Malawi Individual Tax Guide

Malawi

Blantyre GMT +2

EY Street address:

Mail address: Apex House P.O. Box 530 Kidney Crescent Blantyre Blantyre Malawi Malawi

Executive and immigration contacts

Chiwemi Chihana

+265 (1) 770-368

Fax: +265 (1) 770-361

Email: chiwemi.chihana@mw.ey.com

Macdonald Kamoto +265 (1) 876-476

Fax: +265 (1) 870-605 Email: macdonald.kamoto@mw.ey.com

A. Income tax

Who is liable. Resident individuals are subject to income tax on their income deemed to be from a source in Malawi. For the income tax rates applicable to resident individuals, see Rates Nonresident individuals are subject to Malawi income tax at a standard rate of 15% on their Malawi-source income. A person is considered resident for tax purposes in Malawi if he or she is physically present in Malawi for an aggregate period of 183 days in any 12-month period. Income is deemed to be from a source within Malawi if it is derived from the carrying on in Malawi of a “trade.” For this purpose, “trade” covers any employment, pro fession, business, calling, occupation, or venture, including the leasing of property. Foreign-source income is exempt from tax.

Income subject to tax

Employment income. As noted in Who is liable, income derived from employment in Malawi is subject to income tax.

Investment income. A final withholding tax of 10% is imposed on dividends distributed to resident and nonresident individuals.

Interest and rent are included in assessable income.

Amounts received for the right of use or occupation of land and buildings or plant and machinery or for the use of patents, designs, trademarks or copyrights or other property, which in the opinion of the Commissioner General of the Malawi Revenue Authority is of a similar nature, is included in assessable income.

Self-employment and business income. As noted in Who is liable, income derived from the carrying on of self-employment or busi ness activities in Malawi is subject to income tax.

If land is sold and if timber that is intended for sale is growing on the land, the market value of the timber is included in the seller’s taxable income. However, a deduction is allowed. If the land was acquired by the taxpayer for valuable consideration, the Commissioner General apportions a reasonable part of that consideration to the timber and this amount may be deducted. If

no valuable consideration was given for the land, the Commissioner General sets a reasonable value for the standing timber, which may be deducted.

Foreign-exchange gains and losses. Realized foreign-exchange gains and losses are assessable. Unrealized foreign-exchange gains and losses are not taxable.

Exempt income. Certain income is specifically exempt from tax under the Taxation Act. The following are examples of exempt income:

• Foreign-source income

• Redundancy pay of up to MWK50,000

• All income derived from pension funds, whether received as a lump sum or annuity

• War disability or war widows pensions

Capital gains and losses. Capital gains derived by individuals are included in assessable income and subject to tax at the normal progressive income tax rates. However, capital gains derived from the following transactions are not subject to tax:

• Disposal of the individual’s principal residence

• Transfers between spouses or former spouses, or to a spouse from the estate of a deceased spouse

• Capital gains derived from disposal of shares traded on the Malawi Stock Exchange if the shares are held for at least 12 months

• Disposals of personal and domestic assets not used in connec tion with a trade

Capital losses on assets not qualifying for capital allowances can be offset only against current or future capital gains. However, such capital losses may be set off against other income in the year of the death of the taxpayer or the year in which the business ceases operations. Capital losses with respect to assets on which capital allowances have been granted are fully deductible from taxable income.

For assets qualifying for capital allowances, capital gains and losses equal the difference between the sales proceeds and the written-down tax value of the assets. For other assets, capital gains and losses equal the difference between the sales proceeds and the annual cost or costs adjusted by applying the consumer price index published by the National Statistics Office on the date of disposal of the asset. An asset’s fair value can be used as the basis instead of the actual cost if it was determined as of 1 April 1992 and was accepted by the Commissioner General by September 1995.

Deductions. Expenditure and losses are allowable as deductions in determining the assessable income of an individual if they are not of a capital nature and if they are wholly, exclusively and necessarily incurred for the purposes of the trade or in the production of income. For tax purposes, certain expenses are not allowed as deductions, including the following:

• Losses or expenses that are recoverable under insurance con tracts or indemnities

• Tax on the income of individuals or interest payable on such tax

• Expenses relating to income that is not included in taxable income

Expenses for which subsidies have been or will be received

Rent or cost of repairs to premises not occupied for purposes of trade

Costs incurred by individuals to maintain themselves and their families

Domestic or private expenses of individuals including the cost of travel between the individual’s residence and place of work

Fines payable that are charged under the Taxation Act or any other law

Individuals may deduct donations to charitable organizations that are approved and gazetted by the Minister of Finance. However, individual donations in excess of MWK5 million to approved charitable organizations or nonprofit institutions operating solely or principally for social welfare, civic improvement, educational development or other similar purposes as the Minister may approve are not allowable for deduction.

