Tanzania is definitely a safari destination but how about becoming a holding company destination?
Investors who want to operate in multiple jurisdictions often prefer the structure of a holding company. Depending on the nature and location of investment, certain jurisdictions have emerged as favourites for establishing holding companies. Mauritius, British Virgin Islands (BVI) and Ireland are some popular examples. For investments flowing into Africa, Mauritius and increasingly UAE are the preferred locations.
There are numerous advantages linked to holding companies. They attract foreign direct investment (FDI) which stimulates economic activities and creates jobs resulting in an increase of tax revenues and growth of the financial sector among other benefits.
The choice of jurisdiction for a holding company is influenced by several factors including the tax structure. I will explore some tax considerations that directly affect investor choices.
A holding company will normally receive income in the form of dividends and interest. Having tax concessions on such income sources can attract investors. The popular holding company jurisdictions either have a full exemption or a reduced rate on taxation of such income subject to meeting certain conditions. Dividend and interest income derived by a Tanzanian entity from a non-resident person is taxed at 30% - quite a high rate!
In Tanzania, there is also a dividend withholding tax on payments made to local holding companies i.e. even if the funds have not moved out of Tanzania. The effective tax rate where there is presence of a local holding company is 14.5% (combined effect of 5% on payment to local entity and another 10% to the non-resident shareholder). Global best practice is exemption from tax on payments of dividend to a resident shareholder - Rwanda introduced such an exemption in 2022.
Tax treaty network of a country is also an area of consideration for investors. Tanzania has double tax agreements (DTAs) with nine countries out of which only a couple provide real advantage (incentives) over the domestic law. Except for India and South Africa whose treaty was signed in 2011 (effective 2012) and 2005 (effective 2007) respectively, most agreements were executed between the 1960s and 1990s. These agreements do not reflect the changes in the Tanzanian economy or the advancements in e-commerce globally. More importantly, they do not reflect the current economic partners in terms of investment entities as well as manpower influx who both tend to be taxing points and prone to double taxation incidence. Treaty negotiations have been underway with various countries including Mauritius, UAE and Oman but not yet reached a conclusion.
Controlled Foreign Corporation (CFC) rules are also key to investor choices for a holding company destination. These rules aim to avoid profit shifting to subsidiaries located in a low tax jurisdiction. Tanzania does have CFC provisions however they do not appear to meet the intended purpose. For instance, there are no exemptions to the application of these rules (opposed to best practice globally) to cater for scenarios where the subsidiary is located in a high tax or a comparable jurisdiction (hence no motive for profit shifting). In essence, the CFC rules apply to all resident entities that hold shares outside Tanzania regardless of the size of investment and the tax rate in the foreign country. This would cause an unnecessary compliance burden hence discouraging expansion of local businesses making them uncompetitive in regional markets.
Another essential factor is exit taxation. The ease of winding up including the associated costs plays a significant role in holding company choices. As a holding company normally has multiple subsidiaries, the tax cost of dissolving a subsidiary is evaluated by investors - for instance, the extent of capital gains tax on disposal of shares in a subsidiary. Whilst Tanzania does not have any special rules incentivising such structures, some jurisdictions have introduced participation exemption rules designed to encourage cross border investments by providing exemptions from capital gains tax on disposal of shares in subsidiaries subject to meeting certain conditions.
As the reading of the national budget is around the corner, what policy changes can Tanzania consider?
Expanding the tax treaty network and renegotiating old treaties is essential. To encourage local businesses to flourish on a regional and global scale, consideration needs to be given to introducing exemptions for application of CFC rules - for instance exclusion for subsidiaries in countries with a similar or higher tax rate to Tanzania. Special rules aimed at minimal taxation on (i) disposal of shares in subsidiary of a holding company and (ii) dividend and interest income derived by the holding company can be regarded to push Tanzania ahead in the queue for holding company favourite.
I am hopeful that I will be able to recommend Tanzania as a holding company destination in the near future.
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