Malawi Corporate Tax Guide

Malawi

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Malawi landline and mobile phone numbers are not preceded by a city code. When dialing these numbers from within Malawi, dial 0 before dial ing the number.

Blantyre GMT +2

EY +265 1-876-476

Mail address: Fax: +265 1-870-605, +265 1-872-850 P.O. Box 530 Blantyre Malawi

Street address: Apex House Kidney Crescent Blantyre Malawi

Business Tax Advisory Chiwemi Chihana

+265 1-876-476

Mobile: +265 999-836-396 Email: chiwemi.chihana@mw.ey.com Watson Nakanga +265 1-876-476

Mobile: +265 999-952-040 Email: watson.nakanga@mw.ey.com

International Tax and Transaction Services – Transaction Tax Advisory Patrick Mawire

Mobile: +260 960-344-106 (resident in Lusaka, Zambia) Email: patrick.mawire@zm.ey.com

A. At a glance

Corporate Income Tax Rate (%) 30 (a)

Capital Gains Tax Rate (%) 30/35 (b) Branch Tax Rate (%) 35

Withholding Tax Rate (%) (c)

Dividends 10 (d) Interest 20 (e)

Royalties 20 (e)

Rent 20 (e)

Payments for Services 20

Payments for Casual Labor Exceeding

MWK35,000 20 Fees 20 (e)

Commissions 20 (e)

Payments to Nonresidents Without a Permanent Establishment in Malawi 10/15 (f) Branch Remittance Tax 0 Net Operating Losses (Years) Carryback 0 Carryforward 6/10 (g)

(a) For other rates and information regarding a mineral royalty, see Section B. (b) See Section B. (c) See Section B for an extended list of withholding taxes and for further details regarding these taxes.

(d) This withholding tax is imposed on dividends paid to residents and nonresi dents.

(e) This withholding tax is imposed on foreign companies with a permanent establishment in Malawi.

(f) The 10% rate applies to income derived from a mining project by way of interest, royalties, payment for independent personal services or dividends. The 15% rate applies to management fees and other payments.

(g) The 6-year period applies to all taxpayers except for mining projects, which have a carryforward period of 10 years.

B. Taxes on corporate income and gains

Corporate income tax. Locally incorporated companies and branch es of foreign companies are subject to corporate income tax on their income deemed to be from a source in Malawi. 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, profession, business, calling, occupation, or venture, including the leasing of property. Foreign-source in come is exempt from corporate income tax.

Rates of corporate income tax. Locally incorporated companies are subject to corporate income tax at a rate of 30%. Branches of foreign companies are subject to tax at a rate of 35%.

Effective from 1 July 2016, income tax is imposed on income from life insurance business at a rate of 30%. Life insurance companies are subject to tax on their investment income, includ ing income from the leasing of property, in accordance with the general provisions of the Taxation Act.

Income from a pensions business is taxed at a rate of 15%. Taxable income of a pensions business includes administration fees and investment income.

Effective from 1 July 2016, Malawi introduced a new mining tax regime under the 16th and 17th Schedules to the Taxation Act, which introduced a mineral royalty payable as a tax with respect to mining products at the following rates:

• All minerals other than precious stones and semiprecious stones and commercial minerals exported in an unmanufactured state: 5%

• Commercial minerals exported in an unmanufactured state: 5%

• Precious stones and semiprecious stones: 10%

The mineral royalty is payable to the Malawi Revenue Authority on a quarterly basis within 21 days after the end of each quarter of the year of assessment.

Additional mineral resource rent was also introduced and is imposed at a minimum of 15% on after-tax resource rent from a project. After-tax resource rent is determined in accordance with Paragraph 23 of the 16th Schedule to the Taxation Act.

Presumptive taxes. Presumptive taxes on turnover have been introduced for taxpayers with a turnover of less that MWK12,500,000. Taxpayers with turnover of less than MWKK12,500,000 can now elect to pay presumptive taxes.

