Withholding Taxes

Withholding taxes (WHT) are taxes deducted at source from certain payments to residents and non-residents. Tanzania uses WHT to efficiently collect tax on dividends, interest, royalties, service fees, and other payments. For investors, it’s important to understand which payments will attract WHT, the rates, and whether such WHT is final or creditable.

Overview of Withholding Tax System

When certain types of income are paid, the payer must withhold a percentage and remit it to the TRA. The recipient then receives the net amount and, depending on the nature of income, the WHT may be either:

• a final tax (the recipient has no further tax to pay on that income), or
• an advance tax credit (the recipient includes the gross income in their return but claims the WHT as a credit toward their tax liability).

Tanzania’s withholding tax rates differ for resident vs. non-resident recipients, and some rates are reduced under tax treaties for non-residents (discussed later).

Below are the key withholding taxes in Tanzania as of 2024:

Dividends

• Dividends to Residents:
  • If a company pays dividends to a resident company that holds 25% or more of its shares, WHT is 5%​. This encourages holding companies structure locally. For example, if Company A (Tanzanian) owns 30% of Company B, any dividends from B to A are taxed at 5%.
  • Dividends from a company listed on the DSE (Dar es Salaam Stock Exchange) are 5% to any resident individual or entity​. (a concessional rate to promote investment in listed shares).
  • Otherwise (for resident individuals or companies with smaller shareholdings), dividend WHT is 10%​.
  • The 5% or 10% WHT on dividends to residents is final tax for the recipient​, meaning residents don’t include that dividend in taxable income; the WHT satisfies their tax.
• Dividends to Non-Residents:
  • Non-residents generally face a 10% WHT on dividends​.. The only exception is dividends from DSE-listed companies, which are 5% even for non-residents​.
  • These rates (5%/10%) are usually final. Under tax treaties, the rate might be lower (e.g., the India-Tanzania treaty allows 10% or 5% if certain ownership threshold​).

So, for example, a foreign investor owning shares in a Tanzanian company will typically have 10% of any dividends withheld. If the investor’s home country has a treaty with Tanzania, the rate could be reduced (treaty rates are covered below).

Interest

• Interest paid to residents: WHT is 10% on interest paid by financial institutions to individuals (like bank deposit interest)​. For resident companies receiving interest, 10% is withheld as well; they then include the interest in taxable income but get credit for WHT (for companies it’s an advance tax). However, most interest from banks to resident individuals is final taxed at 10%​. (so individuals don’t file it).
• Interest to non-residents: Also 10% WHT​, which is generally a final tax on that interest (non-resident has no further Tanzanian tax). For example, if a Tanzanian company pays interest on a loan from a foreign parent, it must withhold 10%. (Note: There’s an exemption for certain government-project loans and certain financial institutions under strategic arrangements​).

Under tax treaties, interest WHT can be reduced (often to 10% or 12.5% depending on treaty; Zambia treaty even 0% for certain interest​).

One special case: Interest on listed corporate or municipal bonds of at least 3-year maturity is exempt from WHT to encourage bond market​.

Royalties and Natural Resource Payments

• Royalties (payments for use of copyrights, patents, trademarks, designs, models, secret formulas, know-how, etc.): WHT is 15% for both residents and non-residents​.. This 15% is usually final for residents (so if an author receives a royalty, 15% withheld is final). Notably, a lower rate of 10% applies if the royalty is for the use of cinematographic films, video tapes, or sound recordings, and an even lower 5% if paid to a resident sports entity or the Tanzania Football Federation​.
• Natural resource payments (payments for the right to take minerals, oils, natural resources): WHT also 15% (both residents and non-residents)​, treated similarly to royalties.

For example, if a mining company pays a landowner royalties for extraction rights, it withholds 15%. If a local TV station pays a foreign distributor for film broadcasting rights, 15% is withheld (or 10% if it qualifies as cinematography film royalty)​.

Service Fees

Tanzania imposes withholding on certain service fees:

• Service fees to resident individuals or entities for professional or consulting services: WHT is 5%​. This typically applies when a company hires a local consultant (not employed). The 5% acts as advance tax for resident professionals (who will file a return, deducting that WHT). For small payments, this also helps capture tax.
• Service fees to non-residents for services performed in Tanzania (management, technical or professional fees): WHT is 15%​. This is a final tax on the non-resident (since they typically have no local presence to file returns). For example, hiring a foreign engineering firm to do a study in Tanzania – 15% of their fee is withheld. (If the service by non-resident is performed entirely outside Tanzania, it may not be Tanzanian-sourced; but often, technical services are deemed sourced in Tanzania if utilized here, so withholding still applies.)

