Zambia Corporate Tax Guide

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Principal Tax Contact

 Patrick Mawire +260 (211) 378-308 Mobile: +260 960-344-106 Email: patrick.mawire@zm.ey.com

International Tax and Transaction Services – Transaction Tax Advisory

Patrick Mawire +260 (211) 378-308 Mobile: +260 960-344-106 Email: patrick.mawire@zm.ey.com Towera Temba-Nkanza +260 (211) 378-300 Mobile: +260 7070-8664 Email: towera.temba-nkanza@zm.ey.com

A. At a glance

Corporate Income Tax Rate (%)

0 to 30 (a)

Capital Gains Tax Rate (%) 0

Branch Tax Rate (%) 0 to30 (a)

Withholding Tax (%) (b)

Dividends 15/20 (c)

Interest 15/20 (d)

Royalties 15/20 (e)

Management Fees 15/20 (f)

Rental Income 0 (g)

Branch Remittance Tax 20

Net Operating Losses (Years)

Carryback 0

Carryforward 5 or 10 (h)

(a) For details, see Section B. The tax rate on betting is 25%. (b) The 20% rate applies to payments to nonresident companies and individuals. The other rates apply to payments made to resident companies and individu als.

(c) For resident and nonresident companies and individuals, this is a final tax. Zambian-incorporated companies may offset the withholding tax imposed on dividends received from other Zambian-incorporated companies against with holding tax payable on their own distributions of dividends.

(d) Withholding tax is payable on the accrual of interest. This rate applies to interest accrued by companies. This is a final tax for nonresident companies. Resident companies may credit the withholding tax against their income tax. (e) For individuals and nonresident companies, this is a final tax. Resident com panies may credit the withholding tax against their income tax. Effective from 1 January 2021, Section 82A of the Income Tax Act provides for the charging of withholding tax on commodity royalty financing payments made by Zambian residents to nonresidents at a rate of 15%. Commodity royalty

financing payments are amounts paid by persons resident in Zambia to non residents that are computed by reference to the production, profit, or value of production from a mineral deposit or other natural resource in Zambia that is payable under royalty financing. It excludes the repayment of the purchase price for the commodity royalty.

(f) The 15% rate applies to resident companies and individuals, while the 20% rate applies to nonresidents. This is a final tax for nonresident companies and individuals. The tax withheld from payments to resident companies and indi viduals is granted as a credit in the final tax return.

(g) The withholding tax regime on rental income is abolished, effective from 1 January 2022 and there is no longer a requirement to withhold tax from rental payments. Turnover tax is imposed at a rate of 4% on gross rental in come of up to K800,000 per year and at a rate of 12.5% if the gross rental income exceeds K800,000 per year. The 12.5% rare applies to the total gross rental income. The turnover tax is subject to detailed rules.

(h) See Section C.

B. Taxes on corporate income and gains

Corporate income tax. Resident and nonresident companies are subject to tax on their income derived from Zambian sources. However, residents are subject to tax on dividends and interest received on a worldwide basis. Resident companies are also sub ject to tax on profits derived from a business carried on partly inside, and partly outside, Zambia. A company is considered resi dent in Zambia if it is incorporated in Zambia or if the central management and control of the company’s business or affairs are exercised in Zambia.

Tax rates. The following are the standard corporate tax rates.

Source Rate (%) Farming 10 Rent 4 to 12.5 Agro-processing 10 Export of non-traditional products 0 Manufacturing 30 Income earned from the manufacturing of products using copper cathodes 15 Banking income 30 Mobile telephone operators

Profits up to ZMW250,000 30 Profits exceeding ZMW250,000 40 Income from mining operations 30 * Income from mineral processing 30 Income earned by hotels and lodges on accommodation and food services 15 Trading and other sources 30

* A mining operation is any operation carried out under a mining right referred to in Section 6 of the Mines and Minerals Development Act, but does not include any operations carried out under a prospecting permit or prospecting license or any operations involving only mineral processing. Mining opera tions are subject to a mineral royalty (see Section D). If the income from a mining operation exceeds 8% of gross sales, the rate is determined in accor dance with the following formula: Y = 30% + [a - (ab ÷ c)]

The following are the values of the items in the formula:

• Y = the tax rate to be applied per year

• a = 15%

• b = 8%

• c = the percentage ratio of assessable income to gross sales However, if the base metal produced or recoverable under the license is cop per, the mineral royalty payable is at the following rates.