Presumptive tax is payable quarterly. The following are the annual taxes:

• Taxpayers with a turnover of more than MWK4 million but less than MWK7 million: annual tax of MWK110,000

• Taxpayer with a turnover of more than MWK7 million but less than MWK10 million: annual tax of MWK170,000

• Taxpayer with turnover of more than MWK10 million but less than MWK12,500,000: annual tax of K225,000

Capital gains and losses. Pending enactment of the Capital Gains Tax Act, capital gains derived by companies are included in taxable income and are subject to tax at the applicable corporate income tax rate.

Effective from 3 November 2020, the definition of “amount real ized” for Capital Gains Tax purposes is amended by substituting a new paragraph relating to the disposal of an asset by sale for cash. For such a disposal, “amount realized” is defined to mean cash received or contracted to be received, including any contin gent amount agreed to at the time of the disposal.

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 assets not qualifying for capital allowances, capital gains equal the difference between the sales proceeds and the basis of the asset, which is either the cost of the asset or the open market price of the asset at the time of acquisition. The basis of a capital asset may be determined under either of the following methods:

• Applying the consumer price index published by the National Statistical Office at the date of disposal of the asset that is applicable to the year in which the purchase or the construction of the asset was effected or completed

• Using the value of the asset as of 1 April 1992 that was submit ted to and accepted by the Commissioner of Taxes, adjusted by the consumer price index published by the National Statistical Office at the date of disposal of the asset

Capital gains are not subject to tax if they are used within 18 months to purchase a qualifying asset like, or related in service or use to, the asset that was sold.

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 in which a company ceases to exist. Capital losses with respect to assets on which capital allowances have been granted are fully deductible from taxable income.

Effective from 3 November 2020, gains realized on the transfer of property from an individual to a trust are exempt from income tax, provided the individual transferring the property is a settlor of the trust.

Additional income for mining companies on change of control. For mining companies, under the Taxation Act, if there is change in control or effective control of the conduct of the taxpayer’s mining project or of the taxpayer or if the benefit of the conduct of the taxpayer’s mining project changes, whether by a transac tion to which the taxpayer is a party or by some other transaction, the taxpayer is required to include in its income in relation to the project the excess of the value of the assets of the project over the value of the liabilities of the project.

Administration. The tax year runs from 1 April to 31 March with effect from 1 April 2022. The year of assessment for income tax is any period of 12 months with respect to which tax is charge able. Financial years ending on or before 31 August 2021 were normally treated as relating to the tax year ended in June of that calendar year.

Companies must file an income tax return with the Commissioner General of the Malawi Revenue Authority within 180 days after the end of the year of assessment.

At the beginning of each year of assessment, the company must estimate the tax payable in that year. This estimated tax, which is known as provisional tax, must be paid quarterly by the 25th day of the month following the end of each quarter. The total install ments must equal at least 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.

Effective from 1 July 2015, interest on unpaid tax is charged at the prevailing bank lending rate plus 5% per year.

Under a self-assessment system, taxpayers are responsible for calculating their tax liability and submitting tax returns together with any outstanding tax due. The Malawi Revenue Authority accepts the return as filed and does not issue any administrative assessments. If it is not satisfied, it will undertake to verify the correctness of the information contained in the return.

Dividends. A final withholding tax at a rate of 10% is imposed on dividends distributed to resident and nonresident companies and individuals. Dividends are not subject to another 10% withholding tax if they are redistributed. Declaration of the dividend by companies should be made within 30 days of the declaration to the tax authority.

Tax on deemed interest. Interest income is deemed with respect to interest-free loans and is subject to income tax, effective from 1 July 2015.

Effective from 1 July 2018, the law was amended to include inter est if 0% or no interest is charged on loans between related parties. Interest on domestic loans is at the prevailing bank rate plus 5% per year, and interest on foreign loans is at 5% on the US dollar equivalent of the loan.

