Commissioner General, TRA v Village Supermarket Ltd - Civil Appeal No. 10 of 2024
1. Facts
On 7th September 2017, Village Supermarket Group (VSG), a company registered in Mauritius, acquired 52,495 shares (99.9%) in Village Supermarket Limited from its three individual shareholders: Jamila Jamani 20%, Nazira Abdul Jamani 30%, and Abdul Jamani 50%. Nominal value TZS 10,000 per share. 5 shares (0.1%) retained by Mr. Jamani.The shareholders of VSG were the same three individuals who sold the shares.TRA, on 27th Nov 2017, determined that this was a change in underlying ownership under Section 56 Income Tax Act, 2004 triggering deemed realization of assets/liabilities under Sec 36/39/40 ITA, and issued a corporate tax assessment of TZS 168,557,337.60.Respondent objected on 1st Feb 2018, objection rejected and assessment confirmed on 24th Dec 2018.TRAB allowed the appeal, holding no change in underlying ownership as control remained with same persons within parent company. TRAT (14th Sept 2023, Tax Appeal No. 14/2022 - Ngimilanga VC) upheld TRAB, holding:Transfer was made but there is no evidence that same resulted in change of underlying ownership... ownership remained in the hands of same three shareholders... Sec 56 is not automatic, there has to be sufficient evidence beyond share transfer that underlying ownership changed by more than 50%.TRA appealed to Court of Appeal.
2. Issues
Whether transfer of 99.9% shares to VSG constituted a change in underlying ownership under Sec 56(1) ITA where shareholders of transferor and transferee are same persons?
What is the correct interpretation of "underlying ownership" and "membership interest" under Sec 3 ITA?
Whether Sec 56 operation is automatic upon >50% change or requires additional evidence of beneficial change?
Whether corporate veil principle in Salomon v Salomon AC 22 applies and bars looking at natural persons behind VSG?
Whether deemed income tax under Sec 56 was justified?[1897]
3. Holding
Appeal allowed with costs. TRAB and TRAT decisions set aside.Court (Ismail JA) held:There was a change in underlying ownership. Once 99.9% shares moved to VSG, VSG became new underlying owner. Threshold in Sec 56(1) is 50% and more.Membership interest defined in Sec 3 ITA is broad - includes shares in a corporation, interest of beneficiary in trust, right to participate in income/capital. TRAB/TRAT gave it a restrictive, narrow meaning limited to natural persons' right to income.Salomon principle applies. A company and its shareholders are distinct legal persons. You cannot collapse VSG into its shareholders to say "same owners". The transfer created a legal firewall. Tax regime still respects separate personality.Sec 56 is automatic. No extra evidentiary requirement beyond proving transfer >50%. Holding that transfer and change in underlying ownership are different things requiring separate proof was wrong. Transfer of that magnitude is the change.Consequently, respondent was deemed to have realised assets under Sec 39 and liabilities under Sec 40, and TRA was justified to assess tax under Sec 56.
4. Legal Significance
Leading authority on Sec 56 ITA in Tanzania:
Clarifies anti-avoidance purpose of Sec 56: Prevents avoidance through share transfers that leave assets untaxed. Any shift >50% of underlying ownership triggers deemed disposal.
Strict interpretation of tax statutes: Court reaffirmed rule in Ecolab East Africa v CG-TRA TZCA 283 - tax law must be interpreted as written, without interpolation.
Corporate veil in tax: Rejects "look-through" argument where same individuals own holding company. For ITA purposes, holding company is new owner. Closes a common restructuring loophole used with Mauritius holding companies.
Overrules TRAB/TRAT doctrine that Sec 56 requires proof of change in ultimate natural persons/beneficial owners.[2021]Practically, any Tanzanian entity transferring >50% to a holding company, even if owned by same shareholders, will trigger deemed realization tax.
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