Level Copper Norm Price Range

Less than USD4,500

Mineral Royalty Rate (%)

USD4,500 but less than USD6,000 6.5

USD6,000 but less than USD7,500 7.5

USD7,500 but less than USD9,000 8.5

USD9,000 and above 10

The mineral royalty rate on cobalt and vanadium is 8%. A person that is in possession of minerals extracted in Zambia for which mineral royalty has not been paid is liable to pay mineral royalty at the rates set out in the table above if the mineral is copper. A mineral royalty paid is not allowed as a deduction in determining taxable income for a mining entity.

A tax incentive is available to companies that are newly listed on the Lusaka Stock Exchange. A two percentage point reduction of each corporate tax rate is granted to such companies. In addition, a reduction of five percentage points (for a total reduction of seven percentage points) of each corporate tax rate is available to compa nies with more than 33% of their shares owned by Zambians. The incentive applies for one year only, and a company may claim the incentive only once.

Capital gains. Capital gains are not subject to tax in Zambia.

Administration. The Zambia Revenue Authority administers the Income Tax Act. The tax year runs from 1 January to 31 December. Annual tax returns must be filed by 21 June of the following accounting year.

Companies must make four advance payments of tax, which are due on 10 April, 10 July, 10 October and 10 January. The install ments are based on an estimate of the tax due for the year. The balance of tax due must be paid by the due date for filing the annual tax return.

A company may apply to the Commissioner-General to use an accounting year other than the standard tax year. However, the due dates described above for filing returns and advance payments of tax also apply to companies with an accounting year-end other than 31 December.

following are the Pay-As-You-Earn (PAYE) bands.

Dividends.

withholding tax is imposed on dividends paid to resident companies and individuals. A 20% withholding tax is imposed on dividends paid to nonresident companies and indi viduals. This is a final tax. Dividends payable by subsidiaries are also subject to withholding tax at a rate of 15%.

The option to offset the tax withheld on dividends received by a Zambian-incorporated company is available against the with holding tax payable on their own dividend distributions.

Foreign tax relief. In the absence of double tax relief under a double tax treaty, unilateral tax relief is available to resident companies for foreign taxes paid on foreign income subject to Zambian tax. The amount of the tax credit is the lower of the Zambian tax payable on the foreign income and the foreign tax paid on the same income.

C. Determination of trading income

General. Assessable income equals the amount of a person’s income liable to tax that may be included in an assessment and that remains after allowing the deductions to which that person is entitled under the provisions of the Income Tax Act. Expenses are deductible to the extent they are incurred wholly and exclusively for the purposes of the business.

The deduction of interest is now limited to 30% of the tax earn ings before interest, tax, depreciation and amortization (EBITDA). The disallowed interest expense in the tax year may be carried forward up to a maximum of five years. The carryfor ward period of disallowed interest expense is increased to 10 years for mining operations and electricity generating entities, effective from 1 January 2022. The limitation applies to gross interest arising from loans that are both revenue and capital in nature.

Companies engaged in fishing or farming for two consecutive tax years may elect to calculate taxable income or loss for the two tax years by averaging the taxable income earned or loss incurred in each of the two tax years. This election must be filed with the Commissioner-General before the end of the tax year following the second consecutive tax year. The election is not allowed in certain circumstances.

A deduction of a local content allowance is available. It equals 2% of expenditure incurred, other than that of a capital nature, for the growing or purchase of agricultural products by companies carrying on agro-processing or manufacturing in a tax year. The local content allowance applies to agricultural products grown within Zambia, including cassava, pineapple and mango, and is claimable each year that the expenditure is incurred but may not be claimed for more than three tax years.

An annual allowance of 10% is provided for expenditure incurred for the growing of, among others, rose flowers, tea, coffee and citrus fruit trees. For persons growing the plants mentioned above for the first time, the expenditure incurred is not deductible and may be carried forward to the following tax year up to the first year of production. From 2021, the allowance is extended from a period of three consecutive years to five years.

Inventories. Inventories are valued at the lower of cost or net realizable value.

Provisions. Specific identifiable provisions with proof of steps taken to collect the debt are allowed for tax purposes, but general provisions are not allowed.

Tax depreciation. Annual wear-and-tear allowances, which are calculated using the straight-line method, are available for the following assets.

Asset Rate (%)

Industrial buildings

Low-cost housing (buildings used to provide housing for the purposes of a business with a cost per unit of up to ZMW20,000 [USD952.38 as of February 2021]) 10 Others 5

Commercial buildings 2

Implements and plant and machinery used in farming, tourism, electricity generation and manufacturing 50 Other implements and plant and machinery, and commercial vehicles 25 Non-commercial vehicles 20 Property, plant and equipment investment by companies in the priority sector 100

The amount of depreciation claimed on an asset may be recap tured when the asset is sold. In general, the amount recaptured is the excess of the sales price over the tax value, but it is limited to the amount of depreciation claimed.

