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 30%.
Income earned by hotels and lodges on accommodation and food services will be taxed at a reduced rate of 15% for the charge years 2021 and 2022. This reduction was introduced in order to provide tax relief to hotels and lodges that suffered 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 USD4,464.332).
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 the winnings payable and redemptions by the players.
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.
The 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. However, for companies carrying on mining operations or electricity generation, the disallowed interest deduction cannot be carried forward for more than ten 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 capital gains tax in Zambia; however, if a resident or non-resident sells property in Zambia, the provisions of the Property Transfer Tax Act Chapter 340 of the Laws of Zambia will apply.
“Property” is defined as:
The tax rates are as follows:
Property Transfer Tax at a rate of 5% of the realised value is also payable on the transfer of any shares in a non-resident holding company that holds at least 10% of the issued shares in a company incorporated in Zambia. The realised value for the transfer of shares in a non-resident company is limited to the value of the effective shareholding in the Zambian entity. Effective shareholding is defined as the extent of control or ownership in a company incorporated in Zambia by the company incorporated outside Zambia, expressed as a percentage.
To encourage the uptake of reinsurance from local Zambian firms and further develop the industry, withholding tax at the rate of 20% is paid on reinsurance premiums to a recipient not registered in Zambia.
Insurance Premium Levy is imposed on all insurance premiums for all classes of insurance business excluding reinsurance, at the current rate of 5%.
The Income Tax Act provides for the following maximum tax rates for turnover received by a person or partnership from the letting of property:
This applies to a landlord or a person or partnership who is appointed by the Commissioner-General as withholding agent.
Mining companies are required to pay mineral royalty, which varies depending on the type of mineral, as follows:
Mineral royalty is deductible for corporate income tax purposes.
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 the following:
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. Zambia recently made amendments to the Income Tax (Transfer Pricing) Regulations 2000 when it promulgated the 2018 Transfer Pricing (Amendment) Regulations, the 2020 Transfer Pricing (Amendment) Regulations and the 2021 Transfer Pricing (Amendment) Regulations. As a result, the Income Tax (Transfer Pricing) Regulations 2000 are now 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 consecutive 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 30% 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.
There are currently no changes being made or discussed in relation to the Two-Pillar model; however, tackling BEPS is one of the key priorities of the Zambian government, as can be seen from the regular amendments to the Transfer Pricing Regulations, to align them with the OECD Transfer Pricing Guidelines for multinational entities. Therefore, as the Two-Pillar model will benefit the country, the tax authorities are likely to implement it to some extent. However, Pillar 2 will introduce a global minimum corporate tax rate of 15%, which would not have a significant impact on Zambia, where the corporate tax rate for local and foreign companies is 30%. Being primarily focused on reallocating taxing rights among states, with respect to digital companies, Pillar 1 is a model that the tax authorities would consider giving effect to as services offered by multinational entity digital companies are widely used in Zambia; therefore, taxing these companies would increase Zambia’s revenue growth.
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. Zambia does not have state aid rules or other similar constraints.
The current provisions of the Zambian Income Tax Act have dealt with hybrid instruments and the BEPS process, which has been implemented through the Transfer Pricing Regulations of 2000 as amended in 2018, 2020 and 2022. 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.
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 currently in favour of the proposal provisions 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. In Zambia, country-by-country reporting only applies to multinational enterprise groups with business entities in two or more states and an annual consolidated revenue exceeding ZMW4.795 billion during the immediately preceding accounting year.
The filing requirements are applicable to Zambian tax resident entities of multinational enterprise groups for tax years ending on 31 December and each subsequent tax year. Country-by-country reporting provides for the automatic exchange of the country-by-country reports among tax administrations in jurisdictions in which the multinational enterprise group operates.
To align with international practice relating to country-by-country reporting, multinational enterprises are required to provide the following information:
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%.
Corporate Tax in Zambia
President Hakainde Hichilema was inaugurated as the seventh President of the Republic of Zambia on 24 August 2021. In his inauguration speech, the President advised that the government was committed to making the necessary administrative changes to achieve development in Zambia, for the purpose of reviving Zambia’s economy.
Following this, the Minister of Finance and National Planning (the Minister) presented the National Budget for the Fiscal Year 2022 (the Budget Address) to the National Assembly on 29 October 2021. The theme of the Budget Address was “Growth, Jobs and Taking Development Closer to the People”, and it set both the tone and the tempo of the government's intention to pursue economic and social transformation for Zambia.
The significant tax developments for the Fiscal Year 2022 include the following.
