Expenses are generally deductible against taxable income from the same source, provided that they are not of a capital nature and are incurred wholly and exclusively for the purposes of a business.
Provisions can only be deducted to the extent that they are specific. Even if a provision complies with IFRS, it will be disallowed (and any reversal of the provision will not be taxed) to the extent it is considered to be general in nature.
Depreciation and amortisation
Accounting depreciation and amortisation are not deductible; instead, a tax deduction referred to as ‘capital allowances’ is available on capital expenditure for business purposes.
Zambia has a system of capital allowances that provides for deductions in ascertaining business income. These are calculated at annual rates on qualifying capital expenditure, which currently apply as follows:
|Category of qualifying expenditure||Rate of allowance (calculated on a straight-line basis)|
|Industrial buildings||Investment allowance of 10% *|
|Initial allowance of 10% *|
|Annual wear and tear allowance of 5% *|
|Other commercial buildings||Annual wear and tear allowance of 2%|
|Implements, machinery, and plant - farming and agro-processing||Annual wear and tear allowance of 100%|
|Implements, machinery, and plant - manufacturing, tourism, generation of electricity, and leasing||Annual wear and tear allowance of 50%|
|Implements, machinery and plant - other||Annual wear and tear allowance of 25%|
|Commercial vehicles||Annual wear and tear allowance of 25%|
|Non-commercial vehicles||Annual wear and tear allowance of 20%|
|Patents, designs, trademarks, and copyrights||Premium allowance on straight-line basis over the life of period for which the right is granted|
|Mining expenditure (only available for assets brought into use)||Mining deductions of 20%|
|Farm improvements||Farm improvement allowance of 100%|
|Construction and improvement of commercial and industrial buildings by person approved under the Zambia Development Agency (ZDA) Act||Improvement allowance of 100%|
* For industrial buildings, the investment allowance and the initial allowance can both be claimed in the year in which the building is put into use, together with the wear and tear allowance for that year.
Goodwill is not deductible as it is a capital expense.
A deduction is allowed for preliminary business expenses in the charge year in which that business commences, provided that the expenditure was incurred within 18 months before the commencement and provided that the expense would have been deductible if it had been incurred after the commencement.
There are special rules for prospecting expenditure in an area in Zambia over which a mining right has been granted. These enable the shareholders of the company undertaking the prospecting to claim a deduction for the prospecting expenditure, provided certain conditions are met.
Deductibility of interest is limited to 30% of a company’s tax earnings before interest, tax, depreciation, and amortisation (EBITDA). This limit excludes businesses on the turnover tax system and taxpayers engaged under the Banking and Financial Services Act. Any unrelieved interest may be carried forward for deduction in the following year provided that the total interest deducted does not exceed 30% of the tax EBITDA for that year and the interest is in line with the arm’s-length principle. Any unrelieved interest may, however, only be carried forward for a period of five years.
If the interest expense for any charge year does not exceed 30% of the tax earnings, it is still possible for some or all of the interest charged to be disallowed if the interest is not in line with the arm’s-length principle based on the transfer pricing requirements.
Further, the interest expense is deductible provided that the loan or advance was obtained for capital employed wholly and exclusively for business purposes (or in the production of another source of income).
Note, however, that incidental costs of obtaining finance, such as commitment and guarantee fees and any other incidental costs of a similar nature, are not deductible.
A specific bad debt is deductible if it can be proved that it is bad or likely to become bad.
No deduction is allowed for impairment provisions/bad debt incurred by banks and financial institutions for debts that are secured against collateral.
A payment to a public benefit organisation that is approved by the Zambian government or owned by the Zambian government is deductible.
Payments made by an employer by way of a contribution to an approved fund established for the benefit of employees are deductible. Note that special rules apply for the deductibility of lump sum payments and payments in arrears. Payments to non-approved pension funds are not deductible.
Payments to directors
Payments to directors are deductible, provided they are incurred wholly and exclusively for the purposes of a business (or other source of income). A payment could, however, be disallowed if it is deemed to be merely a domestic or personal expense.
Research and development (R&D) expenses
All revenue expenditure on experiments or research relating to a business is deductible. A deduction against business income is also allowed for a contribution to a scientific or educational society or institution, which is required to be used solely for industrial research or scientific experimental work connected with the business. While capital expenditure on research is disallowed in the income statement, it may qualify for capital allowances.
Bribes, kickbacks, and illegal payments
Bribes, kickbacks, and illegal payments would normally be disallowed on the basis that they are not wholly and exclusively for the purposes of a business.
Fines and penalties
A penalty arising under the Income Tax Act is specifically disallowed. Other fines and penalties may be disallowed on the basis that they are not wholly and exclusively for the purposes of a business.
Zambian CIT is not deductible. Other tax liabilities suffered should be deductible, provided they are revenue expenses and wholly and exclusively incurred for the purposes of the business (or other source of income). See the Tax credits and incentives section regarding credits for non-Zambian tax suffered on non-Zambian source income.
Other significant items
Other specific rules concerning expenses considered to be allowable include the following:
- Deductions for costs of an employer to establish and administer an approved share option scheme.
- Deductions for technical education.
- Deductions for SDL payments.
- A fixed deduction of ZMW 1,000 for employing a person with a disability.
Other items specifically disallowed include the following:
- A loss or expense that is recoverable under an insurance contract or indemnity.
- Expenditure on the provision of entertainment, hospitality, or gifts.
- Provision for a contingent employee cost that is not paid out to the employee in the charge year.
- Mineral royalties payable under the Mines and Minerals Development Act, 2015.
Benefits provided that are incapable of being turned into money or money’s worth (e.g. the use of cars and accommodation provided by the employer) are taxable on the employer under corporate tax.
Special rules apply for determining the gains or profits of an insurance business.
Net operating losses
Losses can be carried forward to set against profits of the same source. Normally, losses are available to carry forward for a period of five years after the charge year in which the loss was incurred. In the case of a person carrying on a mining operation or hydro, wind, solar, and thermo power generation, the loss carryforward period is ten years.
The set off of a loss incurred by a person in a charge year from mining operations shall be limited to 50% of the taxable income of the person carrying on mining operations.
There is no ability to carry back losses.
Losses arising from one source cannot be set against income arising from another source.
Payments to foreign affiliates
Certain ‘loans to effective shareholders’ may give rise to CIT liabilities. Note that transfer pricing rules may also apply (see Transfer pricing in the Group taxation section).