Updated on July 19, 2022
The Zimbabwe Income Tax Act [Chapter 23:06] imposes income tax on firms and individuals based on income derived from or deemed to be derived from Zimbabwean sources. Those who sell or dispose of certain Zimbabwean assets face a capital gains tax as well.
Non-resident dividends, resident dividends, non-resident remittances, non-resident royalties and interest, automated financial transactions, intermediated money transfers, and non-executive director fees are all subject to withholding taxes enacted by the Income Tax Act. Small and medium-sized businesses are likewise subject to presumptive taxes under the Income Tax Act.
However, all taxes imposed by the Income Tax Act are subject to the requirements of Double Taxation Agreements, when relevant.
Zimbabwe does not levy provincial taxes on its citizens.
In this chapter
- Legal system
- Taxation authorities
- Business vehicles
- Financing a corporate subsidiary
- Corporate income tax
- Cross-border payments
- Payroll taxes
- Indirect taxes
Roman Dutch common law is the basis of Zimbabwe’s operational legal system, which also incorporates elements of English law, particularly in commercial law. Taxes, on the other hand, are only levied when required by law. These include the Income Tax Act [Chapter 23:06], the Capital Gains Tax Act [Chapter 23:01], the Value Added Tax Act [Chapter 23:12], the Customs and Excise Act [Chapter 23:02], the Stamp Duties Act [Chapter 23:09]. If you’re wondering how much tax you’ll be paying, the Finance Act [Chapter 23:04] is your guide.
It is the responsibility of the Zimbabwe Revenue Authority (ZRA) to oversee the country’s taxation system. According to the Income Authority Act [Chapter 23:11], it was tasked with evaluating, collecting, and enforcing the payment of all tax revenue.
It is possible for both locals and non-residents to set up and operate enterprises in Zimbabwe. Solitary proprietorships, partnerships, private limited companies, and public limited companies can all be used to conduct business in Zimbabwe, as can non-Zimbabwean firms, co-operatives and companies limited by guarantee. A trust, which is a common law device, can also be used to do business.
A partnership is a legal agreement between two or more people or organizations to carry out a business endeavor.
Because the Income Tax Act explicitly removes partnerships from the definition of a person, it is normally not considered a separate legal entity for tax purposes. The Value Added Tax Act, on the other hand, makes an exception because it does not exclude a partnership from the definition of an individual.
The partnership’s legal personalities, i.e., the partners, are taxed under the Tax Act.
Shares of the partnership’s income are subject to taxation by the partners in proportion to their ownership stakes.
Because joint ventures are treated as partnerships rather than as independent legal entities, the parties involved in them must pay taxes on their respective portions of the partnership’s profits. Even if partners are required to file a combined tax return for the partnership’s profits or losses, they are still personally liable for any taxes due. As a result, partnerships in Zimbabwe are tax-transparent entities that lack a distinct legal identity.
Only revenue from a Zimbabwe-based partnership is subject to taxation. In order for income to be considered as coming from Zimbabwe, partners must perform their services in Zimbabwe. As long as the non-resident partners don’t perform any services outside of Zimbabwe, their income is considered to derive from a domestic source. For the purposes of determining the source of income, the location of payment is irrelevant. The exception to this is if the service is delivered outside of Zimbabwe, but the income is derived from a trade within Zimbabwe.
If all of the company’s paperwork is in order, incorporation in Zimbabwe usually takes no longer than seven (7) days.
It’s possible for a company to be restricted either by stock ownership or by a guarantee. In both cases, the firm is a separate legal entity that is responsible for its own taxation of its income. Because of this, corporations are compelled to withhold a portion of their shareholders’ dividends. As a result of this, shareholders are taxed twice – first on the company’s income, and then on the dividends it pays out. The company’s losses cannot be passed on to its shareholders despite the fact that it is subject to both federal and state taxes.
A minimum of US$30 million in capital is required by the Reserve Bank of Zimbabwe for all international banks and large indigenous commercial banks by the end of 2020, however no capital requirements are imposed by Zimbabwean law for new enterprises.
Commercial banks, merchant banks, building societies, development banks, and discount houses should have a minimum of US$20 million in assets by the same date, as should discount houses. In addition, public limited businesses must have a minimum of ZWL$10 million in subscribed capital.
Corporation owned by a private company
Private Business Corporations (PBCs) are also allowed to be registered at Zimbabwe’s Companies Registry.
Registration can take up to seven (7) business days. There should be no more than twenty people on a PBC. Individuals can only join (natural persons). Members’ interests set the boundaries for private business corporations.
