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The Finance Act, 2020 which came into force on 1 July 2020, introduced a raft of changes to various legislations.
Key among the changes relevant to Private Equity firms are (i) the amendment to the Companies Act, 2002 imposing a mandatory requirement for every registered company in Tanzania to disclose its beneficial owners to the Registrar of Companies and also for the Registrar of Companies to maintain a register of beneficial owners of all the companies registered in Tanzania and (ii) the amendments to the Income Tax Act which provide for certain triggers and compliance procedures for the payment of capital gains tax on the realisation of investment assets in Tanzania. We highlight below the salient features of the two key amendments.
1.Disclosure of ultimate beneficiaries’ requirement under the Companies Act, 2002
Effective 1 July 2020, all persons seeking to register new companies (whether private or public companies) in Tanzania must identify the beneficial owners of such companies and submit the particulars of the beneficiaries to the Registrar of Companies at the time of registration. Pre-existing companies have until 31 December 2021 to submit particulars of their beneficiaries ownership (BO) to the Registrar.1
There is also an ongoing reporting requirement that any changes to the beneficial ownership of a company must be notified to the Registrar within thirty (30) days of such changes, and all companies registered in Tanzania will be expected to submit particulars of their BOs to the Registrar of Companies on an annual basis at the time of filing their annual returns.
The Government subsequently on 14 May 2021 issued the Companies (Beneficial Ownership) Regulations, 2021 (the Regulations) and the Companies (Forms) (Amendment) Rules, 2021, (the Rules) which set out further details on the forms, particulars and processes relating to the disclosure requirement.
Who is to be declared as a beneficial owner?
Pursuant to these amendments to the law, a beneficial owner is defined under the Companies Act, 2002 and the Regulations as a natural person (i) who directly or indirectly ultimately owns or exercises substantial control over an entity or an arrangement, or (ii) who has a substantial economic interest in or receives substantial economic benefit from an entity or an arrangement directly or indirectly, whether acting alone or together with other persons, or (iii) on whose behalf an arrangement is conducted or (iv) who exercises significant control or influence over a person or arrangement through a formal or informal agreement.
The Regulations do not contain a quantifiable threshold to determine if a natural person is a beneficial owner. This casts a wide net and may effectively mean disclosing every natural person who may have some interest in or rights in relation to a reportable legal entity in Tanzania. For comparative purposes, Kenya’s beneficial ownership laws provide that among other things, beneficial owners are natural persons who own more than 10% of the issued share capital or exercise more than 10% of voting rights. In certain other countries, the threshold is 25% so as to exclude persons whose ownership or control or interests are not significant. This practically means that both the General Partner and the Investment Advisor must enter into written agreements with their respective shareholders such that at least 51% of the profits accrued by the Private Equity Fund Manager will accrue to their shareholders who are Black People and/or Black People who are not shareholders in the Private Equity Fund Manager.
The statutory forms require the following details to also be provided:
a)percentage of shareholding (with no minimum thresholds);
b)percentage of voting rights (with no minimum thresholds);
c)a right to appoint or remove a majority of the board of directors of the company (emphasis is ours); and
d)significant influence or control over the company.
It is also the case that the important expression “significant influence or control” is not defined, and as such, careful consideration will have to be given to the meaning of this expression and thereby the natural persons who may be considered as having “significant influence or control”. For example, in the case of a private equity investment, all the natural persons holding shares (whether directly or indirectly) in the limited partnership and general partnership of the private equity fund would potentially have to be disclosed. In order to overcome the practical challenges of implementing the Regulations, it is important that the Government offers clarity on these issues in due course.
What information is to be disclosed?
The particulars to be filed in the Company Registry concerning beneficial owners include: full name, date and place of birth; telephone number, nationality, national identity/passport number, residential, postal and email; place of work and position held; nature of interest including the details of the legal, financial, security, debenture or informal arrangement giving rise to the beneficial ownership; and oath or affirmation as to whether the beneficial owner is a politically exposed person or not.
Moreover, and key to note, is that pursuant to the amendments, the Registrar of Companies is required to establish and maintain a register of beneficial owners of all companies registered in Tanzania. The register will be accessible to government agencies/authorities with responsibilities for combating money laundering and terrorist financing, as well as the authorities that have the function of investigating or prosecuting offences related to money laundering and terrorist financing, such as the Financial Intelligence Unit and the Tanzania Revenue Authority (TRA), amongst others.
