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The treaty will enter into force once ratified by SA and will replace the outdated treaty between SA and the then Southern Rhodesia in 1965.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