New Investment Incentives
To attract investment to Zambia and help secure value addition, the government has strengthened the Multi-Facility Economic Zones (MFEZs) and industrial parks programme. MFEZs and industrial parks are areas or premises declared as such in which industrial and commercial activities take place, catering for both export and domestic-oriented industries. They normally attract investment through the provision of tax incentives.
The government has amended the Income Tax Act, Chapter 323 of the Laws of Zambia (the Income Tax Act) to provide that tax on income earned from the exports of a business enterprise approved by the Zambia Development Agency and the carrying on manufacturing activities in a MFEZ or an industrial park shall be charged as follows:
The Income Tax Act has further been amended to provide that tax at the rate of 0% per annum is deductible from dividends paid by a company operating in an MFEZ or industrial park under the Zambia Development Agency Act No 11 of 2006 (ZDA Act) on profits made on exports, and for ten years from the commencement of works in the MFEZ or industrial park under the ZDA Act.
To ensure that Zambian citizens qualify for these incentives, the threshold for local investors to qualify for the incentives has been reduced to an investment of not less than USD50,000 or the equivalent in convertible currency, in a priority sector, while the threshold for a foreign investor to qualify for the incentives is an investment of not less than USD500,000 or the equivalent in convertible currency, in a priority sector.
To allow companies to retain some funds for further investments as well as attract foreign direct investment, the standard corporate income tax rate has been reduced to 30% from 35%.
The Mining Industry
The mining sector is critical to Zambia's economy because it generates the majority of foreign exchange earnings, and the government has made various changes to the mining tax regime, with the most significant being as follows.
The Insurance and Reinsurance Industry
To support the growth of the local reinsurance sector in Zambia and increase revenue, the government has introduced Withholding Tax at the rate of 20% on reinsurance premiums placed with reinsurers that are not licensed in Zambia. The revenue gain from this amendment has been projected at ZMW48.6 million.
The government has also increased the rate of Insurance Premium Levy (IPL) from 3% to 5%. IPL is imposed on all insurance premiums for all classes of insurance businesses excluding reinsurance; however, there is no IPL imposed on commissions earned on brokerage because commissions are not classified as an insurance business.
The Real Estate Industry
The government has made various legislative changes to the real estate industry; the most significant are set out below.
Previously, rental income – ie, income derived from the letting of real property – was subject to Withholding Tax and this was a final tax. Under the rental income regime, tenants were required to withhold tax from rental income at the rate of 10% and remit the amount withheld to the ZRA. However, the rental income regime has been revised to the turnover tax regime, and rental income is now taxable at 4% per annum on turnover up to ZMW800,000 and at 12.5% per annum on turnover that exceeds ZMW800,000.
The implication of this amendment is that landlords are now required to register for turnover tax and tenants are no longer required to pay tax to the ZRA, unless they are appointed by the Commissioner-General as a withholding agent.
The government has also amended the Income Tax Act to provide for the taxation of an “income real estate investment trust”, which is defined as a collective investment scheme that invests primarily in income-generating real estate. “Income-generating real estate” is defined as real estate properties that generate a consistent recurring revenue in the form of dividends, interest or cash distribution.
Following this amendment, the distributed income of an income real estate investment trust is now subject to Withholding Tax. The distributed income is the gross rent collected by an income real estate investment minus 25% of gross collections. It must be noted that an income real estate investment trust approved by the Securities and Exchange Commission is exempt from income tax.
The Hospitality Industry
As Zambia’s tourism industry is one of the sectors that has been greatly affected by the COVID-19 pandemic, the government has reduced the rate of Corporate Income Tax on income earned by hotels and lodges on accommodation and food services to 15% until 31 December 2022. This amendment is intended to boost, relieve and promote the tourism industry so that the private sector can establish hotels, lodges and other tourism facilities.
The Gambling Industry
Companies that carry on the business of betting, gaming and lotteries are required to withhold tax at the rate of 20% on winnings from gaming, lotteries and betting. For lotteries, “winnings” means anything won in money or in money’s worth; for gaming or betting, “winnings” means anything won in money or money’s worth minus the total amount staked by the person.
The government has enhanced tax compliance for withholding tax on winnings by requiring tickets to display the withholding tax payable on winnings. The government has also clarified that the requirement to withhold tax on winnings only applies to online casinos and not land-based casinos.
Over the past few years, Zambia’s Transfer Pricing Rules have been amended to align with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Recent amendments to Zambia’s Transfer Pricing Rules include the following.
As the purpose of the recent tax changes is to provide a competitive and stable tax regime that will transform the economy, better the livelihoods of Zambians and enhance the enabling environment for local and foreign investors, the government is expected to make more significant changes to Zambia’s tax regime.