Income Tax in Zambia

Overview

The Income tax Act  is the legislation that governs Income tax in Zambia. Income tax is tax on profits made by Limited Companies, Partnerships and Self-Employed individuals as well as on emoluments earned by employees. All profit making persons have an obligation to pay Income tax on their profits. Similarly, all individuals in employment have an obligation under the Income Tax Act to pay tax on their emoluments. An overview of some of the contents of the Income Tax Act is as follows:

Taxation of Business profits

The Income tax Act defines assessable income as the amount of a personal income liable to tax which may be included in an assessment and which remains after allowing the deductions, to which that person is entitled under the provisions of the Act. The assessable income is returned in an annual income tax return in accordance with section 46(1), 46(2) and 46(3) of the Income tax Act.

The provisions of the Act dealing with returns do not apply to taxpayers covered by Section 64A (2). Section 64A (2) excludes from Income tax, persons with turnover of K800, 000.00 and below. This part prescribes the documents and other supporting documentation, which should be submitted with the returns in order for the Commissioner-General to determine with reasonable accuracy, the assessable income and the tax due. Part V also deals with penalties that are charged on late submission of returns. Section 64(a) empowers the Commissioner-General to estimate tax due from a person in the event that they fail to submit an Income Tax Return. Section 64(b) empowers the Commissioner-General to estimate tax due from a person in the event that their return is unsatisfactory.

The Tax Computation.

Legally speaking, the return must be accompanied by a Tax Computation, section 46 (2) (b).

Part IV (Sections 29 to 44) of the Income tax Act provides guidance on what items of expenditure are allowed to be deducted in ascertaining the taxable business profits. Generally speaking, the Income Tax Act allows as a deduction the following:-

(a) Expenditure incurred wholly and exclusively for the purposes of the business (S29)

(b)Revenue and not capital expenditure (S29)

(c)Losses brought forward from the same source, provided that a loss can only be carried forward for a period of five years (S30)

(d) Capital allowances, Investment allowance and Development allowance (S33 and 34)

(e) Approved fund deductions (S37)

(f) Payments in respect of technical education (S38)

(g) Subscriptions to professional bodies of knowledge relevant to the business(S39)

(h) Donations to approved public benefit organizations (S41)

(i) Revenue expenditure on Research (S43)

(j) Deductions for bad and doubtful debt and deduction for employing a handicapped person (S43A and S43D)

(k) Any other deductions as prescribed by Section 44.

The sufficient condition is that except for capital allowances, all this expenditure must not be capital in nature.

Provisional Tax

Under the Income Tax Act, all taxpayers in receipt of income, other than emoluments from employment or office, are required to make advance payments in the course of the tax year, on account of their estimated tax liability. This estimated liability is referred to as Provisional Tax. The return should contain:

· An estimate (based on information reasonably believed to be true) of the personal income liable to tax;

· A computation of tax based on the rates of tax applicable for the charge year;

· A declaration by the taxpayer that it includes a full and reasonable estimate of his income for the charge year.

· The deadline for the submission of the provisional tax return is as follows:

(a)  in the case of an electronic return, not later than 31st March of the charge year to which the return relates; and

(b)  in the case of a manual return, not later than 5th March of the charge year to which the return relates.

· Late return submission will attract penalties.

· If at any time during the charge year, there are some changes in the business affecting the estimated income, the taxpayer is allowed to submit an amended provisional return.

· Where it is discovered that the taxpayer had under estimated his income by one third or more, penalties are chargeable.

· Provisional Tax is due and payable on the following dates in the charge year:

1st installment − 31st March, payable by 10th April

2nd installment − 30th June, payable by 10th July

3rd installment − 30th September, payable by 10th October

4th installment − 31st December, payable by 10th January

Annual Income Tax returns accompanied by financial statements are to be submitted by 21st June following the year under review.

When a taxpayer who has been paying Provisional Income Tax discovers that his annual turnover will not exceed K800, 000.00 during the year, he shall notify the Commissioner General immediately. However, he shall continue to pay Provisional Income Tax till the end of that particular charge year and shall be assessed under the Income Tax System. At the end of the year, the taxpayer will be required to submit a Turnover Tax Return and a set of accounts with supporting documents covering the whole year.

Taxpayer rights.

Part XI of the Income Tax Act (covering sections 106-114) deals with the right of taxpayers to react to an assessment raised as above. Section 106 states, Subject to the Commissioner-General’s power relating to assessment, every assessment under this Act shall stand good unless proved otherwise by the person assessed upon objection or appeal under this part. This means that if the assessment does not accurately reflect the tax liability of a person, the person must produce evidence to this effect (i.e. object) within thirty days and the assessment may be amended (Section 108).

