Businesses in Zambia generally adopt a corporate form. The two main alternative forms of corporate structures are 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:
Regardless 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 businesses and transparent entities is whether they are incorporated or formed under the laws of Zambia, or whether the place of effective management and control of the entity’s business or affairs is within Zambia for the charge year.
Incorporated businesses are subject to corporation tax, which is currently 35%.
Income earned by hotels and lodges on accommodation and food services will be taxed at a reduced rate of 15% for the charge year 2021. This reduction was introduced in order to provide tax relief to hotels and lodges as a result of decreased income due to the COVID-19 pandemic.
The tax rate for partnerships/business names or sole proprietorships is the rate of tax applied to individuals. The current top tax rate is 37.5% for any annual income in excess of ZMW82,800 (approximately USD3,887).
The presumptive tax on a person carrying on the business of betting and gaming is as follows:
For the purposes of betting and gaming, “net proceeds” means the gross proceeds minus sums paid out for the prizes; “gross takings” means the total amount staked by players minus winnings payable.
Taxable profits are calculated after deducting any losses and expenditure incurred in a charge year wholly and exclusively for the business, other than those of a capital nature, and/or any expense that may be allowable in terms of the 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 revenue expenses wholly and exclusively incurred in earning revenue into account.
Capital allowances are deductions that businesses can claim for wear and tear of qualifying fixed assets bought and used in a trade or business. Qualifying fixed assets include:
The Income Tax Act permits a “deduction for research” as an incentive. This applies to expenditure, not of a capital nature, that is incurred by a business in a charge year on experiments or research relating to the business.
There are no other special incentives that apply to particular industries, transactions or businesses.
Losses that are not of a capital nature are deductible from a business’s gains or profits.
For mining operations or businesses involved in the generation of electricity, losses may be carried forward from year to year, for a maximum of ten years.
For all other businesses, such losses can only be carried forward for a maximum period of five years.
Deductibility of gross interest expense is limited to 30% of a company’s tax earnings before interest, tax, depreciation and amortisation (EBITDA) and cannot be carried forward for more than five years. This limit excludes businesses on the turnover tax system and taxpayers engaged under the Banking and Financial Services Act.
Consolidated tax grouping is not permitted under the Income Tax Act. Groups of companies cannot utilise separate company losses.
There is no taxation on capital gains in Zambia. However, if a company sells shares that it owns in another company, the vendor will be liable for the payment of property transfer tax in accordance with the Property Transfer Tax Act Chapter 340 of the Laws of Zambia, at a rate of 5% of the realised value of the shares.
The realised value is the price at which the share could have been reasonably sold on the open market at the time of the transfer as determined by the Commissioner General of the Zambia Revenue Authority or its nominal value, whichever is greater.
Pursuant to the Property Transfer Tax Act, the sale of land results in the vendor paying property transfer tax on the land. The rate of tax in this instance is 5% of the realised value of the land or the price at which the land could have been sold on the open market at the time of the transfer as determined by the Commissioner General of the Zambia Revenue Authority, whichever is greater.
Mining companies are required to pay the following taxes:
Closely held businesses mostly operate in corporate form.
The legislation and rules that govern professionals in Zambia do not permit 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 a rate of 20% and obtain a withholding tax certificate from the Zambia Revenue Authority. 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 the 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 their shares in a corporation, property transfer tax will apply at a rate of 5% of the realised value.
Dividends on shares in publicly traded companies are subject to withholding tax at a rate of 20%.
The sale of shares in publicly traded companies is not subject to any tax under the Property Transfer Tax Act.
In the absence of income tax treaties, Zambian law provides for withholding tax on interest, dividends and royalties on all income earned or deemed to be from a source within Zambia. The withholding tax on interest, dividends and royalties is charged at a rate of 15% for Zambian residents and 20% for non-residents.
In the absence of income tax treaties, there are no reliefs available.
The primary tax treaty countries used by foreign investors to make investments in Zambian 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 primary 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 the goods and/or services rendered by the investors to the local subsidiaries – are done so 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.
Where there is a double taxation treaty in force between the jurisdictions of the parties to a controlled transaction, the provisions of that treaty will prevail over the provisions of the Income Tax Act in the resolution of any dispute concerning international transfer pricing. The use of the mutual agreement procedure (MAP) is only permissible where it is contained in a double taxation agreement. Given the lack of case law pertaining to transfer pricing disputes and the fact that the Zambia Revenue Authority does not release information on such disputes, it is difficult to state with certainty how often international transfer pricing disputes are resolved through double taxation treaties and MAPs.
Compensating adjustments are allowed/made when a transfer pricing claim is settled. There are no difficulties in operating a 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 a rate of 5% of the realised value of the shares.