What are the implications on private equity firms and private companies of disclosing ultimate beneficial owners pursuant to the Regulations?
The requirement to disclose beneficial ownership can potentially have a significant impact on new and pre-existing companies in Tanzania, as there are various tax implications to consider, such as transfer pricing and thin capitalisation, amongst others, that may arise from the disclosure of relationships between various entities in Tanzania by virtue of a common ultimate beneficial owner.
As a result of the wide definitions and no thresholds, legal entities will face practical reporting challenges, some of which are explained below:
a)If a legal entity has private equity investment, it would be practically impossible to identify each natural person that has shareholding (direct or indirect) in the limited partner and general partner of the private equity fund.
b)A receiver or security holder is likely to be reportable by virtue of having significant influence or control.
c)If a legal entity has entered into a financing arrangement which gives to financiers broad covenants and rights to appoint board members, then the financier could be reportable by virtue of exercising significant influence over a company.
d)In the case of listed companies, ownership is likely to be diverse and shareholding may be held by pension funds and other similar entities, making it impossible to identify the ultimate shareholders.
e)Is a financial controller reportable by virtue of exercising significant influence over a company’s financial affairs?
f)There may be a whole host of different legal entities that enjoy ownership or control rights in relation to which it may be practically impossible to identify all the natural persons. Examples are pension funds, unit trusts and collective investment schemes.
In this regard, there is need for companies to assess the impact of the beneficial owner disclosures on their shareholding structures and business operations, and if need be, take appropriate steps to mitigate exposure and begin gathering the requisite information in anticipation of fulfilling the filing requirements in the near future. Notably, the failure to keep a record of beneficial owners or to disclose to the Registrar the beneficial owners or changes in beneficial ownership is an offence and could result in the Company being liable to a fine not less than TZS 5,000,000 (approximately USD 2,155) and not more than TZS 10,000,000 (approximately USD 4,311).
2. Capital Gains Tax Triggers and Compliance Measures
Capital gains tax in Tanzania is due on realisation of interest in land, petroleum, mineral rights, buildings situated in Tanzania or shares or securities held in resident entities in Tanzania.
The Finance Act, 2020 amended section 90 of the Income Tax Act by introducing a definition of what amounts to the date of realisation for purposes of computing capital gains tax. In addition, the amendments also introduced compliance requirements for persons who derive a gain upon realisation of investment assets in Tanzania.
Specifically, effective 1 July 2020, the date of realisation of an interest in an investment is defined to mean: “the date oexecution of contract for sale; or the date of parting with possession, use or control of a realized asset; or the date of payment of part or whole of the consideration for the realized asset; whichever comes earlier”** (emphasis is ours).
In addition, the amendments further require a person who derives a gain from realisation of investment assets to notify the Commissioner General of TRA (the Commissioner) within fourteen (14) days of realisation of the asset*** and pay the instalment tax on the gain within thirty (30) days or such other period determined by the Commissioner from the date of the realisation of an interest. Further, the relevant authorities responsible for registration, transfer or approval of such transactions, such as the Tanzanian Investment Centre or the Fair Competition Commission (as applicable), shall not register the transfer of the interest or change the name of the Company without the production of a certificate by the Commissioner certifying that the instalment tax has been paid or that no instalment tax is payable.
Whilst the above amendments bring clarity as to what amounts to the date of realisation, there are some practical challenges. Specifically, the requirement to pay the single instalment within thirty (30) days from the date of realisation of assets (as defined under the Tanzanian laws) does not take into account the fact that, from a legal perspective, the execution of a contract of sale or payment of part of the consideration does not guarantee the realisation of an asset, as various conditions precedent to completion of the transaction, such as the necessary approvals from the regulatory authorities and the transfer of legal ownership, are likely to still be pending at that time. Where a transaction may not close, it is important for sellers to carefully manage the practical challenge of seeking a refund for capital gains tax that has been paid.
It is important for private equity firms with investments in or contemplating investing in Tanzania to consider these amendments when evaluating their transactions and for general compliance purposes.
This article was first published by AVCA Legal and Regulatory Bulletin March edition.