If the taxpayer is unsuccessful, he/she may appeal to the Tax Appeals Tribunal (TAT) for further determination.

Personal Income Tax

Under the Income Tax Act, Zambia has a source-based system for the taxation of income. Income deemed to be from a Zambian source is generally subject to Zambian income tax. Zambian residents are also subject to income tax on interest and dividends from a source outside Zambia.

Personal income tax rates

The rates of income tax applicable to an individual for the charge year ending 31 December 2017 are as follows:

Taxable Income (ZWM)		Income Tax Rate (%)
From	To
0	39,600	0
39,601	49,200	25
49,201	74,400	30
Above 74,400		37.5

*Zambian kwacha

In principle, the same rates apply to both Zambian and non-Zambian residents. In practice, the only mechanism for income of non-Zambian residents to be subject to income tax at these rates would be on Zambian-source emoluments from an employment or office under PAYE. Other Zambian-source income of non-Zambian residents could be subject to withholding tax (WHT).

Note that a special rate of 10% may apply to taxable lump sum payments from approved pension funds and taxable gratuities and compensation for loss of office.

Residency Rule

An individual will be treated as Zambian resident unless present in Zambia for a temporary purpose only and not with a view or intent of establishing residence in Zambia. Any individual present in Zambia for 183 days or more in a charge year will be treated as Zambian resident in that charge year.

Taxable Income

Employment income

Emoluments regarded as arising from a Zambian source in respect of an employment are subject to income tax. Emoluments are deemed to be from a Zambian source if it is a remuneration from employment exercised or office held in Zambia, or if it is received by virtue of any service rendered or work or labour done by a person or partnership in the carrying on in Zambia of any business, irrespective of whether payment is made outside Zambia, or by a person resident outside Zambia.

The employer is responsible for paying the income tax arising on the emoluments under the PAYE regulations.

The definition of emoluments is wide and includes any salary, wage, overtime, leave pay, commission, fee, bonus, gratuity, benefit, advantage (whether or not capable of being turned into money or money’s worth), allowance (including inducement allowance), pension, or annuity, paid, given, or granted in respect of any employment or office, wherever engaged in or held.

Benefits provided to employees that are capable of being turned into money or money’s worth are regarded as income of the employee and are subject to PAYE. However, benefits provided that are incapable of being turned into money or money’s worth (e.g. the use of cars and accommodation provided by the employer) will be taxed on the employer rather than on the employee.

In addition to the above, the employer is required to pay a skills development levy of 0.5% of a company's total emoluments on a monthly basis.

Equity compensation

The allotment or acquisition of shares under a share option scheme that is approved by the Zambia Revenue Authority (ZRA) is exempt from income tax.

Specific rules for other share option schemes apply from 1 January 2014.

Business income

Business income is generally calculated on the same basis for individuals as companies.

Business income is generally determined in line with applicable accounting standards (excluding receipts of a capital nature). Expenses wholly and exclusively incurred for the purposes of the business are generally deductible, provided they are of a revenue nature rather than capital in nature.

Capital expenditure is disallowed, but capital allowances are available on qualifying capital items.

Capital gains

Zambia does not have a capital gains tax, and, except where provided otherwise in the Income Tax Act, capital gains are not subject to tax.

Dividend income

Zambian resident individuals are taxed on dividend income from both Zambian and non-Zambian sources.

In the case of dividend income received from a Zambian resident company, the WHT deducted on the payment of the dividend should represent the ‘final tax’, and the Zambian resident individual receiving the dividend should not be subject to additional income tax.

Interest income

Zambian resident individuals are generally taxed on interest income from both Zambian and non-Zambian sources.

From 1 January 2013, interest earned by individuals from savings and deposit accounts is exempt from tax.

In the case of other Zambian-source interest income, the WHT deducted on the payment of interest should represent the ‘final tax’, and the Zambian resident individual receiving the interest is not subject to additional income tax.

Rental income

Zambian-source rental income of a Zambian resident is subject to tax as a separate source.

From 1 January 2014, a landlord suffers WHT at the rate of 10%. This is now the final tax for the landlord.

Exempt income

As noted above, capital gains and non-Zambian source income (with the exception of dividends and interest) are outside the scope of income tax.