In determining the taxable income derived from farming, expenses with respect to the following are allowed as deductions:

The stumping, leveling and clearing of land

Works for the prevention of soil erosion

Boreholes

Wells

Aerial and geophysical surveys

Water control work with respect to the cultivation and growing of rice, sugar or other crops approved by the Minister of Finance and water conservation work (reservoir, weir, dam or embankment constructed for the impounding of water)

Rates

The following are the income tax rates.

Taxable income

exceeding Rate MWK

100,000

Withholding taxes. Certain payments are subject to withholding tax. The tax is withheld by the payer and remitted to the Malawi Revenue Authority on a monthly basis by the 14th day of the fol lowing month. Recipients of the payments treat the withholding tax as an advance payment of tax that offsets income tax subse quently assessed.

Withholding Tax Exemption Certificates may be issued to quali fying taxpayers whose affairs are up to date. Under the Taxation Act, exemption from withholding tax is not granted for bank in terest, rent, royalties, fees, commission, payments for casual labor and payments to contractors and subcontractors.

The Commissioner General may exempt from withholding tax the receipts of certain persons or organizations that are exempt from tax under the Taxation Act.

The following table provides withholding tax rates.

Payment Rate (%)

Interest 20 Royalties 20

Rents 20

Payments for supplies to traders and institutions 3

Technical fees 20 Commission 20

Payments for carriage and haulage 10

Payments for sales of the first 1,200 kilograms or 10 bales of tobacco sold at auction floors 0 Payments for sales of tobacco in excess of 1,200 kilograms or 10 bales sold at auction floors 3

Payments for sales of tobacco through farmer clubs at auction floors 0

Payments for other farm produce 3 Payments to contractors and subcontractors in the building and construction industries 4 Payments for public entertainment 20 Payments for casual labor up to MWK15,000 0 Payment for casual labor over MWK15,000 20 * Winnings from betting, gambling and lottery activities in excess of MWK100,000 20

* The withholding tax is imposed on the entire amount without deducting MWK15,000.

The income of a nonresident arising or deemed to arise from a source within Malawi that is not attributable to a permanent establishment of the nonresident in Malawi is subject to a final tax at the following rates:

• 15% of management fees

• 10% of income derived from a mining project by way of interest, royalties, payments for independent personal services or dividends

• 15% of the gross amount of other such income

A withholding tax is also imposed on dividends (see Investment income).

Relief for losses. Assessed losses attributable to trading opera tions may be carried forward to offset assessable income in the following six years. Loss carrybacks are not allowed.

B. Other taxes

Estate duty. Estate duty is a form of inheritance tax in Malawi and is payable by the executors or administrators of estates of deceased. The following are the rates of the estate duty.

Principal value of the estate Rate

exceeding of duty

Principal value of the estate

Reductions in rates are allowed for quick successions. The value of the estate comprises all assets of the deceased at the date of his or her death less any debts. In addition, any gifts or transfers of property for less than full value made within three years of death must be included in the value of the estate.

Property tax. Property tax is levied by local authorities on the value of industrial, commercial or private properties owned by a taxpayer in the district. The tax is payable semiannually. The rates vary depending on whether the property is located in an urban or rural area and whether it is an industrial, commercial or private property.

Presumptive taxes. Income earned by small businesses are now subject to presumptive taxes at the rates specified in the Amendment Act. This will be enforced through the block management system to make sure that all traders in cities and towns are tax compliant.

Advance income tax on imports. Commercial importers are sub ject to a 3% withholding tax on the landed cost of imports at the point of entry into Malawi. This is not a final tax because a tax refund will be given if the actual income tax paid by the trader at the end of the year is more than the applicable (assessed) tax on the profits of the business.

C. Social security

does not require social security contributions.

D. Registration, tax filing and payment procedures

Effective from 1 July 2018, a person who carries on business is liable for registration for income tax from the date the business was registered. Employers are expected to apply for tax registration within 15 days.

The year of assessment is from 1 July to 30 June. For self-employed individuals, financial years ending on or before 31 August are normally treated as relating to the year of assessment ended in June of that calendar year.

Individuals must file an income tax return with the Commissioner General within 180 days after the end of the year of assessment. The balance of tax due is payable when the tax return is due.

Married women have the option of filing their own returns. The earned income of a wife is not aggregated with her other income or the income of her husband when calculating their joint tax liability.

Income of minor children earned in their own right is deemed to be their own income and is taxed accordingly. Income of minor children arising from a trust established or gift made by a parent is deemed to be income of the parent.

Under the Pay-As-You-Earn (PAYE) system, an employer mak ing payments totaling in excess of MWK540,000 per year to an employee for services rendered is required to withhold income tax from such payments. The tax withheld must be remitted to the Malawi Revenue Authority by the 14th day of the month follow ing the month in which the tax is withheld.

At the beginning of each year of assessment, a business tax payer must estimate the tax payable in that year. This estimated tax, which is known as provisional tax, must be paid quarterly within 25 days after the end of each quarter. The total install ments must be not less than 90% of the actual tax liability for the year of assessment.