The 2021 amendment of Section 34A (2) of the Income Tax Act has increased the period in which the development allowance can be claimed. A development allowance is an allowance that applies to a person growing rose flowers, tea, coffee, bananas, citrus fruit trees, and other similar plants or trees, for the first time. The expenditure incurred is not deductible. The development allowance may be carried forward to the following tax years up to the first year of production. However, the development allowance cannot be carried forward for more than five consecu tive years.

Relief for losses. Tax losses may be carried forward five years to offset income from the same source. Mining operations and com panies operating in the hydro- and thermo-generation sector may carry forward losses for a period of 10 years. Effective from 1 July 2015, a loss from a mining operation is deducted from 50% of the income of a person from the mining operation. In general, losses may not be carried back.

Groups of companies. No provisions for filing consolidated re turns exist in Zambia.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax (VAT), on any supply of goods and services, other than an exempt supply, made in Zambia and on taxable imports; exports are zero-rated

Nature of tax Rate (%)

National Pensions Scheme Authority (NAPSA; social security system) contributions on monthly wages; maximum contribution of ZMW1,149 per month for both employers and employees

Employer 5 Employee 5

Property transfer tax on direct transfers of shares (and equivalent rights) 5

Property transfer tax on indirect transfers of shares (and equivalent rights) of companies incorporated in Zambia 55

Property transfer tax on the transfer of mining rights and interests in mining rights 10

Property transfer tax on transfers of mining licenses (effective 1 January 2022) 10

Property transfer tax on intellectual property; effective from 1 January 2018 5 Royalty on the extraction, production and selling of ore; the mineral royalty tax rate varies depending on the type of mineral Various

E. Miscellaneous matters

Foreign-exchange controls. The Zambian currency is the kwacha (ZMW).

Zambia does not impose foreign-exchange controls.

Transfer pricing. Transfer-pricing rules apply to transactions between related parties. Related-party transactions must be conducted at arm’s length. Transfer-pricing rules apply to transactions with nonresident related parties as well as to transactions between local entities. The Zambian transfer-pricing regulations are based on Organisation for Economic Co-operation and Development (OECD) rules, and any price determined in accordance with OECD rules is acceptable. Effective from 1 January 2018, taxpayers must retain transfer-pricing documentation and submit it within 14 days of a request by the tax authority or they will be subject to a penalty of 80 million penalty units (ZMW24 million). Taxpayers are required to have the transfer-pricing document ready at the time of filing of the income tax return (due 21 June).

The required period for the retention of documents and informa tion is 10 years for a business transacting with associated per sons. From 2021, the threshold for the preparation of transfer-pricing documentation for local companies is increased from an annual turnover of ZMW20 million to ZMW50 million. The requirement to file a Country-by-Country (CbC) report is introduced. An ultimate parent entity that is tax resident in Zambia, and that had consolidated group revenue of EUR250 million or ZMW4,795,000 in the previous accounting year must file a CbC report with the Commissioner-General 12 months after the last day of the reporting year of the multina tional enterprise (MNE) with respect to that reporting accounting year.

Effective from 1 January 2022, the legislation provides clarity with respect to the use of a single currency threshold, denominated in kwacha, for CbC reporting. Previously, the transfer-pricing regulations provided for two currencies at EUR 750 million or K4.795 billion. Following this amendment, an MNE group with a consolidated group revenue of K4.795 billion or more is required to file a CbC report.

A non-reporting entity must submit a CbC report notification providing the identity and tax residence of the reporting entity in its MNE group before the close of the financial year (last day of the MNE accounting period).

Permanent establishment. The provision of services, including consultancy services, through employees or other personnel en gaged by an entity in Zambia for a period or periods exceeding an aggregate of 90 days in any rolling 12-month period results in a permanent establishment.

F. Treaty withholding tax rates Management

Dividends Interest Royalties fees % % % %

Canada 15 15 15 0

China Mainland 5/15 10 5 0

Denmark 15 10 15 0

Finland 5/15 15 5/15 0

France 15 10 15 0 Germany 5/15 10 10 0 India 5/15 10 10 0 Ireland 0 0 0 0

Italy 5/15 10 10 0 Japan 0 10 10 0

Kenya 15 15 15 20

Netherlands 5/15 10 10 0

Norway 15 10 10 20

South Africa 20 20 15 20 Sweden 5/15 10 10 20 Switzerland 5/15 5/10 0 20 Tanzania 15 15 15 20

Uganda 15 15 15 20

United Kingdom 5/15 10 10 0

Non-treaty jurisdictions 20 20 20 20