According to the Income Tax Act [Chapter 23:04], they are, therefore, distinct legal entities that bear their own tax burdens.
As long as one Zimbabwean is a member, non-Zimbabweans can participate in Private Business Corporations. It is possible to run a PBC with just one member, but that individual must be a Zimbabwean.
Small, medium, and large-scale businesses (MSMEs)
Small and medium-sized companies (MSMEs) are not a distinct type of business, but rather refer to a group of businesses owned by one or more people in a specific industry area (Agriculture, Arts, Entertainment Culture, Education, Sport, Mining and Quarrying, Manufacturing, Construction, Energy, Financial Services, Transport, Retail, Tourism and Hospitality and Services). Small businesses, PBCs, and single proprietorships are all examples of these businesses. According to Chapter 24:12 of the Small and Medium Enterprises Act, there are certain revenue requirements and formulae for enterprises to be classified MSMEs. Businesses who don’t keep sufficient accounting records in Zimbabwe are not subject to any special tax rules under Zimbabwean law. If they keep books like this, they are considered tax-compliant and are required to pay income tax. Taxes are expected from a variety of small enterprises, including taxi drivers, hair salon owners, small-scale miners, and others.
The Cooperative Societies Act [Chapter 24:05] permits the formation of co-operatives for the purpose of conducting business.
A majority of the members should be Zimbabwean citizens or foreign nationals who reside in Zimbabwe on a regular basis.
As a result, international investors will be less interested in investing in cooperatives. With the Zimbabwean Revenue Authority, co-operatives are registered and taxed like corporations.
Under the common law in Zimbabwe, trusts can be set up. A trust is a legal arrangement in which one person acts on behalf of another person or an unspecified object.
A Trust Deed is used to create it, and it can (but need not) be registered with the Deeds Registry office for official purposes.
It is, however, standard practice to file trust deeds with the state where they are created. A trust’s income is taxed at the same rate as corporate income before it is distributed to the beneficiaries.
Corporations from Other Countries
It is illegal for foreign corporations to avoid paying taxes in Zimbabwe because of the Income Tax Act.
A Double Taxation Agreement governs how the foreign corporation is taxed in the country where it is based, hence this position can be challenged.
In the event of a Double Taxation Agreement, the provisions of the Zimbabwean statutes are superseded.
According to a review of Zimbabwean tax treaties, local tax is also imposed where a foreign firm has a permanent establishment in Zimbabwe.
It is possible that such a location be a workplace or a building site, for example. To be taxed in Zimbabwe, a foreign corporation’s permanent establishment needs to be registered with the Zimbabwe Revenue Authority as a tax entity.
For profits, fees, royalties and remittances, the country of origin of the non-resident may be exempt from paying withholding tax if a Double Taxation Treaty exists between Zimbabwe and the nation of origin.
In the absence of a treaty, dividends from listed securities are subject to a 10% withholding tax, while any other dividend is subject to a 15% withholding tax. Non-residents’ fees, royalties, and remittances are also subject to a 15% withholding tax under Zimbabwe’s Finance Act [Chapter 23:04].
Withholding tax on dividends paid to a foreign company’s Zimbabwean branch is not required unless such a provision is incorporated in a tax treaty. There is no withholding tax if the branch’s fees, royalties, or remittances are sent to the foreign head office.
Branch offices, on the other hand, are considered resident taxpayers and must pay income tax in the country they are located in.
Taxes on payments for head office charges are also imposed at a 15% withholding rate.
Financing a corporate subsidiary
Contributions for shares
Zimbabwean equity financing involves the distribution of shares in exchange for cash or currency equivalents from investors.
The company’s “issued share capital” account is bolstered by the allotment.
Benefit from each other’s success
Rather than in the issued capital account, corporations that issue shares at a price above their par value accumulate the difference in their share premium account. As fully paid bonus shares, a member, director, or employee may use a share premium to pay up unissued shares. Share premium can also be applied to a trustee of such a member, director, or employee.
A company’s share premium account can also be used to write off the company’s preliminary expenses, as well as expenses, commissions paid, or discounts allowed on any of the company’s issues of shares or debentures.
If you sell your stock for more than the par value, you’ll face capital gains tax, and the Revenue Authority has the authority to calculate the fair market value for that purpose.
Issues Not Listed Below
If a non-public Zimbabwean corporation distributes its paid-up capital to non-resident shareholders, the corporation will not be taxed on the distribution. Only gains that have not yet been dispersed are eligible for these bonus shares. Under the Income Tax Act, scrip dividends are taxed if they are issued in a scrip dividend arrangement. Bonuses paid out of profits that have not been distributed are not taxed.
