Zimbabwe proposes amendments to thin capitalization rules 

By Walker Nyachowe, Managing Director, Walker Consulting Services

 Zimbabwe’s Minister of Finance Economic Development, the Honourable Mthuli Ncube, presented the 2019 Mid-Term Fiscal Policy Review Statement on 1 August under the theme “Building a Strong Foundation for Future Prosperity’’. 

The Fiscal Policy Review Statement came a few weeks after currency reforms in Zimbabwe which saw the re-introduction of the Zimbabwean Dollar (ZWL) through Statutory Instrument 142 of 2019.

The Finance Minister proposed to amend the definition of debt in relation to thin capitalization as stipulated in section 16(1)(q) of the Income Tax Act, (Chapter 23:06) to exclude debts contracted with a local financial institution and local contracting parties not associated with each other, as defined in section 2A of the Income Tax Act. An exception is provided where the parties have not colluded for the purpose of avoiding tax.

 Debts contracted through a government credit facility by a public entity as defined in the Public Entities Corporate Governance Act, are also proposed to be excluded from the definition of debt in relation to thin capitalization.

In general, Zimbabwe’s thin capitalization rules disallow for corporate tax excess interest where the debt to equity ratio exceeds 3:1.

Other key tax proposals in the Mid Term Fiscal Review were the revision of tax bands for employment income as well as the introduction of separate employment income tax tables for individuals earning in the Zimbabwe local currency (ZWL) and those earning in the United States of America dollars (USD) effective 1 August.

There were also proposals to change the rate of capital gains tax effective 1 August and proposals on the deductibility of mining royalties with effect from 1 January 2020.