Changes required to legislation on indirect disposals of companies

What you need to know:

Following the 2012 amendment, where there is such a change all the assets and liabilities of the Tanzanian company are deemed to be realised for tax purposes and if this results in a gain, then such a gain is taxable.

However, the rules as drafted have potentially much wider ranging unintended implications including the possibility of a disposal being subject to taxation twice, minority shareholders being impacted by an indirect disposal they have no part of and even uncertainty of how the tax can be calculated if the connection with Tanzania is very remote. In addition, the change now impacts transactions that really were not the objective of the amendment – for example, transactions not motivated by tax avoidance, and where more of the transaction value relates to assets outside Tanzania than inside. For example, if a major multinational is taken over tomorrow on an international stock exchange, and if it has a subsidiary in Tanzania, then the subsidiary in Tanzania is deemed to have disposed of its business at market value and then reacquire it – and this is irrespective of the fact that the underlying value in Tanzania might be a miniscule proportion of the value of the multinational’s value.

Firstly, such provisions normally only apply where the value in country is primarily attributable to a particular class of assets (for example, “immovable property” (South Africa), “taxable property” (China)) as opposed to any trading business. Secondly, and more importantly, the provisions normally only apply where a de minimis threshold for underlying value of the transaction is attributable to the country - for example, 80 per cent and 50 per cent in South Africa and India respectively. Although, China does not have an explicit percentage requirement, there has to be a tax avoidance motive for the indirect disposal provisions to apply – and one of the factors in considering this is whether the main source of asset value / income is in China, so again not too dissimilar to India’s 50 per cent threshold. China also explicitly excludes transactions on stock exchanges from being subject to the provisions.

Changes required to legislation on indirect disposals of companies

What you need to know:

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