Eswatini Makes Big Changes to its Income Tax Laws

Eswatini was formerly known as Swaziland. To help you find it, it is a small kingdom of about 1.2 million people, lying between South Africa and Mozambique. Although it is not a huge economy, it has important timber and sugar industries, tourism, and has a soft drink concentrate plant, as well as banks and telephone companies as normal for any country. So far, so encyclopaedia, why are we talking about this little country today?  Well, Eswatini has recently made very significant changes to its income taxes, generally with effect from 1 July 2024.

The good news

The corporate income tax rate has been cut to 25% (from 27.5%). This is for the year of assessment ended 30 June 2023. This is good news, but maybe not for those with tax assets, as their value will now be reduced.

A tax incentive is also available for certain, approved, new business projects, called Development Enterprises. These can benefit from a 10% tax rate for a 10-year period.

The not-so-good news

The rates of withholding taxes on interest and dividends paid to non-residents have increased to 15%. The double taxation treaty with South Africa limits the withholding tax on interest, and on dividends to shareholders who own at least 25% of the company, to 10%. However, there is some bureaucracy involved to benefit from this reduced rate.

Branch profits tax. A branch of a foreign company remains subject to tax on its profits at the corporate rate. However, the rate of tax on any after-tax profits that are paid to the head office has been increased to 15%. Again, the double taxation treaty with South Africa should protect South African companies from this additional tax.

The rate of initial allowances on the acquisition of certain assets has been reduced to 30% and is now only granted if the asset cost more than SZL 5 million.

Profits or losses from long-term contracts are now taxed using the percentage of completion basis.

The definition of a permanent establishment has been changed. It now includes consulting services provided by a person who is in Eswatini for more than 30 days in a 12-month period, which is quite a low threshold. However, once again, the double taxation agreement with South Africa provides some protection, as it requires a 90-day period.

Loans to shareholders are now taxed as income of the shareholders – unless the loan is repaid during the year.

The “not good” news

Loss carry-forward will now be limited to a five-year period. So, if a company had a taxable loss for the 2023 year, this can be set off against future profits up to the 2028 year, but not after that. There is an exception for timber and orchard plantations. The tax loss for a timber plantation will be carried forward until the plantation has reached maturity. For an orchard plantation, the tax loss will be carried forward until the orchard becomes productive. We think the five-year limit will apply from those dates of maturity or productiveness. Companies may need to prepare separate tax records for plantations at different life-stages.

The manufacturing income of a company is now ring-fenced, so losses from manufacturing cannot be set against the company’s other income. This will also require separate records for the different activities of a company, as well as possible debate about what is (and is not) manufacturing.

Deductions for interest and similar expenses (including forex differences, loan raising or guarantee fees etc) are limited to 30% of tax EBIDTA. This will not apply to banks. This applies to all interest, not just to interest paid to associated persons. Any amount disallowed can be carried forward and used in the following 3 years (but still subject to the 30% of tax EBIDTA limit).

Capital gains are now taxable. Capital gains on the disposal of business assets are included in taxable income. A business asset is one used (or held ready for use) in a business, including shares (but excluding trading stock). A South African person owning shares in an Eswatini company will be protected from this tax by the double taxation agreement unless the company principally owns immovable property in Eswatini.

As always with taxes on capital gains, there are some special rules to deal with part disposals, with acquisitions and disposals in non-arm’s length transactions, and with non-resident persons who become resident. If a resident person becomes non-resident, there is an exit tax, as that person is treated as disposing of all assets for their market value.

The taxable gain is the disposal proceeds less the cost base. The cost base is the cost, plus costs of alteration or improvement if not already allowed as an income tax deduction. Initial allowances granted for an asset are added to the disposal consideration.

There is a roll-over relief for involuntary disposals, if the proceeds are reinvested in an asset of a like kind, within one year of the involuntary disposal.

There are other roll-over reliefs for reorganisation of a resident company or a group of resident companies and for asset-for-share exchange where the transferor of the asset owns at least 50% of the shares in the company, as well as some special rules for liquidation of a resident company where assets are transferred to a resident company which owns at least 50% of the company that was liquidated.

Losses on disposal are reduced by any depreciation allowances granted for the asset disposed of. Our initial view is that capital losses can be set off against other income, and assessed losses can be set off against capital gains.

One piece of good news is that the cost base is indexed for inflation, but only if the asset immovable property that has been owned for more than 12 months. This helps to limit the extent to which the tax is imposed on inflation.

Assets acquired before 1 July 2024 are deemed to have been acquired on 1 July 2024. Further, their cost base is their value on 1 July 2024, so it appears that taxpayers should obtain valuations of all assets held on the date this tax was introduced. This should stop the tax being imposed on historic gains made before the tax commenced.

Detailed transfer pricing (TP) rules have been introduced. We will write a separate newsletter on this as the elephant in the room requires a standalone newsletter, maybe even a few!

Eswatini new TP rules that align broadly with the OECD guidelines, but with some unique adjustments. These rules mandate comprehensive documentation requirements for both cross-border and domestic transactions. The key documents include a Master File, Local File and Country-by-Country (CbC) Report. The TP rules also apply if an Eswatini taxpayer engages in a transaction with a person in a jurisdiction with a beneficial tax regime (as determined by the Eswatini tax authority), even if they are not associated persons. So quite an aggressive approach to TP.

This documentation should detail the nature of the intra-group transactions, transfer pricing methods used, and evidence supporting the arm’s length nature of these transactions. Ensuring compliance with these requirements will help avoid penalties and support the defence of your transfer pricing positions during audits.

Conclusion

As we said at the beginning, the changes are rather sweeping. Some of them seem to require some actions from taxpayers, to mitigate their effects or even to apply the new legislation. We have tried to highlight that appear to us to be the important changes, but we have not listed every issue, and we expect further issues to arise with further analysis of the law, and as taxpayers try to apply the new law to their situations.

Please contact us if you would like to talk about any issue arising from this new legislation.