Subject: Tax exemption for strategic investors, withholding tax on foreign loan interest, statutory interpretation, and legitimate expectation.
Mlimani Holdings Limited, a company engaged in property investment, entered into a Performance Contract with the Government of Tanzania and was granted strategic investor status under section 20(1) of the Tanzania Investment Act, Cap. 38. The contract contemplated various investment incentives, including exemption from withholding tax on interest payable on foreign loans.
Clause 1.1(i) of the Performance Contract provided for exemption from withholding tax on foreign loan interest through a Government Notice. Clause 1.2 addressed the publication and renewal of Government Notices, assigning the Project Facilitation Team (PFT) a role in procuring the Minister for Finance to implement the relevant benefits.
Following a tax audit covering the income years 2013–2016, the Tanzania Revenue Authority (TRA) discovered that Mlimani Holdings had failed to withhold tax on interest paid on loans obtained from Turnstar Holdings Limited, its shareholder and a related company.
On 21 September 2017, TRA issued a withholding tax assessment certificate amounting to approximately TZS 2.36 billion, comprising principal tax of TZS 1,573,547,541 and interest of TZS 786,915,048.
Mlimani Holdings challenged the assessment before the Tax Revenue Appeals Board (TRAB), arguing that its Performance Contract entitled it to the exemption. The Board rejected the argument because the required Government Notice had not been issued. The Tax Revenue Appeals Tribunal (TRAT) subsequently dismissed its appeal on 17 August 2022.
Dissatisfied with the Tribunal's decision, Mlimani Holdings appealed to the Court of Appeal on two grounds concerning its eligibility for strategic-investor tax incentives and its entitlement to withholding tax exemption under the Income Tax Act.
The Court of Appeal identified two principal questions:
1. Responsibility for the Government Notice: Whether Mlimani Holdings or TRA/the Project Facilitation Team was legally responsible for ensuring the issuance and publication of the Government Notice required to activate the withholding tax exemption.
2. Eligibility for withholding tax exemption: Whether Mlimani Holdings qualified for exemption under section 82 of the Income Tax Act, 2004, in respect of interest on a loan obtained from a related company.
The Court also considered whether section 20(1) of the Tanzania Investment Act independently conferred the exemption and whether the investor could rely on legitimate expectation arising from the Performance Contract.
The Court held that the Performance Contract expressly contemplated withholding tax exemption through a Government Notice. At the time TRA issued the assessment, no such notice had been issued by the Minister for Finance.
The Court examined clauses 1.1(i), 1.2 and 2.1(iv)(d) of the Performance Contract, particularly the provisions governing the PFT's functions.
Although the PFT had responsibility for overseeing implementation of the project and compliance with the contract, the Court rejected Mlimani Holdings' contention that TRA was responsible for securing the exemption on its behalf. It found that the appellant's argument that TRA was required to guide it through the procedure for obtaining the exemption was misplaced.
Accordingly, the absence of the required Government Notice meant that Mlimani Holdings had not satisfied the conditions necessary to enjoy the exemption.
The Court agreed with the two tax tribunals that strategic-investor status did not, by itself, establish an unconditional entitlement to withholding tax exemption.
The applicable exemption had to be grounded in the relevant tax legislation and implemented in accordance with the prescribed requirements. In this case, the Income Tax Act governed the withholding tax treatment, while the Performance Contract expressly contemplated a Government Notice.
The Court therefore rejected the argument that the investor's strategic status was sufficient to exempt it from the assessed tax.
The Court observed that the loan had been obtained from Turnstar Holdings Limited, a shareholder and related company of Mlimani Holdings.
It upheld the interpretation adopted by the TRAB and TRAT that section 82 of the Income Tax Act did not extend the claimed exemption to interest payable on a loan obtained from an associated or related company in the circumstances of the case.
The Court consequently found no basis for interfering with the tribunals' interpretation of the applicable provisions.
Mlimani Holdings could not rely on the Performance Contract or the doctrine of legitimate expectation to bypass the legal conditions for obtaining the exemption.
The Court emphasized that legitimate expectation could not prevail over clear statutory provisions requiring the issuance and publication of a Government Notice.
In interpreting tax legislation, the Court endorsed the strict approach: statutory provisions should be applied according to their plain meaning, without adding or removing words from the legislation.
The Court of Appeal dismissed the appeal for lack of merit. The parties were ordered to bear their own costs.
The decision clarifies that obtaining strategic-investor status under investment legislation does not necessarily confer an immediately enforceable exemption from every tax liability. Where an incentive is subject to conditions under the relevant tax legislation and an investment agreement, those conditions must be satisfied.
For investors, this means that investment approval and contractual incentives should not be treated as substitutes for compliance with tax-specific requirements.
The judgment demonstrates the importance of distinguishing between the contractual promise of a tax incentive and its legal implementation. A Performance Contract may contemplate an exemption, but the investor must establish that the legal conditions required to activate that benefit have been met.
This has practical implications for investment agreements involving withholding tax, corporate income tax and other fiscal incentives.
The treatment of the loan from Turnstar Holdings Limited highlights the importance of examining the identity and legal status of a lender when determining the availability of a tax exemption.
Investors using shareholder loans or other related-party financing arrangements should independently verify the applicable withholding tax provisions rather than assuming that an exemption associated with strategic-investor status covers all foreign borrowing.
The Court reaffirmed that legitimate expectation cannot be used to circumvent clear statutory requirements. Although contractual commitments by public authorities may be relevant to an investor's expectations, they cannot automatically displace the conditions prescribed by legislation.
The decision therefore reinforces the principle of legality in tax administration: tax incentives must be exercised within the framework established by law.
By endorsing the strict interpretation of tax statutes, the Court emphasized that courts must give effect to the language enacted by Parliament. Neither a taxpayer's commercial expectations nor a broad interpretation of investment incentives can replace the requirements of the applicable tax legislation.
This approach promotes legal certainty in determining whether an exemption is available and under what conditions.
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