In the Namibian Budget Speech held in March 2018, far-reaching reforms to the Namibian tax system were proposed, promising to substantially change the basis of taxation in Namibia and impact existing and new business transactions in the country. These proposals have now been fleshed out and, while subject to amendment, the parameters of these changes have been clarified. The key details of these tax proposals are summarised below.

Introduction of a residency basis of taxation

A significant proposal relates to the introduction of a residency basis of taxation which will apply to “residents” of Namibia as defined with effect from:

• in the case of any taxpayer, other than a company, at the commencement of the year of assessment commencing on or after 1 March 2019; and
• in the case of any taxpayer that is a company, at the commencement of the year of assessment of such company on or after 1 January 2019.

It is proposed that the definition of “gross income” in section 1 of the Income Tax Act is amended to provide for the taxation of the total amount received or accrued to a Namibian resident, regardless of the source of the income. In the case of a non-resident, gross income is defined to mean the total amount received by or accrued to or in favour of such person from a source within or deemed to be within Namibia. As such, residents of Namibia will be subject to tax on their worldwide income and non-residents only on Namibian sourced income.

In terms of this proposal, the case of a natural person, “a resident” will be defined to include natural persons ordinarily resident in Namibia and natural persons who qualify as a resident by virtue of their physical presence, which essentially requires that the individual is physically present in Namibia for a period exceeding 183 days in a year of assessment and 915 days over a five-year period.

In the case of a person other than a natural person, any “company” as defined by the Income Tax Act, is deemed to be a “resident”. The definition is widely worded and includes, inter alia, associations, companies, corporations and trusts incorporated or established under Namibian law, as well as foreign entities that have an office or place of business in Namibia or derive income from any source within Namibia or in which any person ordinarily resident or carrying on business in Namibia is a shareholder or member. Also included in the definition is any unit trust scheme, managed or carried on by any company registered as a management company under the Unit Trusts Control Act, 1981 and trusts operating or formed in Namibia.

Introduction of withholding tax on dividends received by a resident shareholder

A final withholding tax at a rate of 10% of any amount of dividend transferred, applied, declared or paid by a company for the benefit of any shareholder is proposed to be introduced, thus expanding the ambit of dividend withholding tax to also include Namibian resident recipients of dividends.

An exemption from this withholding tax will be applicable to dividends received by the Government of the Republic of Namibia, municipalities, local authorities and pension funds as well as amounts distributed out of dividends received from another company.

It is proposed that the definition of a “dividend” will be amended to include any amounts declared, transferred or applied by a company for the benefit of any shareholder whether, (a) by way of a distribution or (b) as consideration for the acquisition of any share in that company, without taking into account any liability in respect of any loan, or any financial arrangement, as attributable to that share or interest. These proposals are aimed at ensuring that no loan repayment is taken into consideration before withholding tax is applied.

Trusts now deemed to be companies

In terms of another significant proposal, trusts would be treated as companies for tax purposes. As a result, distributions from a Namibian trust would essentially be regarded as a dividend paid to a shareholder, attracting dividend withholding tax.

It is proposed that the definition of the term “company” will be amended for the inclusion of any trusts operating or formed in Namibia and charitable, religious or educational institutions formed or operating in Namibia. The definition of the term “shareholder” will be amended to include the beneficiaries of trusts.

Introduction of thin capitalisation rules

Although the Namibian Revenue Authority has, in practice, been applying a safe-harbour debt to equity ratio of 3:1 as provided for by Namibia’s exchange control regulations, the Namibian Income Tax Act did not contain specific provisions pertaining to thin capitalisation.

It is proposed that thin capitalisation rules will now be introduced to provide a legal basis for this practice to provide that where a resident company has a debt-to-equity ratio in excess of 3:1 at any time during a tax year, a deduction is disallowed for any interest paid to the non–resident shareholder (a minimum of 50% ownership or control is required by the non-resident) in respect of any loan or financial arrangement; or foreign currency exchange loss incurred by the resident company during that period on that part of the debt which exceeds the 3:1 ratio.

Loss carry-forward

Provisions will also be introduced to limit the carry-forward of assessed losses to a period of five years and prohibit the deduction of any foreign loss.

Conclusion

The proposed amendments to the Income Tax Act will have a significant impact on businesses operating in Namibia. Particularly, operations or investments being conducted through trusts will be materially affected by the proposed treatment of such trusts as companies for tax purposes.

We recommend that persons with companies, trusts or other operations in Namibia take advice in respect of the potential impact of these proposed amendments.

For more information, please contact:

Hartmut Ruppel
ENSafrica Namibia | executive chairperson
hruppel@ENSafrica.com
cell: +264 81 124 6943

Wolf Wohlers
ENSafrica Namibia | director
wwohlers@ENSafrica.com
cell: +264 81 122 2942

Celia Becker
Africa regulatory and business intelligence | executive
cbecker@ENSafrica.com
cell: +250 783 553 415

Nicolette Smit
tax | director
nsmit@ENSafrica.com
cell: +27 82 872 6166

Lavina Daya
tax | principal associate
ldaya@ENSafrica.com
cell: +27 83 254 8532

Mike Benetello
tax | executive
mbenetello@ENSafrica.com
cell: +27 83 388 2030