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

Withholding Tax Exemption Certificates may be issued to qualifying taxpayers whose affairs are up to date (that is, companies that have no outstanding tax liabilities or who have

made satisfactory arrangements to settle any outstanding tax liabilities). Under the Income Tax Act, no exemption from withholding tax is granted for bank interest, 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 Income Tax Act. The following table provides withholding tax rates for payments to residents and to nonresidents with a permanent establishment in Malawi. For tax purposes, resident companies are companies incorporated in Malawi.

Withholding

Payment tax rate (%)

Interest 20

Royalties 20

Rent 20

Commissions for individual insurance agents and individual banking agents 1

Payments for carriage and haulage 10

Payments for tobacco and other farm products: Sale of tobacco by tobacco clubs 1 Payments for tobacco and other farm produce 3 Payments to contractors in the building and construction industries 4

Payments for public entertainment 20

Payments for casual labor: Payments of up to MWK35,000 0 Payments in excess of MWK35,000 20 Payments for services 20

Winnings on betting and gambling, including lotteries

First MWK100,000 of winnings from betting 0 First MWK500,000 of winnings from gambling including lotteries 0

Winnings in excess of MWK100,000 if the winnings are from betting including lotteries 5 Winnings in excess of MWK500,000 if the winnings are from gambling including lotteries 5

The tax withheld from winnings, commissions for individual insurance agents and individual banking agents, and the sale of tobacco by tobacco clubs is a final tax.

A 3% withholding tax is imposed on imports. Taxpayers with a valid tax clearance certificate are exempted from this advance tax.

The income of nonresidents 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 withholding tax at a rate of 15% on management fees and other payments and 10% on income derived from a mining project by way of interest, royalties, payments for independent personal services or dividends, unless the income is specifically exempt from tax under a double tax treaty or tax law.

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

Foreign tax relief. If foreign income that has been taxed in a for eign country is included in taxable income in Malawi, a tax credit is available to reduce the tax payable in Malawi. To qualify for this relief, the company must prove to the Commissioner General that it has paid the tax on the income in the foreign country. On receipt of this proof, the Commissioner General grants the relief.

C. Determination of trading income

General. Taxable income is the income reported in the companies’ financial statements, subject to certain adjustments.

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 is of a similar nature, is included in taxable income.

Certain income is specifically exempt from tax under the Taxation Act, including foreign-source income.

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

Expenditure that is not of a capital nature and losses, wholly and exclusively and necessarily incurred for the purposes of trade or in the production of income, are allowable as deductions in deter mining the taxable income of a company. 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 the taxpayer or interest payable on such tax

• Income carried to any reserve fund or capitalized

• An expense relating to income that is not included in taxable income

• Contributions by an employer to any pension, sickness, accident or unemployment fund that has not been approved by the Commissioner General

• An expense for which a subsidy has been or will be received

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

• Fringe benefits tax and any penalty chargeable on the fringe benefits tax

Expenditure incurred within 18 months before the start of a manufacturing business is allowable as a deduction if it would normally be allowable in the course of business.

Deductions of employer pension contributions are limited to 15% of the employees’ gross annual salary.

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 portion 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.

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

• The stamping, 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)

Inventories. Trading stock and work in progress must be valued based on the cost or market sales price.

Livestock may be valued for tax purposes at either cost or market selling value.

Capital allowances

Investment allowance. An investment allowance is granted at a rate of 100% of the cost of new or unused industrial buildings and plant or machinery that is used by the company for “manufactur ing,” which includes hotels and farming. The rate is 40% if these items are used.

For purposes of investment allowance, plant and machinery does not include motor vehicles intended or adapted for use on roads.

Staff housing does not qualify for the investment allowance.

The investment allowance reduces the value of the asset for pur poses of calculating the annual allowance in subsequent years of assessment.

