TANZANIA: REQUIREMENT FOR MAINLAND COMPANIES WITH OPERATIONS IN ZANZIBAR TO INCORPORATE SUBSIDIARIES IN ZANZIBAR
The Finance (Public Revenue Management) Act, 2021 of Zanzibar that was assented to on 24 June 2021 amended Section 238 of the Zanzibar Companies Act, 15 of 2013 (Companies Act) in respect of companies incorporated in Tanzania Mainland (Mainland) with a place of business or branch in Zanzibar.
The amendment requires these companies to register foreign subsidiary companies under the law applicable in Zanzibar for their operations in Zanzibar. As a result, existing branches of Mainland companies will need to be deregistered and replaced with Zanzibari subsidiaries.
Following this amendment, the Minister for Trade and Industries Development issued a Public Notice (Notice) on 21 September 2021, requiring all companies incorporated in Mainland and issued with Certificates of Compliance for their operations in Zanzibar, to incorporate subsidiaries in Zanzibar within 90 days from the date of the Notice.
According to the Notice, failure to comply with this requirement will result in the branch being struck off the Register. They will therefore not be permitted to conduct operations in Zanzibar.
The question, however, is whether this timeline is realistic for entities to restructure their operations and ensure compliance from legal, regulatory and tax perspectives. A further concern is the administrative costs of operating a parent company in Mainland and a subsidiary in Zanzibar where previously they were treated as one legal entity.
Issues to note
Incorporation of a subsidiary in Zanzibar will require compliance with the Zanzibar Companies Act, including the preparation of separate books of accounts for the Zanzibar subsidiary. Prior to the change, the results of the branch were incorporated in the Mainland company’s books of accounts.
With regards to tax, we understand that the subsidiary will need to obtain a new Taxpayer Identification Number (TIN) in Zanzibar and comply with filing and payment requirements in Zanzibar. This covers both union taxes (such as corporate income tax, withholding taxes and employment taxes) and non-union taxes (such as value added tax).
Further, any transactions between the Mainland parent and the Zanzibari subsidiary will need to be carried out on an arm’s length basis, taking into account the requirements under the Tax Administration (Transfer Pricing) Regulations 2018 and related laws.
We also anticipate a tax leakage on dividend payments such that withholding tax will apply on dividends distributed by both the Mainland parent and the Zanzibari subsidiary. For instance, dividend payments made to the Mainland parent by the Zanzibari subsidiary will be subject to withholding tax at 5%. Ultimately, the dividend distributed by the Mainland parent to its non-resident shareholders will also attract withholding tax of 10%. In this case, an effective withholding tax rate on profits derived by the group from the Zanzibari subsidiary will be 14.5%.
In relation to licensing, we note that the subsidiary may also be required to comply with different licensing requirements under union and Zanzibari laws.
A copy of the Notice is available here.
Article by Wilbert Kapinga, Aisha Sinda, Fabiola Ssebuyoya and MohammedZameen Nazaraliin