International Tax (Treaties, Permanent Establishments, Anti-Avoidance)

International tax rules determine how cross-border transactions and foreign investors are taxed in Tanzania, and how Tanzanian businesses are taxed abroad. Key considerations include tax treaties that prevent double taxation, permanent establishment (PE) rules that decide when a foreign entity is taxable in Tanzania, and anti-avoidance measures to curb abuse of international structures.

Double Tax Treaties

Tanzania has a limited network of Double Taxation Agreements (DTAs). As of 2024, DTAs are in force with the following countries​:

• Canada
• Denmark
• Finland
• India
• Italy
• Norway
• South Africa
• Sweden
• Zambia

These treaties typically reduce withholding tax rates on dividends, interest, and royalties, and provide rules for taxation of business profits, avoidance of double taxation, and exchange of information.

For example:

• Under the India-Tanzania treaty, withholding tax on dividends is 5% (if >10% share owned) or 10%, interest 10%, royalties 10%, and importantly, fees for technical services (FTS) are exempt in Tanzania if the Indian enterprise has no PE in Tanzania. This means an Indian company providing consulting services to Tanzania could receive payment with 0% WHT (versus 15% normally​ – a significant benefit. The treaty thus fosters cross-border services.
• The South Africa treaty sets dividends at 10% (if >25% holding) or 20%, interest 10%, royalties 10%, and technical fees 15​%.
• The Zambia treaty is very generous: 0% on dividends, interest, royalties, and business profits are taxable only in the country of the recipient unless the income is connected to a PE. This reflects the close economic integration (both being EAC/SADC members).

Investors from treaty countries should claim treaty benefits by providing a certificate of residence from their home country’s tax authority. Without claiming, the domestic rates will be withheld by default.

Tanzania is not yet party to many newer treaties (no treaties yet with big economies like UK, USA, China, etc., though negotiations have occurred). In absence of a treaty, foreign investors rely on domestic law (which taxes only Tanzanian-source income, but with full withholding taxes).

Tanzania also signed the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) under BEPS in 2019, but it’s not yet in force for Tanzania pending ratification. Once effective, it could modify some treaty provisions (e.g. adding anti-abuse clauses).

Tanzania does provide unilateral relief: if a Tanzanian resident earns income abroad that was taxed abroad, Tanzania allows a foreign tax credit up to the Tanzanian tax on that income​. However, given most investors in Tanzania are non-residents, treaty or withholding arrangements matter more than unilateral relief.

Permanent Establishment (PE) Rules

A permanent establishment in Tanzania refers to a fixed place or representative through which a non-resident conducts business in Tanzania. If a foreign company has a PE, Tanzania has the right to tax the profits attributable to that PE (at normal corporate rate). Understanding what creates a PE is crucial for foreign investors operating without a local subsidiary.

Under domestic law (and mirrored in treaties), a PE include:

• A fixed place of business: e.g. a branch office, factory, workshop, mine, oil well, or construction site that lasts more than 6 months.
• An agent in Tanzania who can conclude contracts or habitually secure orders on behalf of the non-resident constitutes a PE, unless the agent is independent. So, if you have a dependent sales agent in Dar es Salaam regularly finalizing deals for a foreign company, that foreign company is deemed to have a PE.
• Use or installation of substantial equipment or machinery in Tanzania can create a PE (for instance, a foreign company installing telecom towers for over 6 months has a PE.
• Provision of services in Tanzania for an aggregate of 183 days or more in a 12-month period by a foreign enterprise can also be treated as a PE under local regulations (even if no fixed office; this is an anti-avoidance measure in some treaties or local law for service PEs).

The African Barrick Gold case affirmed that even registering as a branch (foreign company certificate of compliance) amounted to being “formed” in Tanzania and hence resident​. But generally, a company that is incorporated abroad will be non-resident unless it either is managed from Tanzania or meets PE criteria. If a foreign parent simply owns shares in a Tanzanian company, that parent company itself doesn’t have a PE – it’s the subsidiary that’s a resident taxpayer.

For foreign investors operating in Tanzania without a subsidiary, careful consideration is needed: if they regularly do projects in-country via long-term contracts or agents, they may inadvertently create a PE and owe taxes. Sometimes investors prefer to set up a local subsidiary or branch deliberately, to clarify tax status.

If a DTA exists, its PE definition will apply, often similar to above but sometimes narrower (e.g., construction site PE exists only if project lasts more than 12 months in some treaties). Treaties also can override local agent rules by requiring certain independence criteria.

Once a PE exists, Tanzania will tax the PE’s profits on a net basis (income minus expenses attributable to the PE). The foreign company should register and file returns for the PE. Also, a PE of a foreign company is taxed at 30% CIT and when profits are remitted abroad, a branch profits tax of 10% applies (this mirrors the dividend WHT for subsidiaries).