It’s important to note that payments to non-resident companies for “technical services” in mining, oil, and gas have a special treatment: such payments are subject to a 15% final withholding tax (as CIT) under an anti-avoidance rule​. Essentially, non-resident service providers in extractive industries are taxed via WHT on turnover instead of normal CIT.

Digital content creators: A new category – payments to a resident digital content creator (e.g. a local influencer being paid for online content) attract 5% WHT​. This is recent, ensuring those earnings are captured. Non-resident content creators have N/A in that line (since if they earn from Tanzania without a presence, possibly the digital services tax or other rules apply instead).

Digital asset payments: If someone sells a digital asset (like cryptocurrency) and receives payment, there is a 3% WHT on the payment to the seller of the digital asset​. This appears to apply whether the seller is resident or non-resident (the footnote indicates even non-resident sellers are subject, likely meaning local platform must withhold)​. This is part of new digital economy tax measures.

Rent and Real Estate Payments

• Rent to residents: Rent on land/buildings paid to a resident is subject to 10% WHT​. This WHT for individuals is usually final (so a landlord paying 10% is done). If the recipient is a company, it credits against CIT. Note, however: only certain payers must withhold on rent – generally, any corporate tenant or government must withhold when paying rent to a resident landlord. Individual tenants in a personal capacity are not required to.
• Rent to non-residents: Also 10% on land/buildings​, which is final for the non-resident.
• Rent for equipment/machinery: If renting movable assets, different rules:
  • Construction equipment or aircraft lease: 10% for both resident and non-resident​.
  • Other movable assets (not aircraft, not construction equipment): 0% for resident (no WHT) but 10% for non-resident​. So, if a Tanzanian company leases a computer from a resident individual, no WHT; if from a foreign company, 10% WHT.
• These ensure parity where often resident lessors can be taxed via normal income tax, but non-residents are captured via withholding.

Other Specific WHT Categories

• Directors’ fees (for services as a board director, not full-time employee): 15% WHT for both resident and non-resident directors​. This is final for individuals.
• Insurance premiums paid to non-resident insurers: 5% WHT​. Local insurance premiums to resident insurers have no WHT (they pay normal tax).
• Telecom and mobile money agent commissions: Payments by telecoms to their agents (e.g. mobile money operators) have 10% WHT​.
• Government payments for goods: Government agencies must withhold 2% on payments for supply of goods or services they procure, as a broad collection mechanism​. (This doesn’t apply if the supplier is tax-exempt or the supply is exempt, etc.)
• Mining sector specific: Buying minerals from small-scale miners – 2% WHT​. on payments for minerals to a primary mining license holder or artisanal miner.
• Carbon credit sales: Notably, 10% WHT on payments for carbon emission reductions (carbon credits)​.. This reflects Tanzania’s new interest in carbon trading – when a company buys carbon credits from a project owner, 10% is withheld, even if seller is non-resident, making it a final tax on that sale in Tanzania.

These diverse categories show Tanzania’s effort to capture tax at source in various transactions.

Withholding Tax Compliance

The withholding agent (payer) must deduct and remit these taxes to TRA by the 7th day of the following month (or in practice, by the same schedule as PAYE)​. They also must file a WHT schedule. Failure to withhold makes the payer liable for the tax plus penalties. Thus, investors should build withholding tax checks into their accounts payable processes.

For the income recipient:

• If resident and the WHT is final (like bank interest or dividends), they have no further obligation, but they should keep the withholding certificate as proof.
• If resident and WHT is not final (like 5% on a local consultant’s fee), they must file an annual return including that income. The 5% is credited against their final tax. Often, 5% will be much lower than their marginal rate, so they’ll pay more tax on net profit.
• Non-residents typically treat WHT as final satisfaction of Tanzanian tax. However, they might utilize the WHT as a foreign tax credit in their home country (if allowed).

Double Tax Treaties Influence

Tanzania has tax treaties with a few countries: Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden, Zambia​. These treaties can reduce WHT rates. For example:

• India treaty: Dividends 5% or 10%, Interest 10%, Royalties 10%, and it eliminates Tanzanian WHT on management/technical fees paid to Indian residents​. (0% on technical fees by treaty) – a notable benefit for Indian service providers.
• Italy treaty: Dividends 10%, Interest 15%, Royalties 15%, Tech fees 15%​.
• South Africa: Dividends 10% or 20% (if <25% ownership then 20% otherwise 10%), Interest 10%, Royalties 10%, Technical fees 15%​.
• Zambia: 0% WHT on dividends, interest, royalties, and fees between the governments/residents (likely aimed at eliminating double taxation within the unified market context). Indeed, Zambia treaty shows 0% for those categories​, facilitating cross-border payments in the region.