Financing with debt
The tax consequences of withholding
Companies in Zimbabwe are not taxed when they borrow money and pay it back with interest. However, a 15% withholding tax is imposed on interest paid by a financial institution to a taxpayer who is a resident of the United States. Non-residents’ interest on inbound loans is exempt from taxation.
The use of sparse capitals
Thin capitalization rules for debt financing are included in the Tax Act.
Corporations in Zimbabwe that pay or receive interest from non-resident shareholders cannot deduct this interest if their debt to equity is greater than 3 to 1. Deductibility of interest is reduced proportionately when debt exceeds this ratio, and any interest payment that is restricted under these rules is considered a dividend for the purposes of withholding tax requirements.
Taxes on stamps
Neither debt nor equity financing is subject to stamp duty.
Corporate income tax
Income tax rate
The tax rate for corporations and trusts will rise to 24% on January 1, 2020.
A person’s income is not taxed for the first five years of the arrangement if they are involved in an approved construct, own, operate, and transfer (BOOT) or build, operate, and transfer (BOT) arrangement. During the next five years, income will be taxed at 15%. Similarly, industrial park developers pay no income tax for the first five years of operation before paying a tax of 24 percent. Concessionary rates of 20% apply to manufacturing firms that export 30% or more of their output but not more than 41%.
Manufacturers who export more than 41% but less than 51% of their revenue pay an even lower tax rate of 17.5%. Manufacturers who export more than 51% of their products are subject to a 15% income tax. There is a 15% tax on the income of those who have mining leases specifically for their use.
Gains on investments
The Capital Gains Tax Act [Chapter 23:01] of Zimbabwe imposes a special tax on capital gains.
This is a tax levied on gains derived from the sale or otherwise determined to be the disposal of a specific asset that originates in Zimbabwe. Assets classified as “specified assets” include rights to property registered in accordance with particular statutes, immovable property in Zimbabwe, or any marketable security. Bonds that may be traded on the stock market, shares, debentures, stock, or any right that a person has as a result of their participation in a unit trust are examples of marketable securities.
Non-residents are taxed on the profits they make from the sale of certain Zimbabwean assets. Immovable property gains are decided by the location of the property, but gains on other specified assets are determined by the residency of the individual selling the property. Double taxation treaties may allow non-residents to avoid paying taxes.
Branch profit tax is not included in the Internal Revenue Code.
Taxable earnings are calculated
Taxes are levied on a taxpayer’s taxable income derived from the operations of their business. Total revenues and accruals of the taxpayer are reduced by amounts that are not subject to taxation and permissible deductions in order to arrive at taxable income.
In most cases, a business can subtract its current expenses when calculating its net income. The majority of the time, capital expenditures aren’t deductible from your taxable income. Disallowable expenditures include all expenditures that are not related to commerce. A capital allowance is a deduction that can be used to a variety of expenses. Tax law’s version of depreciation is capital allowances. Also deductible is the interest paid to generate profits from a business or property (subject to thin capitalization).
Reporting of Taxes
Corporations based in Zimbabwe, regardless of whether they are resident or non-resident, are required to file an annual income tax return.
It is the Commissioner of the Revenue Authority’s responsibility to notify those individuals whose tax returns must be submitted, and they must do so within 30 days after the date of the notice. A civil penalty is imposed by the Revenue Authority if returns are not filed on time.
Partners in a partnership need to file a tax return together that shows the total income of the partnership, as well as the financial statements essential to establish its financial status. In addition to the joint return, partners who receive income from other sources should complete a separate return.
The unpaid tax accrues interest at a rate of 10% per year and a penalty of up to 100% of the tax owing if it is not paid on time.
Despite not being a member of the Organization for Economic Co-operation and Development (OECD), Zimbabwe’s transfer pricing policy typically adheres to the arm’s length concept. The country enacted new transfer pricing legislation in 2016 to supplement the existing standards that control transfer pricing concerns in transactions involving citizens.
The arm’s length principle must be adhered to in all transactions controlled by the Act.
There is reference to transfer pricing regulations from both the OECD and the United Nations (UN).
Taxpayers who engage in transactions that violate transfer pricing laws may have their taxable income reduced or increased by the Commissioner of the Revenue Authority. In addition, the Commissioner has the authority to reclassify income and expenditures as revenue or capital, depending on the circumstances.
