Property Linked Units

In recent years Zambia has seen huge growth in the construction sector, both residential and commercial. The establishment of three cement plants in the past seven years, given that until then there was only one from the 1970’s, is testament to this.

In the 2013 Budget Address, the Honourable Minister of Finance, Alexander Chikwanda, introduced fiscal incentives for property linked units of a property loan stock company, commencing in 2014.

While “Property linked units” and a ”Property loan stock company” are new concepts to the Zambian legal scene, they have been in existence in the region, namely Botswana and South Africa for some time.

It goes without saying that incentives for a hybrid financial instrument or an entity active in a particular economic sector, are intended to spur increased activity in a number of ways. In the case of the property loan stock company and property linked units, the apparent intention would be to spur property development with its allied effects on employment and infrastructure development.

In addition, the intention in the case of the Minister of Finance’s Budget Address appears also to have an impact in developing breadth of the capital markets and wider participation directly in the Zambian capital market.

The Income Tax (Amendment) Act, No 18 of 2014 (the “Income Tax (Amendment) Act”) introduces to the income tax legislation the “Property linked unit” and a ”Property loan stock company”.

A property linked unit is “…a unit comprising a share and a debenture in a company, where the share and debenture are linked together and cannot be disposed of independently of each other…”.

A property loan stock company is “…a company listed on the Lusaka Stock Exchange which is involved in real estate investment and development and has a capital structure that consists of property linked units;…”

The Income Tax (Amendment) Act amends section 82A of the Income Tax Act Chapter 323 of the Laws of Zambia (the “ITA”). Section 82A of the ITA provides, inter alia, for persons making certain payments to withhold tax (withholding taxes) from that payment. These include rent, interest, royalties etc.

Under section 82A the Commissioner General may, in certain circumstances, direct that no withholding be made in the cases of interest, royalties, or commissions.

The amendment to Section 82A now provides that in the case of interest, such a direction (that no withholding be made), can only be made in respect of interest arising from a property linked unit of a property loan stock company (which by definition must be listed on the Lusaka Stock Exchange).

The effect of this is that the lender will receive the full interest, and is responsible for payment of any taxes on such income based on their own status. Previously 15% withholding taxes was to be deducted by a borrower before interest paid over.

Given that Zambia has double taxation agreements with 20 countries, there are opportunities for offshore lending to Zambian property companies, who issue property linked units that are listed on the Lusaka Stock Exchange. Considering that the second Tier of the Lusaka Stock Exchange only requires a minimum of 30 unrelated shareholders and low capitalisation, the bar is set quite low.

A related amendment in the Income Tax (Amendment) Act is that the withholding tax rate on rent has been reduced from 15% to 10% and from our research appears to be treated by the revenue authority, the Zambia Revenue Authority, as a final tax.

Thus the effect is that a property development company whose property linked units are admitted to listing on the Lusaka Stock Exchange, would have a corporate tax rate of 10%, unlike 35% for most other businesses in Zambia. It would then (subject to a direction from the Commissioner General), pay interest on its loans without a deduction of withholding tax.

There is some uncertainty about whether the reduced withholding tax on rental is a final tax, since the legal provisions do not expressly state this, as is usually the case with other similar provisions. However it was clearly the intention from the Minister of Finance’s budget address, where he was quoted as saying “..I propose to change the taxation of rental income by reducing the withholding tax to 10 percent from 15 percent and make this a final tax….”

As stated above, the Zambia Revenue Authority also appears to take this position.

In the case of interest, the actual language of the statutory provisions may also not have reflected, the original intention.

In the case of interest, the Finance Minister was quoted as saying “…I propose to exempt from withholding tax interest arising from the debenture part of a property linked unit paid to Zambian investors in any Property Loan Stock Company listed on the Lusaka Stock Exchange..”

However the provision as it currently stands makes this exemption subject to the Commissioner General’s direction.

With a property developer in Zambia having the full benefits of a corporate tax rate of 10% on its rental income, and no withholding on interest payments to its lenders, the property market would be ripe for development. For lenders, depending on the jurisdiction that the financing originates from, the impact of taxation for financing this type of customer would be worth some level of consideration.

 

Disclaimer: This should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication. Readers are advised to seek legal advice before considering taking any action.