Exempt categories of income include:

· Lump sum payments withdrawn from an approved fund at retirement age, death, or permanent incapacity.

· Approved payments for injury or sickness.

· A scholarship, bursary, or maintenance for education.

· Alimony, maintenance, or matrimonial allowance.

· A pension received from an approved fund.

· A dividend declared from farming income for the first five years the distributing company commences farming.

· Ex-gratia payments to a spouse, child, or dependant on the death of an employee.

· Lump sum payments paid to an employee on loss of office on medical grounds.

· A dividend declared by a company listed on the Lusaka Stock Exchange to an individual.

· Dividends declared by a company engaged in the assembly of motor vehicles, motor cycles, and bicycles for five years from the declaration of the first dividend.

· Dividends declared by a company approved under the Zambia Development Agency Act (ZDA Act) for five years from the date operations commence.

· Certain payments to government employees, members of the armed forces, etc.

From 5 January 2016, pension is exempt from tax. A pension benefit is defined in the Zambian Constitution to include: ‘pension, compensation, gratuity or similar allowance in respect of a person’s service’.

Residency Rule

An individual will be treated as Zambian resident unless present in Zambia for a temporary purpose only and not with a view or intent of establishing residence in Zambia. Any individual present in Zambia for 183 days or more in a charge year will be treated as Zambian resident in that charge year.

Deductions from Income

Employment expenses

An expense is deductible against taxable emoluments if it is incurred wholly and exclusively for the purpose of that source of income and is not capital in nature. This test is difficult to satisfy in practice where an expense is incurred by an employee. Capital allowances may be available in limited circumstances.

Alimony

Alimony payments are not deductible.

Charitable contributions

A payment to a public benefit organisation that is approved by the Zambian government or owned by the Zambian government is deductible. The maximum amount deductible is 15% of taxable income.

Mortgage interest expenses

Mortgage interest is not deductible.

Taxes paid

Zambian taxes paid are not deductible.

Standard deductions

There is no standard deduction.

Personal allowances

There are no personal allowances. However, as set out in the rate table, the first ZMW 36,000 of taxable income (excluding taxable lump sum payments from approved pension funds, gratuities, and compensation for loss of office) is subject to income tax at 0%.

Business deductions

Business expenses are generally deductible, provided that they are not capital and they are incurred wholly and exclusively for the purposes of the business.

Losses

Losses can be carried forward for set-off against profits of the same source. Normally, losses are available to carry forward for a period of five years after the charge year in which the loss was incurred. In the case of a person carrying on a mining operation or hydro, solar, wind, and thermo power generation, the loss carryforward period is ten years.

There is no ability to carry back losses.

Losses from one source cannot be set against income from another source.

Corporate Income Tax

Under the Income Tax Act, Zambia has a source-based system for the taxation of income. Income deemed to be from a Zambian source is generally subject to Zambian income tax. Zambian residents are also subject to income tax on interest and dividends from a source outside Zambia.

A non-Zambian resident enterprise with a Zambian permanent establishment (PE) will be subject to corporate income tax (CIT) on its Zambian-source income. If there is no PE, Zambian-source income of the non-Zambian resident may still be subject to WHT.

The standard CIT rate applicable to the income of companies (and other persons other than individuals) is 35%.

The following sources of income are subject to different CIT rates:

Source of Income	Tax Rate (%)
Electronic communications networks or service licensees (income in excess of 250,000 Zambian kwacha [ZMW])	40
Farming	10
Agro-processing	10
Export of non-traditional products	15
Production of organic fertiliser and chemical manufacture of fertilizer	15

The rates applicable for mining operations (for both base metals and industrial minerals) are as follows:

Tax on mining operations (for both base metals* and industrial minerals**)	Tax Rate (%)
CIT	30
Additional variable profits	N/A

The CIT rate of 35% is applicable on income from mineral processing***.

Notes

* Mining operations means an operation carried out under a mining right, excluding an operation carried out under a mineral processing licence only or an exploration licence.

** Industrial minerals include rocks or minerals other than gemstones, base metals, energy minerals, or precious metals used in their natural state or after physical or chemical transformation, including barites, dolomite, feldspar, fluorspar, graphite, gypsum, ironstone when used as a fluxing agent, kyanite, limestone, phyllite, magnesite, mica, nitrate, phosphate, pyrophyllite, salt, sand, clay, talc, laterite, gravel, potash, potassium minerals, granite, marble, clay, silica, diatomite, kaolin, bentonite, or quartz.