If the amount of tax unpaid as a percentage of the total tax liabil ity exceeds 10% but does not exceed 50%, a penalty equal to 25% of the unpaid tax is imposed. If the percentage of unpaid tax exceeds 50%, a penalty equal to 30% of the unpaid tax is imposed.

Interest on unpaid tax after an assessment may be levied at a rate of 20% of the amount of tax that was due to be paid in the first month or part thereof and further interest is charged on the outstanding amount of tax at the prevailing bank lending rate plus 5%.

Under the PAYE system, a penalty of 15% plus a further sum of 5% per month is charged on any amounts not remitted to the Malawi Revenue Authority within 14 days from the end of the month in which the tax was deducted.

E. Double tax relief and tax treaties

Foreign-source income that is taxed in the country of source is eligible for double tax relief either under the existing double tax treaty between the country of source and Malawi, or as unilateral relief. If income that has been taxed in a foreign country that does not have a double tax treaty with Malawi is included in taxable income in Malawi, a tax credit may be available (credit method) to reduce the tax payable in Malawi. To qualify for this relief, the income must be derived from a foreign government, state corpo ration or local authority. An individual must prove to the Commissioner General that he or she has paid the tax on the income in the foreign country. On receipt of this proof, the Commissioner General grants the relief. If there is a double tax treaty in place between the country of source and Malawi, there is a treaty override and double tax relief under the double tax treaty prevails.

Malawi has entered into double tax treaties with the following countries.

France South Africa Switzerland Norway Sweden United Kingdom

F. Entry into Malawi

Foreigners traveling to Malawi require a valid passport from their countries of origin.

Nationals of certain countries need a visa to enter Malawi. They must pay the following fees for their visas.

Type of visa Fee (USD)

Single entry and valid for three months 75

Multiple entry and valid for six months 150

Multiple entry and valid for one year 250

Foreigners wanting to work, stay or engage in business in Malawi are required to obtain the relevant permits.

G. Work and business permits

Temporary employment permits

Overview. The following is an overview of temporary employ ment permits:

• The duration is six months.

• It is issued for a short-term employment purpose.

• Dependents are not allowed.

• The permit is renewable.

• Extension for another six-month period is allowed.

Requirements. The employer must apply for a temporary employment permit before the employee begins employment. The employer must submit the following documents to the Immigration Office:

• A cover letter

• Copy of passport showing photograph and personal details

• Educational and professional certificates certified as true cop ies of the originals

• For a new applicant, evidence that the position was advertised in the local press and the curriculum vitae (CV) of each local Malawian who applied for the post

• Two passport-size photographs

• Police clearance from country of origin

• Medical report

• Certificate of incorporation of the company employing the individual

• Copy of visitor or business permit

The employer must pay a processing fee of USD100 and, on approval, a fee of USD500.

The temporary employment permit is valid for a period of two years and can be renewed for an additional two years.

Business residence permits

Overview. The following is an overview of business residence permits:

• The duration is five years.

• It is issued for the establishment and running of a business or the engagement in a profession, an occupation or in selfemployment in Malawi.

• Dependents are allowed for the mining, trading, manufacturing, agriculture, self-employed and consultancy sectors. This measure is not specified for the education, energy, tourism and health sectors.

• This permit is issued strictly for trading business purposes only.

• The funds to be invested should originate from a legal source outside Malawi with a minimum amount of USD50,000.

• The permit is renewable for a successive period of five years.

Requirements. Persons who want to engage in business must obtain a business residence permit. An applicant for this permit must submit the following documents to the Immigration Office:

• Two passport-size photographs

• Copy of passport showing photograph and personal details

• Cover letter from the applicant

• Medical certificate

• Company profile and structure

• Business Registration Certificate

• Business plan for the business intended to be established

• Police clearance letter from the country of origin

• A bank statement showing that the applicant has brought into the country at least USD50,000 (MWK20 million)

The applicant must pay a processing fee of USD100 and, on approval, a fee of USD2,000 or USD3,500, depending on the type of application.

The business residence permit is valid for five years and is renewable.

Permanent residence permits

Overview. The following is an overview of permanent resident permits:

• There is no expiration date for this permit.

• The holder of the permit may reside in Malawi permanently.

• The permit can include dependents.

• The permit will be cancelled if a holder fails to return to Malawi once in 12 months’ time

Requirements. Residents who hold a temporary employment permit or business residence permit and have stayed in Malawi for at least five years can apply for a permanent residence permit. The applicant must submit the following documents to the Immigration Office:

• Two passport-size photographs

• Copy of passport showing photograph and personal details

• Cover letter from the applicant

• Police certificate

• Medical certificate

• Tax clearance certificate issued by the Malawi Revenue Authority to confirm that applicant is paying tax

• Bank statement showing that the applicant is financially stable

• Documents evidencing ownership of assets in Malawi

The applicant must pay a processing fee of USD100 and, on approval, a fee of USD2,500.