Initial allowance. The initial allowance is granted with respect to capital expenditure incurred during the year of assessment on certain assets that are used for the purposes of the company’s trade or business or for farming purposes. “Manufacturers” can claim either initial allowances or investment allowances on industrial buildings and plant and machinery, but they cannot claim both allowances for the same asset. The following are the rates for the initial allowance.

Assets Rate (%)

Farm improvements, industrial buildings and railway lines 10

Articles (includes working instruments), implements, machinery and utensils (private passenger vehicles are excluded) 20 Farm fencing 33⅓

Annual allowances. Annual allowances are claimed on cost in the first year and subsequently on written-down values. For newly constructed commercial buildings, other than industrial build ings, with a cost of at least MWK100 million, the rate is 2.5%. For farm improvements, industrial buildings and railway lines, the rate of the annual allowance is 5%. For farm fencing, the rate is 10%.

For other assets, the allowances granted are determined by the Commissioner General. The rates vary between 10% and 40%, depending on the type of asset.

For purposes of granting capital allowances, a commercial build ing means a shopping center with a collection of independent retail stores, services and a parking area conceived, constructed and maintained by a management firm as a unit.

Mining allowance. An allowance equal to 100% of expenditure incurred by mining companies may be claimed. The export allow ance and transport allowance (see Special allowances) may not be claimed by mining companies.

Balancing charge or allowance. If an asset for which capital allowances have been claimed and allowed is disposed of during the year of assessment, the proceeds of disposal, if any, are set off against the written-down tax value of the asset, and either a bal ancing charge or allowance arises.

Special allowances. Malawi offers special tax allowances, which are described below.

Export allowance. An allowance equal to 25% of taxable income from export proceeds is granted with respect to sales of goods that are classified as nontraditional exports. The Commissioner General has issued a directive providing that the export allow ance should be calculated on “taxable” export proceeds less export-related expenses. This remains an area of controversy with much debate surrounding the interpretation of the meaning of “taxable income.” Tea, tobacco, sugar and coffee do not qual ify for this allowance.

International transport allowance. An allowance equal to 25% of the international transport costs with respect to non-traditional exports may be claimed. Tea, tobacco, sugar and coffee do not qualify for this allowance.

Research expenditure. Expenditure not of a capital nature that is incurred by a company on experiments and research with respect to the company’s business are allowed as a deduction from tax able income. Similar deductions apply to contributions, bursaries (broadly, scholarships) and donations to research institutions for the purposes of industrial research or scientific experimental work or education connected with the business of the company.

Relief for losses. In general, losses incurred in trading operations may be carried forward and offset against profits in the following six years. Loss carrybacks are not allowed.

Effective from 1 July 2016, losses attributable to a mining start-up expenditure, or to a deductible expenditure incurred before the issuance of a small-scale mining license, a medium-scale mining license, a large-scale mining license or an artisanal mining permit that first applies to the mining project may be deducted in the year that the losses arise and in the following year up to a period of 10 years after the losses arise, or in the following year up to a period of 10 years after a mining permit first applies to the mining project, whichever is later. The taxpayer may choose which losses to deduct to gain the most deductions for these and other losses.

Groups of companies. Malawi does not allow consolidated returns or provide other types of relief for groups of companies.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate

Value-added tax; levied on a wide range of imported and locally manufactured goods and services; collected by the Malawi Revenue Authority from the importer, manufacturer, wholesaler, retailer or provider of services 16.5% Stamp duties

Transfer of shares 0% Sale of real property; imposed on sales proceeds 1.5%

Partnership instruments MWK20 Mortgages, bonds, debentures or covenants exceeding MWK1,000 MWK1.20 per each MWK200

Registration fee of a company MWK75,000 Property tax; levied by local authorities on the value of industrial, commercial or private properties owned by a taxpayer in the district; payable semiannually Various Commercial properties 0.875% Residential properties 0.518% Fringe benefits tax; imposed on employers other than the government with respect to fringe benefits provided to employees, excluding employees earning less than MWK1,200,000 per year 30%

Resource rent tax; imposed on after-tax profits of mining companies if the company’s rate of return exceeds 20% 15%

E. Miscellaneous matters

Foreign-exchange controls. The currency in Malawi is the kwacha (MWK).