*** Mineral processing means the practice of beneficiating or liberating valuable minerals from their ores, which may combine a number of unit operations, such as crushing, grinding, sizing, screening, classification, washing, froth floatation, gravity concentration, electrostatic separation, magnetic separation, leaching, smelting, refining, calcining, and gasification or any other processes incidental thereto.

Reductions in CIT rates apply to a company operating under a priority sector declared under the Zambian Development Agency Act (ZDA Act), 2006, as amended.

Reduced CIT rates apply in some other cases, including for certain companies listed on the Lusaka Stock Exchange.

Mineral royalty tax

The mineral royalty tax regime in Zambia has undergone a number of changes since 2015. However, with effect from 1 June 2016, the following mineral royalty rates apply:

Description	Rate
For a holder of a mining licence:
a)     Of the norm value of the base metals produced or recoverable under the licence, except when the base metal is copper.	5
b)     Of the gross value of the energy and industrial minerals produced or recoverable under the licence.	5
c)     Of the gross value of the gemstones produced or recoverable under the licence.	6
d)     Of the norm value of the precious metals produced or recoverable under the licence.	6
Where the base metal produced or recoverable under the licence is copper:
a)     On the norm value when the norm price of copper is less than 4,500 United States dollars (USD) per tonne.	4
b)     On the norm value, when the norm price of copper is USD 4,500 per tonne or greater, but less than USD 6,000 per tonne.	5
c)     On the norm value, when the norm price of copper is USD 6,000 per tonne or greater.	6

Taxable Income

Zambian CIT rules set out a number of sources of income that are subject to CIT. Income from each source is calculated separately, and a CIT liability arises on each source with no ability to offset a loss from one source against income from another source.

Business income

Business gains or profits from a Zambian source are taxable by reference to a charge year. This charge year runs from 1 January to 31 December; however, entities can apply to the Zambia Revenue Authority (ZRA) to have their accounts prepared for a different year end.

Inventory valuation

In calculating business income, IFRS should be followed for CIT purposes, including the determination of stock valuation.

Capital gains

Zambia does not have a capital gains tax regime, and, except where provided otherwise in the Income Tax Act or other legislation, capital gains are not subject to tax.

Dividend income

All dividend income (from both Zambian and non-Zambian sources) of a Zambian resident company is subject to CIT as a separate source.

In the case of dividend income received from another Zambian resident company, the WHT deducted on the payment of the dividend should represent the ‘final tax’, and the Zambian resident company receiving the dividend is not subject to an additional CIT liability.

Interest income

All interest income (from both Zambian and non-Zambian sources) of a Zambian resident company is subject to CIT as a separate source.

In the case of interest income from a Zambian source, the taxable amount for the recipient company is inclusive of the WHT deducted on the payment of the interest. The WHT is available as a credit for offset against the final CIT liability of the recipient Zambian resident company.

Rental income

Zambian-source rental income of a Zambian resident company is subject to CIT as a separate source.

WHT arises at 10% on rental payments. This is the final tax for a landlord, which will not be subject to a further CIT liability.

Royalty income

Zambian-source royalty income (which is very widely defined for these tax purposes) of a Zambian resident company is subject to CIT as a separate source, together with premiums or any like consideration for the use of any Zambian property.

The taxable amount for the recipient company is inclusive of the WHT deducted on the payment of the royalty. The WHT is available as a credit for offset against the CIT liability of the Zambian resident recipient company.

Partnership income

Where a business is carried on in partnership, the income to which each partner is entitled in a period is ascertained under the Zambian income tax rules, and each partner is assessed and charged separately. Accordingly, a partnership is broadly transparent for Zambian income tax purposes.

Unrealised gains/losses

Unrealised gains are not taxable, and, similarly, unrealised losses are not tax deductible.

Foreign currency exchange gains/losses

Foreign exchange gains are only taxable to the extent that they are revenue rather than capital in nature, in which case they are not taxed until they are realised. Foreign exchange losses are only deductible to the extent that they are revenue in nature and realised. By exception, foreign exchange losses of a capital nature incurred on borrowings used for the building and construction of an industrial or commercial building are deductible.

Other significant items

Other sources of income that are taxed under separate source include annuities and hedging income.

Foreign income

As noted above, Zambia operates a source-based system of income tax. However, where an individual/corporate entity is resident in Zambia, then they will also be subject to income tax on non-Zambian source dividends and interest income.

There are no specific anti-avoidance rules preventing deferral of non-Zambian source income, although it should be noted that Zambia has a general anti-avoidance rule.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.