Using the suitable transfer pricing method, the arm’s length remuneration of a controlled transaction can be computed.
As specified in the Income Tax Act, there are five permitted ways for determining transfer pricing: the Comparable Uncontrolled Price Method, the Resale Price Model, The Cost Plus Model, The Transactional Net Margin Model, and The Transactional Profit Split Model.
Other taxes, such as VAT, excise duty, stamp duty, and customs duty, may be affected by transfer pricing modifications.
Responsibilization for passive income taxation
Tax is imposed on payments made by a Zimbabwean resident to a non-resident for remittances, royalties, dividends, management, or administration fees. However, this rate may be reduced as a result of applicable double taxation agreements.
Deductibility of service charges
The payer shall deduct and withhold 15 percent of the total amount as income tax from any payment made to a non-resident of Zimbabwe for services rendered in Zimbabwe.
Payment of fees must be made to the Zimbabwe Revenue Authority (ZRA) within 10 days, or any other time permitted by the Commissioner, for the withholding tax. Withholding and remitting taxes incorrectly can result in fines of up to 100% plus interest of 10% on the amount owed.
This is a multilateral tool (MLI)
The Multilateral Instrument does not list Zimbabwe as a signatory country.
Pay As You Earn (PAYE)
Taxpayers who earn more than the zero-rate tax category must have PAYE withheld from their wages by their employers. By the 10th day of the month following the month in which the deduction occurred, this must be remitted to the tax authorities.
Failure to pay taxes will result in a penalty of 100% and interest of 10% per year on the amount owed.
Employers must also keep track of all wages given out and taxes withheld from their employees. As stated in the Finance Act [Chapter 23:04], a sliding scale is used to determine the amount of tax. A further 3% of the total PAYE due should be deducted as an AIDS Levy.
Contributions to the National Social Security Administration (NSSA)
Contributions to the National Social Security Act [Chapter 17:04] are social security payments.
A new business must register with the National Small Business Administration (NSBA) within 30 days of starting.
A late payment penalty is applied to all contributions that are not received by NSSA by the 10th of the month following the month in which they were deducted.
There is 3.5 percent of an employee’s insurable wages that must be taken from the employer’s payroll.
As an additional 3.5 percent of pensionable earnings, the employer pays another 7 percent. The maximum deductible amount is ZWL$5,000 if 3.5 percent of pensionable earnings exceeds ZWL$5,000.
To participate in the NSSA, you must be a member.
Non-Zimbabwean citizens who are not habitually resident in Zimbabwe, diplomats, and domestic servants are exempt from membership.
Employers and workers alike can deduct NSSA contributions from their taxable income in order to calculate PAYE and corporate tax.
Privileged Plans for Retirement
Due to their contractual character, private pension plans are not a statutory requirement.
Collective bargaining agreements, on the other hand, bind employers in a specific industry or sector to certain policies.
Collective bargaining agreements mandate that employees contribute to pension plans, thus their contributions are legally binding.
Employers can deduct up to ZWL$54,000 in contributions from their taxable income in the year of assessment.
Value Added Tax
Value Added Tax (VAT) is a tax on the sale of taxable goods and services that is based on the consumer’s consumption.
Instead of taxing earnings directly, VAT is applied to all transactions. As per the Value Added Tax Act (Chapter 23:12), the tax is levied. However, certain commodities are zero-rated and therefore charged a VAT rate of 0% while other goods are specifically exempted from VAT, making the usual VAT rate of 14.5 percent.
Goods exported from Zimbabwe to an address in an export country are exempt from tariffs, as are some staples like sugar.
Providers of domestic energy, water piped to the home, and rates imposed by local authorities are free from paying VAT on these supplies.
ZWL$4,800,000 (Four Million Eight Hundred Thousand Dollars) in taxable supply in a 12-month period must be registered as Registered Operators by traders.
Tax invoices must be issued within 30 days after supply and VAT must be remitted on or before the 25th day of the month following the month in which VAT was collected by registered operators.
The difference between the operator’s output tax (VAT) and its input tax is what the Revenue Authority considers taxable income (VAT charged on the operator on purchases).
Brokers’ notes written after the sale of marketable securities, the sale of off-market share instruments, the registration of the acquisition of real estate, and the registration of bonds are subject to stamp duties.
For their work on the Zimbabwe chapter of the 2021 Global Tax Guide to Doing Business in Zimbabwe, Dentons would like to thank Vulindlela B. Sibanda and Abigail Mbuyisa, Partners at MawereSibanda.