Zimbabwe’s Special Capital Gains Tax on Mining Titles

Zimbabwe, with its rich mineral resources, has long relied on the mining sector as a cornerstone of its economy. Recognising the potential of mining for national development, the government has introduced a special capital gains tax on entities which acquire or transfer mining title and interest. This article unpacks the special capital gains tax, providing clarity on its mechanisms, implications, and the practicality of its application.

With effect from 1 January 2024, a special capital gains tax was introduced when an entity acquires or transfers a mining title or interest. In this case, an entity is defined in the relevant provisions to include foreign entities and individuals, locally incorporated subsidiaries of foreign companies, entities such as trusts, syndicates, or joint ventures domiciled outside Zimbabwe etc. In summary, the  entity in question should have an international element either through ownership or through offshore structures.

The new tax is on the value of the transaction as opposed to the “gain” from the transaction when one acquires or transfers a mining title or interest. Ordinarily, in terms of the law, capital gains tax is chargeable where there is a gain realized from the sale or deemed disposal of a specified asset which is from a source within Zimbabwe.  As it stands, the special capital gains tax applies on mining titles, which may also be subject to capital gain tax, but the difference is that special capital gains tax is payable by the buyer whereas capital gains tax is tax payable by the seller.

In addition to the above, the tax on the value of the transaction, is applicable in circumstances where the mining title was disposed of within ten years from the date the special capital gains tax became effective on 1 January 2024. This brings within the scope of the tax, mining title disposals which happened from 1 January 2014 to present and post 1 January 2024 transactions. This is off course an administrative burden to entities who in the past 10 years transferred mining title. Practically, these funds obtained in the last ten years would have been depleted by now. Further, the retrospective application of this law, although well-meaning, fails to take into consideration that commercial transactions are governed by contracts in which such matters relating to liability of taxes, would have been included as provisions guiding the parties. Many would not have drafted contracts with the special capital gains tax in mind.  

The special capital gains tax on the transfer of mining titles has far-reaching implications, both for the mining sector and the broader Zimbabwean economy. On one hand, for mining companies and entities involved in the transfer of mining titles, the tax introduces additional financial considerations. The significant tax rate can affect the profitability of transactions, potentially influencing decisions related to acquisitions, disposals, and investments in mining projects. Companies must now factor in the cost of the tax when negotiating transactions, which could lead to more cautious investment strategies or a re-evaluation of asset portfolios. On the other hand, the requirement for formal approval to qualify for the reduced tax rate encourages entities to engage more proactively with regulatory authorities, promoting a more transparent and regulated sector. While the tax can lead to increased administrative burdens, it also offers an opportunity for entities to align more closely with national regulations and standards.

For entities, it is important to determine who is liable for the special capital gains tax to guide parties in their obligation for past and future transactions. The transferee (buyer) is liable to pay the tax and in the event of default by the transferee, the owner of the mining title becomes liable. Without express contractual terms on tax liability in the contracts governing the transfer of the mining title, liability for the special capital gains tax may be a litigious matter. A transferee may default and without qualification, the owner of the mining title prior to the transfer becomes liable.

The standard rate for the tax is set at 20% of the transaction’s value, a figure that reflects the government’s intention to claim a significant share of the profits from these high-value assets. However, a reduced rate of 5% is applicable if the transfer receives the necessary approval from relevant authorities. This incentivizes entities to seek formal approval for their transactions, again promoting transparency and compliance in the mining sector. The implementation of the special capital gains tax is a complex process, involving various compliance and payment conditions. Understanding these details is crucial for entities involved in the mining sector, as it affects their strategic planning and financial outcomes.

The law stipulates clear deadlines for the payment of the tax, catering to different scenarios. Payment is due on 1 April 2024 for transfers within the ten years leading up to 1 January 2024. ). For all other transactions happening on or after 1 January 2024, the tax must be paid within thirty days of the transaction’s conclusion. To accommodate various circumstances that might affect the ability to pay on time, the legislation allows for extensions and staggered payments. The Commissioner-General has the authority to extend the payment deadline by up to six months or to approve a payment plan. This flexibility is crucial for ensuring that the tax does not unduly burden entities, especially for entities involved in large or several transactions. Compliance with the special capital gains tax is mandatory, with stringent measures in place for non-compliance. The failure to pay the tax can lead to legal and financial repercussions, including the invalidation of mining title transfers or denied registration.

In conclusion, the special capital gains tax on the acquisition and transfer of mining titles is a bold step by the Zimbabwean government to ensure that the nation benefits more substantially from its mineral resources. While the tax has the potential to generate significant revenue and promote a more regulated and transparent mining sector, its success will depend on careful implementation, effective enforcement, and the ability to balance revenue generation with investment attraction. As Zimbabwe continues to navigate its economic challenges, the special capital gains tax represents an important element of its broader strategy to harness the mining sector for national development.

Tags: No tags

Add a Comment

Your email address will not be published. Required fields are marked *