A “NEW DAWN” ON THE PROPERTY TRANSFER TAX REGIME

14 October 2022

The proposed Zambian National Budget for the year 2023 has been hailed as a progressive and ambitious developmental programme, building on the New Dawn Government’s mission to transform the Zambian economy. In its quest to generate the much-needed revenue, the 2023 budget is an interplay between revenue concessionary measures and compensating measures. As we enter the new year, we are set to see several reforms being made to, among other things, the property transfer tax (“PTT”) regime in Zambia.

Below is our brief analysis on some of the measures proposed to the PTT regime.

Changes to the rates of PTT

 We note the proposed increase in PTT on the transfer of land, shares and intellectual property from the current rate of 5% to 7.5%. By introducing this compensating measure, the government aims to enhance domestic resource mobilisation to generate more income for the economy. Though this move will enhance domestic resource mobilisation, the counter effect is an increase in the cost of acquiring real property and shares in Zambia. The impact will largely be felt in high value deals, which may lead to a drop in the number of transactions.

In contrast to the foregoing, a concessionary measure has been proposed to reduce the PTT rate on the transfer of mining rights held by exploration companies from 10% to 7.5%. This is a welcome move as the intention is to encourage mining exploration and increase investment in the exploration sub-sector. This will bring to light the true mineral wealth of the country and accelerate the development of new mines, thereby stimulating growth of the economy by boosting production, and improve the livelihoods of the Zambian people through the creation of jobs.

Tax payable on indirect transfers of shares

 The 2023 budget also seeks to introduce further clarity on the parameters surrounding computation of the realised value on an indirect transfer of shares. The realised value of foreign shares transferred will be limited to the proportion of the value of the Zambian company. This brings clarity in that currently, the valuation of an indirect transfer of shares held in a foreign company that owns 10% or more of the shares in a Zambian company does not take into account the relative value that the shares in the Zambian company bear to the value of the foreign company’s shares.

Exemption of surrender and forfeiture of shares from PTT

 The 2023 budget also seeks to provide further clarity on the tax implications with respect to the surrender and forfeiture of shares. It is intended that the current practice adopted by the ZRA will now be expressly provided for in the law. Considering Practice Note No. 1 of 2022 (the “Practice Note”), the current guidance from the ZRA is that when a shareholder forfeits or surrenders a share to the company, it will not attract PTT since the forfeiture or surrender does not amount to a transfer. If the share is subsequently transferred to another person by the company, PTT is payable and the assessment of the tax will be dependent on the value at which the share could have been sold on the market at the time of the transfer. On this basis, the ZRA guide that where a shareholder has forfeited or surrendered shares, that shareholder will not be required to submit a provisional return. The ZRA further guides that, a company selling previously surrendered or forfeited shares is required to furnish a provisional return of tax and account for the PTT applicable.

The Practice Note provides that in order for a transaction to qualify as a surrender or forfeiture, the following conditions must be fulfilled:

• no consideration;
• shares were not paid up for; and
• there has been a call on the shares that have not been paid for.

While we agree with the ZRA’s position that a surrender or forfeiture of shares should not be subject to PTT, we have concerns around adopting the same criteria attached to a forfeiture of shares in the Companies Act, No. 10 of 2017 (the “Companies Act”) to a surrender of shares when the Companies Act does not provide so. The Companies Act requires articles of association to expressly provide for a forfeiture and surrender of shares. The Companies Act further provides that where a member fails to pay a call on shares, the member may, subject to the articles of association, forfeit the shares to the company. The articles of association guide that a call on shares is made in respect of any money unpaid of the shares of the member. Therefore, the criteria for a forfeiture of shares as provided under the Companies Act is that the shares are not paid up for, there has been a call upon the shareholders in respect of any money unpaid on those shares and, consequently, the company offers no consideration for them.

With respect to a surrender of shares on the other hand, the Companies Act offers no guidance on the criteria adopted for this process. In the absence of this guidance, recourse can be had to the common law position. It is observed that under common law, a surrender can either be gratuitous or for consideration. The act of a shareholder either receiving consideration or no consideration is not what constitutes a surrender. Rather, it is the return of the shares initially allotted by the company which amounts to a surrender. In other words, there would have been no subsequent transfer of the shares allocated to the shareholder to a third party, but merely a return of these shares back to the company. Therefore, whether this act is done for consideration or no consideration should not be a criterion in our view.

Where the surrender is done for consideration, the Companies Act provides the process to follow, ensuing in the reduction in share capital of the company. The consideration paid by the company would be a return on capital to the shareholder for the investment initially made. It is our view that such return on capital does not qualify as a transfer. It is our further contention that as the definition of “transfer” in the PTT Act excludes the allocation of a share by the company to the member in whose name it is first registered, the giving back of that share to the company should equally not amount to a transfer. Any subsequent transfer of those shares would however attract PTT as such shares would not have been first registered in the name of this new shareholders (i.e., the registration would be a second registration with respect to those shares).

It is hoped that these issues arising from the interpretation adopted in the Practice Note with respect to the PTT implications on a surrender of shares will be given further consideration prior to enactment of relevant amendments to the PTT Act.

Overall, bringing clarity to the rules governing PTT creates certainty, thereby improving Zambia’s prospects of attracting foreign direct investment.