Property transfer tax at the 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 the company incorporated in the Republic by the company incorporated outside the Republic, expressed as a percentage.
There is an exemption from the payment of property transfer tax for indirect transfers arising out of a group reorganisation that does not result in any change in the effective shareholding of the Zambian entity. However, the exemption is only available to companies that have been part of the group of companies for at least three years preceding the group restructuring.
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 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, the local affiliate should be able to demonstrate that the transaction is on an “arm’s-length” basis in order for the expense to be allowed as a deduction, 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 charged on an “arm’s-length” basis in accordance with the Transfer Pricing Regulations.
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 the 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 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 recommended changes 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 double taxation convention 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%.
On 25 September 2020, the Minister of Finance Dr. Bwalya Ngandu delivered a ZMW119.6 billion (approximately USD5.5 billion) budget with the theme “Stimulate Economic Recovery and Build Resilience to Safeguard Livelihoods and Protect the Vulnerable.” This was the first national budget following the outbreak of the COVID-19 pandemic and, according to the Minister, the focus in the medium-term will be on containing the spread of the virus, mitigating the effects of the pandemic and restoring macroeconomic stability as well as growth.
As is customary following the delivery of the national budget, various amendments to the fiscal statutes came into force on 1 January 2021. This article covers the measures that have been introduced to take effect from 1 January 2021, as well as both direct and indirect taxes applicable to corporate entities in Zambia.
Corporate Income Tax
Corporate Income Tax in Zambia is anchored on the principles of source and residence. Income deemed to be from a Zambian source is subject to Zambian income tax. In addition, the residence of an entity in Zambia will widen the scope of taxation to include interest and dividend income from abroad. A person falling within the definition of residence in Zambia for tax purposes is subject to income tax on interest and dividends from a source outside Zambia. A non-Zambian resident enterprise that has a permanent establishment in Zambia will be subject to corporate income tax on its income derived in Zambia. If the non-resident enterprise does not have a permanent establishment in Zambia, the income of the non-Zambian resident earned in Zambia may still be subject to Withholding Tax (WHT), which is deducted at source.
The Income Tax Amendment Act No 20 of 2020 sets out the amendments to the Income Tax Act, which took effect on 1 January 2021 and are summarised below.
Adjustment to Corporate Income Tax rates
The rate of Corporate Income Tax on income earned by hotels and lodges on accommodation and food services has been reduced to 15% from the standard rate of 35%. According to the Minister of Finance in his budget address, this move was aimed at resuscitating the tourism sector and promoting local tourism given the impact that COVID-19 has had on the Zambian tourism industry.
The rate of presumptive tax on an entity carrying on the business of gaming and betting has been increased from 10% to 25%.
The Zambian Transfer Pricing Regulations have been amended to revise the threshold for the preparation of transfer pricing documentation in Zambia and to introduce the submission of a Country-by-Country (CbC) Report.
The threshold for the preparation of transfer pricing documentation for local companies has been increased. The previous threshold covered entities with an annual turnover of ZMW20 million, but the adjusted threshold is now ZMW50 million (approximately USD2.3 million).
With respect to the new requirement to file a CbC report, an ultimate parent entity that is tax resident in Zambia and has consolidated group revenue of EUR750 million or ZMW19.63 billion in the previous accounting year is required to file a CbC report with the Commissioner General, 12 months after the last day of the reporting year of the multinational enterprise with respect to that reporting accounting year.
Specific terminology and definitions have been provided for relating to CbC reporting, a specific template has been provided for the CbC report and specific regulations have been issued for guidance.
The regulations take effect from the charge year ending on 31 December 2021, and each subsequent charge year.
The Income Tax Act was amended to clarify the rule limiting interest expense deductibility for income tax purposes. Prior to the amendment, interest expense was limited to 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA). The amendment to the rule clarifies that the limitation applies to gross interest on loans.
A further amendment was introduced to extend the obligation to furnish information to the Zambia Revenue Authority (the ZRA). The amendment provides that the obligation to furnish information extends to information that might be held outside Zambia or by a person that is not a Zambian resident. The Income Tax Amendment Act further provides that a person who fails to furnish a record that has been requested shall be barred from using that record to challenge an assessment before a court or tribunal. This change appears to be intended to enhance full disclosure by taxpayers when submitting their tax returns.
Adjustment of development allowance period
The Income Tax Act provides for an allowance of 10% annually for expenditure incurred for the growing of rose flowers, tea, coffee and citrus fruit trees, among others. For persons growing these plants for the first time, the expenditure incurred is not deductible and may be carried forward to the following charge year, up to the first year of production. The allowance was previously claimable for three consecutive years. The period of claim has now been extended from three to five years.