Investors from treaty countries should avail these benefits by providing certificate of tax residence so that the Tanzanian payer can apply the lower treaty rate. Otherwise, the domestic rate is withheld by default.

Practical Impact on Investors

• Equity Investors: When repatriating profits as dividends, foreign investors will see typically a 10% cut (or 5% if listing shares publicly or treaty advantage). This is a cost to factor in ROI calculations, although often mitigated by credit in home country.
• Intragroup Loans: Interest paid to parent companies or foreign affiliates will incur 10% WHT. Investors might compare this to capital gains tax on equity to decide debt vs equity financing. Note also the thin-cap rules under CIT which restrict interest beyond certain debt/equity, but from a WHT perspective, 10% is the toll.
• Service and Management Fees: A common practice is for foreign parent companies to charge management or technical fees. Tanzania’s 15% WHT on such outbound payments (if parent is non-resident) means the local subsidiary effectively bears an extra cost unless the fee is grossed-up. Some structuring (like performing services offshore) might avoid Tanzanian source, but caution: management services to a Tanzanian entity are generally deemed Tanzanian-sourced. Treaties can provide relief (e.g. if investor is Indian, such fees might be exempt from WHT by treaty​).
• Local suppliers and contractors: When engaging local consultants or even other companies, investors might have to deduct 5% WHT on service payments. This requires administrative tracking and could affect small suppliers’ cash flow. It’s good practice to inform domestic consultants that 5% will be withheld so they understand it’s not a loss but an advance tax.

Case Law Note

While specific case law on WHT is sparse (since it’s straightforward, many disputes don’t reach court), one area of contention has been classification: e.g., whether a particular payment is a royalty or a service fee can affect rate. For instance, satellite bandwidth payments – TRA might categorize that as a royalty for use of equipment (15%) versus a service (15% anyway for non-resident, so maybe no difference). Generally, Tanzania aligns with OECD concepts but tends to interpret broadly in favor of withholding.

Another key point: representative agencies – if a non-resident is suspected to have a permanent establishment, TRA might treat payments to it differently (subject to CIT rather than just WHT). But for most straightforward cases, WHT is the final burden on the non-resident.

Summary Table of Key Withholding Taxes (Domestic rates):

• Dividends: 5% (to resident company ≥25% ownership or any DSE-listed dividend), otherwise 10% (residents); 5% (DSE-listed) or 10% (others) for non-residents​. Final in most cases​.
• Interest: 10% (residents and non-residents)​.
• Royalties: 15% (res & non-res)​ (films 10%, sports 5% as special cases​).
• Service fees: 5% (resident)​; 15% (non-resident)​.
• Rent (land/buildings): 10% (res & non-res)​.
• Rent (movables): 0% (res), 10% (non-res) for most; 10% for equipment/aircraft leases regardless of resident/non​.
• Natural resource payments: 15%​.
• Director fees: 15% (res & non-res)​.
• Insurance premium (to non-res insurer): 5%​.
• Mobile money/agency commission: 10%​.
• Govt payments for goods/services: 2%​.
• Minerals purchases (from small miners): 2%​.
• Carbon credit payments: 10%​.
• Digital content creator pays (res): 5%​.
• Digital asset sale payments: 3%​.

Investors should integrate these WHT into contracts. Often contracts will state amounts are “exclusive of any withholding taxes”, meaning the payee bears the WHT. Other times, especially with foreign lenders or service providers, contracts might gross-up payments such that the foreign party receives net agreed amount and the Tanzanian side bears the WHT cost (which increases the effective cost by that percentage).

In summary, withholding taxes in Tanzania are extensive but relatively moderate in rate. They act as a tool for Tanzania to secure its tax on cross-border income flows and certain domestic payments. As an investor, ensuring compliance (deducting and remitting WHT timely) is critical to avoid penalties. Also, taking advantage of treaty reductions can yield significant savings (for example, routing dividends through a treaty country parent might reduce WHT). However, substance requirements and anti-avoidance rules should be kept in mind if considering treaty shopping. Always consult the latest WHT schedule, as Finance Acts occasionally add new categories (like the digital-related withholdings added recently).

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