Foreward by Andrew Chilvers
When the 5th Anti-Money Laundering Directive was introduced into law by the UK and EU in January 2020, for many professionals it was a much needed addition to legislation that would significantly help business transparency and combat money laundering. In essence, it was good for business and for public and professional confidence.
All jurisdictions signing up to the 5th Directive will build and maintain UBO registries that will be publicly available at any time. UBO registries will also be set up for bank accounts and trusts, although these latter two will not be publicly available but be accessed by the relevant authority such as financial intelligence units and legal advisors looking into money laundering. Investigative journalists who can show a legitimate interest in the case can also have access, which is vital if another Panama Papers (see below) is to be uncovered. Across the UK and EU national UBO registers will be set to connect through a central European platform by April 2021.
Tanzania having been a British mandate and subsequently a British Trust before the attainment of its independence, inherited the British common law system and follows it to date. It therefore follows that the doctrine of corporate personality which was introduced by the landmark UK company law case, Salomon versus A. Salomon & Co Ltd  UKHL 1, that saw the House of Lords firmly uphold the principle of separate corporate personality, is not at all new to Tanzania and has always been recognized. This doctrine provides that a company is a legal entity which is separate and distinct from its shareholders, directors and employees hence the creation of the legal fiction ‘corporate veil’. In essence, the corporate veil was devised to enable groups of individuals to pursue an economic purpose as a single unit, without exposure to risks or liabilities in one’s personal capacity.
All around the world, the corporate personality doctrine has, however, been misused either for purposes of money laundering, tax evasion and to curb such practices, transparency rules have been developed to identify the beneficial owners of companies, trusts and other legal arrangements. Tanzania has not been left behind as changes to various laws introducing requirements for the identification of the ultimate beneficial owner were made under the Tanzanian Finance Act 2020 (FA 2020) which came into effect on 1 July 2020. The FA 2020 has introduced changes to the Companies Act, the Trustees Incorporations Act, the Anti-Money Laundering Act and the Income Tax Act by establishing beneficial ownership rules.
The concept of beneficial owner (BO) is not new in the Tanzanian tax system as it is has often been featured in Double Taxation Agreements to which Tanzania is a party as one of the conditions which must be satisfied before one can qualify for tax benefits. However, its inclusion in the FA 2020 is evidently intended to identify ultimate beneficial owners of Tanzania companies and trusts for purposes of preserving the integrity of Tanzania’s tax system (including identifying treaty shopping arrangements), increasing transparency and information sharing between regulatory authorities and combatting money laundering and terrorist financing.
Definition of a beneficial owner under the FA2020
The FA 2020 defines a BO as a natural person who, directly or indirectly:
a) ultimately owns or exercises substantial control over an entity or an arrangement;
b) who has a substantial economic interest in or receives substantial economic benefit from an entity or arrangement (whether alone or together with other persons);
c) on whose behalf an arrangement is conducted; or
d) who exercises significant control or influence over a person or arrangement through an agreement (formal or informal).
It therefore follows that a BO is a natural person who effectively owns or substantially controls a legal entity. Hence, a conduit company cannot be a BO.
New reporting requirements
All persons seeking to register new companies in Tanzania must identify the beneficial owners of such companies and submit their particulars to the Registrar of Companies at the time of registration. Pre-existing companies have until 31 December 2021 to submit similar particulars to the Registrar of companies. In addition, all companies registered in Tanzania must submit particulars of their BOs to the Registrar of Companies on an annual basis at the time of filing their annual returns. Any changes to the beneficial ownership of a company must also be notified with the Registrar within 30 days.
There are no provisions under the Companies Act specifying the threshold in shareholding or control in respect of which UBO information is required. However, the amendment introduced by the FA 2020 to the definition of the term “associate” in the Income Tax Act comes in handy. A person is now considered an associate of another if that person holds or controls 25% (the threshold previously used to be 50%) or more of the shares or voting rights in that other person, although the Commissioner may vary this threshold depending on the business or investment concerned.
It is, however, not yet known if that is the threshold which the Registrar of Companies will impose for purposes of registration of the BO information under the Companies Act.
Register of beneficial owners
The Registrar of Companies is required to establish and maintain a register of beneficial owners of all companies registered in Tanzania. This means Tanzania now has a specific register of beneficial owners(ship). The information held by the Registrar is accessible to various government authorities including the Tanzania Revenue Authority (TRA).
Implications for Tanzanian subsidiaries
Income tax will now be charged and is payable by the agent of a BO or non-resident where a non-resident person receives income, whether directly or indirectly, which has accrued or arisen in Tanzania from or through such agent. An agent of a BO or non-resident includes any Tanzanian company which is a subsidiary of a non-resident company. Bearing in mind that any natural person who owns or controls a foreign parent company with a Tanzanian subsidiary may be considered a BO irrespective of any intermediary companies interposed between that foreign company and the Tanzanian subsidiary, it means that, any income received by such foreign natural person which has accrued or arisen in Tanzania will be subject to the Tanzanian Income Tax Act, including withholding tax.
The implication is that TRA can now consider the economic reality of all corporate arrangements when undertaking tax audits and assessments. If it becomes aware that a foreign company in a group received payment, or made a payment to its shareholders, and such foreign company has a Tanzanian subsidiary, it can apply the BO provisions to assess whether that foreign company is a BO.
All pre-existing companies have until 31 December 2021 to submit BO particulars to the Registrar of companies.
The new beneficial ownership rules will have a significant impact on existing company arrangements in Tanzania. Companies should therefore review intragroup structures to determine potential tax implications which may arise.
Payments to non-resident parent companies including dividends, interest, royalty and intercompany service charges, should be adequately examined against the economic activities of the recipient companies, in line with the new BO rules.