arrangements for the sale of goods and the provision of services locally.
Zambia's local transfer pricing rules and/or enforcement do not vary from the OECD standards in the sense that Zambia recently promulgated the 2018 Transfer Pricing (Amendment) Regulations, Statutory Instrument No. 24 of 2018 (the “Regulations”), which are construed in a manner that is consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as supplemented and updated from time to time.
Compensating adjustments are allowed/made when a transfer pricing claim is settled. There are no difficulties in operating a Mutual Agreement Procedure (MAP) where a transfer pricing claim applies, as long as the MAP is available in a Double Taxation Agreement.
There is no difference in the way local branches of non-local corporations and local subsidiaries of non-local corporations are taxed.
There is no capital gains tax in Zambia. However, if a non-resident sells shares in a company in Zambia, property transfer tax on the value of the sale will apply, at 5%. If the shares are in a publicly listed and traded company, there will be no property transfer tax.
There are no change of control provisions that could apply to trigger tax or duty charges.
No formulas are used because local affiliates of foreign-owned companies are treated as independent entities that are selling goods and services in Zambia.
If a local affiliate makes a payment for management and administrative expenses incurred by a non-local affiliate, in order for the expense to be allowed as a deduction, the local affiliate should be able to demonstrate that the transaction is on an “arm’s length” basis, in accordance with the Transfer Pricing Regulations.
The only restriction is that the interest rates charged by non-local affiliates to local affiliates should be on an “arm’s length” basis.
Zambian income taxation is based on the principles of “residence” and “source”. Corporate tax will not be imposed on a local corporation’s income that is not derived from a source within Zambia or not deemed to be derived within Zambia. However, interest and dividends received by local corporations from a source outside Zambia will be subject to Zambian corporate tax.
The following are non-deductible expenses as prescribed under the Income Tax Act:
Dividends from foreign subsidiaries of local corporations are taxed at the standard corporate tax rate of 35% on the basis that they constitute income accruing to the local corporation.
Intangibles developed by local corporations can be used by non-local subsidiaries in their business without incurring local corporate tax, as there are no regulations covering this.
There is no tax on local corporations in respect of the income of their non-local subsidiaries; this also applies to non-local branches of local corporations.
No rules related to the substance of non-local affiliates apply.
If a local corporation receives income on the sale of shares in a non-local affiliate, it will be considered as income and will be subject to local corporate tax.
There are overarching anti-avoidance provisions whereby if the Commissioner-General of the Zambia Revenue Authority has reasonable grounds to believe that the main purpose or one of the main purposes of any transaction was 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, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as regards liability for tax as he considers appropriate to counteract the avoidance or reduction of liability for tax that would otherwise be effected by the transaction.
The routine audit cycles by the Zambia Revenue Authority are as follows:
The recommended BEPS changes that have already been implemented are as follows:
In 2017, the Zambian government joined the Inclusive Framework on Base Erosion and Profit Shifting and agreed to adopt the BEPS project agreement, the country-by-country reporting measures to prevent tax treaty shopping and also the minimum standards that were set out by OECD and G20 nations in 2015.
By so doing, the Zambian government aims to increase the government’s tax revenue payments and reduce the tax burden on easy-to-pay taxes by creating an atmosphere of fairness among the companies that are liable for tax, which it is hoped will lead to voluntary compliance.
International tax is certainly an issue that preoccupies the tax authorities and multinationals operating in Zambia. However, there is not much intense public scrutiny or interest that could have an influence on BEPS recommendations.
The Zambian government is under intense pressure to raise revenue to plug the fiscal deficit experienced in the recent past. On account of this, there will always be a challenge to keep marginal tax rates low, which is not consistent with a competitive tax code. Furthermore, because of the fiscal pressure, there is a constant review of legislation that may not create predictability and certainty, which is an incentive for tax avoidance.
There are no key features of the Zambian competitive tax system that might be more vulnerable than other areas of the tax regime.
The current provisions of the Zambian Income Tax Act have dealt with hybrid instruments and the BEPS process that has been implemented through the Transfer Pricing Regulations of 2018. In this regard, the changes recommended will not have any significant impact on how the authority deals with hybrid instruments.
Zambia has a territorial tax regime, and interest deductibility restrictions are tailored to this regime.
The CFC proposals would be defective in Zambia to the extent that Zambian legislation is intended to cover Zambian income or income deemed to be Zambian income because it is earned by entities resident in Zambia.
Under current Zambian legislation, a proposal that the profits of subsidiaries that are taxed at low rates should be subject to CFC apportionment would not be workable.
The proposed DTC limitation of benefit and anti-avoidance rules are not likely to have any impact in Zambia.
Transfer pricing changes have not made a radical change to the Zambian tax regime. The taxation of profits from intellectual property is not a particular source of controversy in Zambia.
Zambia is in favour of the proposals for transparency and country-by-country reporting, as they will help Zambian tax authorities deal with profit shifting and avoidance by local corporates affiliated to multinational enterprises.
There are currently no changes being made or discussed in relation to the taxation of transactions effected or profits generated by digital economy businesses operating largely from outside Zambia.
The country has not yet taken a position in relation to the BEPS proposals for digital taxation, and there is no legislation in place at the moment.
Payments in respect of royalties for the use of intellectual property from a source within Zambia or deemed to be within Zambia to a non-resident are subject to withholding tax at the rate of 20%.
The BEPS process is welcome as it is creating a regime that will help Zambian tax authorities combat tax avoidance by multinational enterprises with local affiliates and, to that extent, spread the burden of paying taxes equitably.