Zimbabwe’s Permanent Establishment (PE) Regime: Taxing Non-Resident Business

Zimbabwe’s Permanent Establishment (PE) Regime: Taxing Non-Resident Business

The concept of Permanent Establishment (PE) is foundational to Zimbabwe’s approach to taxing non-resident companies. It establishes a threshold for when a foreign company’s activities within the country create a sufficient taxable presence, thereby subjecting the attributable income to local corporate tax.

This regime is governed primarily by Sections 19A and 19B of the Income Tax Act [Chapter 23:06].

The Basis of Taxation (Section 19A)

A company that is not resident in Zimbabwe is liable to pay tax only if it carries on a business in Zimbabwe through a Permanent Establishment in the country.

The Scope of Income

If a PE is established, the non-resident company is liable to tax on all taxable income, wherever arising, that is directly attributable to that permanent establishment. This attributable income may derive from two key sources:

• Trade: Business income arising directly or indirectly through or from the PE.

• Investment: Income from property or rights used by, or held by or for, the establishment.

Defining Permanent Establishment (Section 19B)

The Income Tax Act defines a Permanent Establishment primarily as a fixed place of business through which the non-resident company carries on its business.

Common Inclusions

The definition of a PE in Zimbabwean law is broad and specifically includes, but is not limited to, the following fixed places of business:

• A place of management.

• A branch.

• An office.

• A factory.

Preparatory and Auxiliary Exceptions

Crucially, an entity is not considered a Permanent Establishment if its presence is solely for activities considered to be of a preparatory or auxiliary character. These exceptions include:

• The use of facilities solely for storage, display, or delivery of goods or merchandise belonging to the enterprise.

• The maintenance of a stock of goods solely for the purpose of storage, display, or delivery.

• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise.

• The maintenance of stock of goods or merchandise solely for the purpose of processing by another enterprise.

Determining Taxable Income (Arm’s Length Principle)

The method for calculating the taxable income of a Permanent Establishment in Zimbabwe aligns with international best practices and the Arm’s Length Principle.

Separate Entity Rule

The taxable income attributed to the PE is determined as if it were a distinct and separate enterprise, engaged in similar activities under similar conditions, dealing wholly independently from the non-resident parent company.

Deductions

In determining the taxable income, the PE is allowed deductions for any allowable expenses incurred for its purposes, including executive and general administrative expenses incurred, whether in Zimbabwe or elsewhere. These deductions are subject to assumptions that the PE has the equity, loan capital, and credit rating it would reasonably have if it were an independent entity.

Anti-Avoidance

Zimbabwean tax law has provisions to address structures that attempt to circumvent the PE rules, such as certain commissionaire arrangements where a person sells a foreign company’s products in their own name but on behalf of the foreign enterprise.

Legislative Context

The legislation defining Permanent Establishment became effective in Zimbabwe from January 1, 2017, formalizing the right to tax non-resident businesses even outside the framework of specific Double Taxation Agreements (DTAs). This approach ensures that companies establishing a sustained economic footprint contribute to the local tax base. Furthermore, the “New Transfer Pricing Method – Quoted Price Method” mentioned in recent National Budget Highlights is a related concept that helps ensure accurate income attribution between the non-resident company and its PE.