Ever since the landmark decision by the House of Lords (UK) in Salomon v Salomon & Co in 1897, the doctrine of corporate personality has been recognised in Tanzanian law. This doctrine provides that a company is a legal entity which is separate and distinct from its shareholders, directors and employees. In essence, it limits the liabilities of shareholders from the obligations of the company by creating what is known as a corporate veil between the shareholders and third parties dealing with the company.
However, the misuse of this doctrine for purposes of tax evasion, money laundering and other illicit practices has grabbed the attention of various regulators and policy makers around the world. To counter such practices, a number of transparency rules have been developed to identify the beneficial owners of companies, trusts and other legal arrangements. From the provisions of the Tanzanian Finance Act 2020 (FA 2020), it appears Tanzania has also followed suit.
FA 2020 which is slated to come into effect on 1 July 2020, has introduced changes to the Companies Act, the Trustees Incorporations Act, the Anti-Money Laundering Act and the Income Tax Act by establishing beneficial ownership rules. The concept of beneficial owner (BO) is not new in the Tanzanian tax realm; it is often featured in Double Taxation Agreements to which Tanzania is a party as one of the conditions which must be satisfied before a claimant can qualify for tax benefits.
However, its inclusion in the FA 2020 is evidently intended to identify ultimate beneficial owners of Tanzania companies and trusts for purposes of preserving the integrity of Tanzania’s tax system (including identifying treaty shopping arrangements), increasing transparency and information sharing between regulatory authorities and combatting money laundering and terrorist financing. This alert is focused on the first intended objective of the new BO rules.
What is a beneficial owner?
The FA 2020 defines a BO as a natural person who, directly or indirectly:
a) ultimately owns or exercises substantial control over an entity or an arrangement;
b) who has a substantial economic interest in or receives substantial economic benefit from an entity or arrangement (whether alone or together with other persons);
c) on whose behalf an arrangement is conducted; or
d) who exercises significant control or influence over a person or arrangement through an agreement (formal or informal).
A BO is therefore a natural person who effectively owns or substantially controls a legal entity. Hence, a conduit company cannot be a BO.
New reporting requirements
All persons seeking to register new companies in Tanzania must identify the beneficial owners of such companies and submit their particulars to the Registrar of Companies at the time of registration.1 Pre-existing companies have six months from 1 July 2020 to submit similar particulars to the Registrar.2 In addition, all companies registered in Tanzania must submit particulars of their BOs to the Registrar of Companies on an annual basis at the time of filing their annual returns.3 Any changes to the beneficial ownership of a company must also be notified to the Registrar within 30 days.4
The Companies Act does not contain any provision which specifies the threshold in shareholding or control in respect of which BO information is required. However, one can take a cue from the amendment introduced by FA 2020 to the definition of the term “associate” in the Income Tax Act. A person is now considered an associate of another if that person holds or controls 25% (the threshold previously used to be 50%) or more of the shares or voting rights in that other person, although the Commissioner may vary this threshold depending on the business or investment concerned.
However, it remains to be seen if that is the threshold which the Registrar of Companies will impose for purposes of registration of BO information under the Companies Act.
Register of beneficial owners
The Registrar of Companies is tasked to establish and maintain a register of beneficial owners of all companies registered in Tanzania. This means Tanzania will create a specific register of beneficial ownership. The information held by the Registrar will be accessible to various authorities including the Tanzania Revenue Authority (TRA).
Implications for Tanzanian subsidiaries
The lifting of the corporate veil to identify BOs does not end there. Income tax will now be charged and is payable by the agent of a BO or non-resident where a non-resident person receives income, whether directly or indirectly, which has accrued or arisen in Tanzania from or through such agent.5 An agent of a BO or non-resident includes any Tanzanian company which is a subsidiary of a non-resident company. This may not initially raise alarms until one remembers that for purposes of income tax, any natural person who owns or controls a foreign parent company with a Tanzanian subsidiary may be considered a BO irrespective of any intermediary companies interposed between that foreign company and the Tanzanian subsidiary. This means that any income received by such foreign natural person which has accrued or arisen in Tanzania will be subject to the Tanzanian Income Tax Act, including withholding tax.
The implication is that TRA can now consider the economic reality of all corporate arrangements when undertaking tax audits and assessments. If it becomes aware that a foreign company in a group received payment, or made a payment to its shareholders, and such foreign company has a Tanzanian subsidiary, it can apply the “BO Test” to assess whether that foreign company is a BO.
The fact that there may be a number of other subsidiaries or affiliated entities interposed between the Tanzanian subsidiary and that foreign company will not stop TRA from applying the “BO Test” against the foreign company or its shareholders. If the “BO test” is satisfied, the payment will be subject to Tanzanian withholding tax and potentially interest and penalty for late payment. Simply put, TRA can now tax Tanzanian subsidiaries for dividends or other distributions paid by their ultimate parent companies to their shareholders which satisfy the “BO test”. The provisions of the Income Tax Act also allow TRA to apply similar rules to other payments, such as royalties and interest, received by ultimate parent companies.
Actions to consider
The new beneficial ownership rules will have a significant impact on existing company arrangements in Tanzania. Companies should review intragroup structures to determine potential tax implications which may arise with the coming into effect of FA 2020.
Payments to non-resident parent companies including dividends, interest, royalty and intercompany service charges, should be adequately examined against the economic activities of the recipient companies, in line with the new BO rules.