Anti-Avoidance and Anti-Tax Avoidance Rules

Tanzania has several anti-avoidance provisions aimed at international tax avoidance:

• Thin Capitalization Rule: As detailed in CIT section, if a Tanzania entity is “exempt-controlled” (owned 25% or more by non-residents or tax-exempts), interest deduction is restricted if debt-to-equity exceeds 3:1 (or 7:3 in ratio terms​). This prevents excessive interest payments to foreign related parties which can erode the tax base.
• Controlled Foreign Corporation (CFC) Rules: Tanzania has provisions on *controlled foreign trusts and corporations​. If a Tanzanian resident controls an offshore company that retains income, the income can be attributed to the Tanzanian for tax. However, given most businesses are inbound rather than Tanzanian multinationals outbound, CFC rules see limited application.
• Change of Control and Asset Stripping: As covered in CIT, if more than 50% underlying ownership changes, Tanzania deems a taxable exit – splitting the year and valuing assets at market value. This prevents avoidance through sale of company shares (internally) to step-up asset basis or free losses. Also, unrelieved losses can be forfeited on a change in control to stop trading in loss companies.
• Treaty Shopping: While Tanzania’s treaties are few, the newer treaties and the forthcoming MLI have Principal Purpose Test (PPT) or similar anti-abuse clauses to deny benefits if one of the main purposes of a transaction or entity set-up was to gain treaty benefits improperly. Even absent PPT, TRA can invoke general anti-avoidance if they see a conduit with no real business except treaty benefits.
• “Beneficial Owner” concept for WHT: Treaties and domestic law use “beneficial owner” to ensure reduced rates only apply if the recipient truly benefits and is not a pass-through. TRA will scrutinize payments to tax havens or agents. The 2020 Finance Act introduced a definition of “beneficial owner” in domestic law (mirroring FATF definitions) to enhance transparency.
• General Anti-Avoidance Rule (GAAR): The Commissioner has broad powers to disregard any transaction that is an “artificial or fictitious transaction” or one that has the direct effect of avoiding tax. The Income Tax Act allows re-characterization or nullification of such arrangements. For instance, if a resident company routes a local sale through an offshore affiliate purely to avoid tax, TRA can ignore the intermediary.
• Permanent Establishment Anti-Fragmentation: The law’s PE definition prevents splitting activities into smaller pieces to avoid the 6-month threshold. Related projects are aggregated to determine if a PE exists.
• Exchange Controls and Repatriation: While not a tax rule, note that Tanzania has some foreign exchange controls requiring documentation for profit repatriation, which incidentally forces companies to have proper tax clearance (e.g., a tax clearance certificate is often needed to get central bank approval to remit dividends or branch profits abroad). This indirectly ensures taxes are paid before money flows out.

One real-world example of anti-avoidance enforcement was the government’s action around indirect transfers of assets: In 2010, when a foreign parent of a Tanzanian mine (Barrick’s subsidiary) was sold as part of a global deal, TRA asserted capital gains tax on the Tanzanian underlying assets (later codified in law that indirect transfers of local assets by non-residents are taxable). This is now explicitly in the law: a gain on disposal of shares of a non-resident company is taxable in Tanzania if that company *derives 50% or more of its value from Tanzanian assets​. So, if a foreign company holding a Tanzanian mine is sold, the seller owes Tanzanian tax on the part of gain attributable to the mine. The African Barrick case in 2015 indeed dealt with such restructuring and established taxation rights.

Managing International Tax for Investors

• Choosing Investment Vehicle: Many investors incorporate a local subsidiary to limit Tanzania’s tax to that subsidiary’s profits (30%) and dividends (10%). Others operate via branch if they prefer losses to flow back, but note branch profits tax equalizes overall burden.
• Permanent Establishment Caution: Investors taking contracts in Tanzania without a local company should monitor duration and activities to avoid inadvertently creating a PE. If short-term, ensure to not have a fixed base or agent concluding contracts. If long-term, registering a branch and complying is better than hoping to fly under radar (risking back taxes later).
• Use of Treaties: If an investor is based in a country with no treaty, sometimes routing investment through a treaty country holding company can reduce WHT on dividends. However, substance is key; a mere shell conduit could be challenged (especially after MLI’s Principal Purpose Test adoption).
• Profit Repatriation: After paying Tanzanian tax, profit repatriation is free of further restrictions aside from WHT. Capital and after-tax profit can be sent out – Tanzania assures that under investment laws (and ICSID conventions). But taxes (including any capital gains tax for the seller) should be settled first.
• Transfer Pricing: This ties with international tax – ensuring intercompany dealings are at arm’s length is fundamental to avoid profit shifting challenges.
• Regional considerations: Tanzania is part of the East African Community (EAC) and Southern African Development Community (SADC). There is no unified tax code yet, but protocols aim to avoid double taxation within the EAC. For example, the EAC Double Tax Agreement (not fully ratified by all). Meanwhile, the African Continental Free Trade Area (AfCFTA) focuses on customs duties removal, not direct taxes, but increased transparency and cooperation are future themes.

In summary, Tanzania’s international tax rules seek to protect its source taxing rights (through PE rules and taxing indirect asset transfers), while treaties offer relief to avoid double taxation and encourage investment. Anti-avoidance rules like thin cap, CFC, and GAAR ensure that common base erosion tactics are mitigated. Investors should design cross-border transactions with these rules in mind to legally optimize tax (e.g., utilize treaty benefits where available, maintain appropriate debt-equity ratio) but avoid aggressive schemes that could be nullified by TRA.

For more information and inquiries reach us out through info@auditaxinternational.co.tz