Introduction of local content allowance on agricultural produce
A provision has been added to the Income Tax Act to allow for the deduction of a local content allowance of 2% of expenditure incurred, other than that of a capital nature, for the growing or purchase of agricultural products by companies carrying on agro-processing or manufacturing in a particular charge year. The local content allowance may be claimed for a period not exceeding three years. This appears to be aimed at encouraging local agricultural production.
Taxation of mining entities
The Mines and Minerals Development Act has been amended to introduce a provision stating that the Mineral Royalty Tax (MRT) may be paid in advance as prescribed. Previously the MRT was payable 14 days after the month in which the sale of the mineral occurred. The regulations governing the prepayment of MRT are yet to be promulgated.
In order to encourage local processing, import duty on copper ores and concentrates has been removed.
Changes to Indirect Taxes
Value-added tax (VAT) is charged on any transaction relating to the sale of goods and services conducted in Zambia. It is important to note that services procured outside of Zambia but used in the country are subject to a reverse charge VAT if the provider of a service does not appoint a tax agent in Zambia. The current rate for VAT in Zambia is 16%.
The Value Added Tax Amendment Act No 23 of 2020 sets out the new amendments to the VAT Act, effective from 1 January 2021.
There has been an increase in the fines payable for evasion of VAT, and for late payment. There has been an amendment to provide for an escalatory fine for filing false returns and statements. In addition, the penalty for tax evasion in respect of the supply and importation of goods and services has been increased from 30,000 penalty units to 300,000 penalty units (ZMW9,000 to ZMW90,000 – USD400 to USD4,000).
Under the VAT Act, the Minister of Finance has issued amendments to the VAT (Zero) Rating Order to introduce new items to be zero rated. These items fall under Group 12 (Petroleum products) of the VAT (Zero) Rating Order and specifically include petrol and diesel. The VAT (Zero rating) Order specifies certain goods and services that are to be taxed at 0%. The zero rating of petroleum products is aimed at cushioning the impact of the depreciation of the local currency on the consumer price of petroleum products.
Customs and excise
The Customs and Excise Act governs customs and excise duty. Excise duty is a tax on particular goods or products, whether imported or produced domestically, imposed at any stage of production or distribution, by reference to the weight, strength or quantity of the goods or products, or by reference to their value. Customs duty is charged on the importation of goods. The Customs and Excise (Amendment) Act No 21 of 2021 sets out the tax changes, which are effective from 1 January 2021.
Duty on importation of electric motor vehicles
Customs duty on the importation of electric motor vehicles has been reduced from 30% to 15%, in an effort to encourage the use of electric motor vehicles and reduce the use of fossil fuel.
Increase in duty on certain agricultural products
Customs duty has been increased from 25% to 40% on the following agricultural products:
The stated aim of this measure is to support local agricultural production.
Suspension of customs duty on tourism vehicles
In a move aimed at spurring the local tourism industry, the previously applicable 15% customs duty on tourist buses and coaches and safari game viewing vehicles has been suspended for a specified period of one year, effective from 1 January 2021.
Excise duty at the rate of ZMW1.50 per litre has been introduced on reconstituted milk, and the customs duty rate for powdered milk has been harmonised at 15%. The amendment is intended to stimulate the local dairy sector.
There has also been a removal of the 10% export duty on crocodile skins.
Property transfer tax
The Property Transfer Tax Act (PTT Act) prescribes a tax of 5% of the realised value on the transfer of land, mining rights and shares.
With respect to shares, property transfer tax is also payable on indirect transfers – ie, transfers of shares in a holding company incorporated outside Zambia that holds at least 10% of the issued shares in a company incorporated in Zambia.
The Property Transfer Tax Amendment Act No 22 of 2021 has introduced amendments to the Act, which are effective from 1 January 2021.
The PTT Act has been amended to redefine the method for determining the realised value on the indirect transfer of shares. This is in order to capture only the Zambia proportion of the value of the consideration or the nominal value.
A further amendment has been made to prescribe the exchange rate applicable to foreign currency-denominated transactions, which will be the appropriate Bank of Zambia mid-rate as at the end of the day immediately preceding the day on which the provisional return is submitted.
Other Key Developments
Double taxation agreements
In June 2020, the government of the republic of Zambia resolved to terminate the double taxation agreement (DTA) with Mauritius. The termination took effect in Zambia on 31 December 2020. The DTA covered income from a number of specific sources and provided for reduced rates of withholding tax, as follows:
No new DTA has been entered into between Zambia and Mauritius.
A new DTA between Zambia and Switzerland came into force on 26 October 2020, replacing the previous one that had been in force since 1959. The previous DTA provided for 0% deduction of withholding tax on dividends, interest, management fees and technical fees earned in a contracting state. Under the new DTA, the rates of withholding tax on income earned in a contracting state are limited as follows: