Zim­babwe rat­i­fies dou­ble tax treaty with SA

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

ZIM­BABWE an­nounced on April 14 that it had rat­i­fied the dou­ble tax agree­ment con­cluded with SA on Au­gust 4 2015 by way of Statu­tory In­stru­ment 40 of 2016 pub­lished in the Of­fi­cial Gazette of April 8.

The treaty will en­ter into force once rat­i­fied by SA and will re­place the out­dated treaty be­tween SA and the then South­ern Rhode­sia in 1965.

In SA, the new treaty is to ap­ply to nor­mal tax, div­i­dends tax, with­hold­ing tax on in­ter­est and roy­al­ties and the tax on for­eign en­ter­tain­ers and sportsper­sons. In Zim­babwe it will ap­ply to in­come tax, non­res­i­dent share­hold­ers’ tax, cap­i­tal gains tax and the non­res­i­dent tax on fees, roy­al­ties and in­ter­est.

In the case of dual-resident en­ti­ties, res­i­dency will no longer au­to­mat­i­cally be al­lo­cated to the state where an en­tity is ef­fec­tively man­aged but, sim­i­lar to the pro­vi­sions of the new SA/Mau­ri­tius treaty, in terms of the res­i­dence tiebreaker clause, where an en­tity is a resident of both con­tract­ing states, the com­pe­tent au­thor­i­ties of the states shall en­deav­our to de­ter­mine the coun­try of res­i­dence by mu­tual agree­ment. The treaty lists fac­tors to be con­sid­ered for this pur­pose, in­clud­ing the place of ef­fec­tive man­age­ment and in­cor­po­ra­tion.

The new def­i­ni­tion of a per­ma­nent estab­lish­ment closely fol­lows the United Na­tions Model Dou­ble Tax Con­ven­tion and in­cludes a build­ing site, construction, assem­bly or in­stal­la­tion project con­tin­u­ing for more than six months, the fur­nish­ing of ser­vices, in­clud­ing con­sul­tancy ser­vices, within a con­tract­ing state for pe­riod/(s) ex­ceed­ing 183 days within a 12month pe­riod and a de­pen­dent agent act­ing on be­half of an en­ter­prise in a con­tract­ing state. The def­i­ni­tion in the cur­rent treaty does not specif­i­cally deal with construction sites or the fur­nish­ing of ser­vices.

In terms of the new treaty, div­i­dends paid by a resident of a con­tract­ing state may be sub­ject to a max­i­mum with­hold­ing tax rate of 5% in such state if the ben­e­fi­cial owner is a com­pany resident in the other state which holds at least 25% of the cap­i­tal of the com­pany pay­ing the div­i­dend. A with­hold­ing tax rate of 10% ap­plies in other cases. No re­lief from div­i­dend with­hold­ing tax is avail­able under the cur­rent treaty which re­tains the stan­dard div­i­dend with­hold­ing tax rate in both SA and Zim­babwe at 15% (10% for div­i­dends de­clared by Zim­bab­wean listed en­ti­ties).

The cur­rent treaty does not con­tain an ar­ti­cle specif­i­cally deal­ing with in­ter­est and, al­though in Zim­babwe in­ter­est pay­ments to non-res­i­dents are ex­empt from with­hold­ing tax, SA in­tro­duced a 15% with­hold­ing tax on in­ter­est with ef­fect from March 2015, for which no re­lief is avail­able under the cur­rent treaty. The new treaty re­duces the with­hold­ing tax rate on in­ter­est pay­ments from SA to Zim­babwe to 5%.

In terms of ar­ti­cle 6 of the cur­rent treaty any roy­alty or rent ac­cru­ing to a resident of one of the ter­ri­to­ries (state A) by virtue of the use of in­tel­lec­tual prop­erty in the other ter­ri­tory (state B), shall be ex­empt from tax in state A if such in­come is sub­ject to tax in state B. Ac­cord­ingly, no re­lief is pro­vided from with­hold­ing taxes levied on roy­alty or rent pay­ments from state B in this ex­am­ple. The new treaty pro­vides for wel­come re­lief, re­duc­ing both the South African and Zim­bab­wean with­hold­ing tax rate on roy­al­ties from 15% to 10%.

Ar­ti­cle 13 of the new treaty deals with tech­ni­cal fees, which is de­fined as pay­ments of any kind in con­sid­er­a­tion for any ser­vice of an ad­min­is­tra­tive, tech­ni­cal, man­age­rial or con­sul­tancy na­ture. Such fees may be taxed in the state in which it arises at a rate not ex­ceed­ing 5% of the gross amount of the fees. The cur­rent treaty does not con­tain pro­vi­sions deal­ing with tech­ni­cal fees and no re­lief is avail­able from the cur­rent 15% Zim­bab­wean with­hold­ing tax on such fees. “Man­age­ment charges” are ex­cluded from the def­i­ni­tion of “in­dus­trial and com­mer­cial prof­its”, which are sub­ject to tax in the other state if such prof­its are at­trib­ut­able to a per­ma­nent estab­lish­ment in the other state.

Whereas the cur­rent treaty does not con­tain any pro­vi­sions ad­dress­ing the treat­ment of cap­i­tal gains, in terms of ar­ti­cle 14 of the new treaty gains de­rived by a resident of a con­tract­ing state (state A) from the alien­ation of im­mov­able prop­erty si­t­u­ated in the other state (state B), or from the shares in a com­pany the as­sets of which con­sist di­rectly or in­di­rectly of such prop­erty, may be taxed in state B.

In re­spect of the elim­i­na­tion of dou­ble tax­a­tion, in SA the new treaty pro­vi­sions are sub­ject to the pro­vi­sions of the law of SA re­gard­ing the de­duc­tion of tax payable in any other coun­try. Ac­cord­ingly, in terms of the In­ter­pre­ta­tion Note 18, the do­mes­tic tax credit pro­vi­sions of sec­tion 6quat of the In­come Tax Act must be ap­plied when cal­cu­lat­ing the re­lief pro­vided by the treaty.

The cur­rent treaty di­rects that SA shall ei­ther im­pose no tax or, sub­ject to such pro­vi­sions as may be en­acted in SA, shall al­low the South­ern Rhode­sian tax as a credit against any South African tax payable in re­spect of prof­its from sources in South­ern Rhode­sia.

The pro­vi­sions of the new treaty shall ap­ply with re­gard to taxes with­held at source, in re­spect of amounts paid or cred­ited on or af­ter the first day of the se­cond month fol­low­ing the date on which the treaty en­ters into force and in re­spect of other taxes, in re­spect of years of as­sess­ment com­menc­ing on or af­ter the first day of Jan­uary fol­low­ing upon which the treaty en­ters into force.

New treaty ap­plies to nor­mal tax, div­i­dends tax, tax on in­ter­est, roy­al­ties, en­ter­tain­ers and sports­men

Celia Becker is an Africa Reg­u­la­tory and Busi­ness In­tel­li­gence ex­ec­u­tive at ENSafrica.

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