The Reserve Bank of Malawi is responsible for enforcing foreignexchange control regulations in Malawi, which include the fol lowing:

• Approval for foreign equity investments in Malawian companies must be obtained from the Reserve Bank of Malawi.

• Foreign currency denominated loans to Malawian entities must be approved by the Reserve Bank of Malawi.

Tax clearance certificate. The following transactions require a tax clearance certificate from the Commissioner General:

• Transfer of land and buildings

• Application for or renewal of a Certificate of Fitness for com mercial vehicles

• Renewal of Business Residence Permit

• Application for or renewal of professional business licenses and permits of medical practitioners, dentists, legal practitioners, engineers, architects and accountants who are engaged in a

private practice on his or her own behalf or in partnership with another private practitioner

• Application for or renewal of a customs agent license

• Application for or renewal of a certificate of registration under the National Construction Industry Act

• Transfer of a company as a going concern

• Externalization of funds to nonresident service providers whose source is deemed to be Malawi

• Renewal of Temporary Employment Permits

• Renewal of business licenses by the Ministry responsible for industry and trade and councils under local government areas

• Application for or renewal of export and import licenses

• Renewal of tourism licenses by the Ministry responsible for tourism

• Renewal, extension or transfer of mining licenses, or transfers of mineral rights by the Ministry responsible for energy and natural resources

• Renewal of telecommunications licenses by the Malawi Communications Regulatory Authority

• Application for or renewal of a license for gaming premises

• Application for or use of a Customs Procedure Code by a privileged organization

• Change of ownership of a company

• Renewal of registration of public transport conveyances by the Road Traffic Directorate

• Supply of goods or services to the Malawi government and its agencies

Transfer pricing. Under the Taxation Act, any person not liable to tax in Malawi who engages directly or indirectly in one or more transactions with a related person not liable to tax in Malawi and the transaction is in relation to a permanent establishment in Malawi of one of the two related persons, the amount of each person’s taxable income is determined in a manner that is consis tent with the arm’s-length principle.

Effective from 1 July 2017, new transfer-pricing regulations were introduced to strengthen the prevention of tax avoidance. The new regulations provide for transfer-pricing guidelines and transfer-pricing documentation. The Transfer Pricing Documentation Regulations provides that any person engaged in controlled transactions should prepare contemporaneous transferpricing documentation coinciding with transactions and that this documentation should be in place at the time of the filing of annual returns.

The documentation required under these regulations must be submitted to the Commissioner General within 45 days following a written request issued by the Commissioner General. Any per son who fails to comply with the notice is subject to an initial penalty not exceeding the Malawi kwacha equivalent of USD1,400 at the prevailing exchange rate and further penalties not exceeding the Malawi kwacha equivalent of USD2,100 at the prevailing exchange rate for each month that the failure contin ues. The Transfer Pricing Regulations provides a threshold of USD135,000 for domestic related-party transactions. For trans actions below this amount, no transfer-pricing compliance is required.

Thin-capitalization rules. Malawi has introduced thin-capitalization rules, which are effective from 1 July 2018. These rules limit the debt-to-equity ratio to 3:1 for all controlled transactions.

F. Tax treaties

Malawi has entered into double tax treaties with France, Kenya, the Netherlands, Norway, South Africa, Sweden, Switzerland and the United Kingdom. The treaty with Kenya is not operational. The Malawi-Netherlands double tax treaty was suspended, effective from 1 January 2014, and a new double tax treaty is under negotiation. A new tax treaty between Malawi and Denmark has been concluded but not yet promulgated. The governments of Malawi and Mauritius are negotiating a double tax treaty.

The treaties vary in the definition of “exempt income.” Malawi has not yet ratified the Multilateral Instrument under the Base Erosion and Profit Shifting Project.