Shareholder Loan vs Equity in Tanzania: The 7:3 Gate and the Bank

This page is the subsidiary funding operating file: it decides which instrument carries the parent’s money in, and what each costs to service and to unwind. It is not a transfer-pricing manual and not a treaty-rate table.

• Interest limitation in detail: thin capitalisation
• The lender’s side of the same facility: lending from abroad
• Proving the money arrived: capital injection evidence
• What the counter applies: BOT foreign-exchange rules

As at 14 September 2026. This file rests on Cap. 332, the Companies Act, Cap. 212, the Stamp Duty Act, Cap. 189 and Tanzania’s foreign-exchange framework; the portals to confirm against are tra.go.tz, bot.go.tz and brela.go.tz.

Debt or equity is settled by the instrument, not by the wire

The revenue authority reads the paper, not the SWIFT narration. Money arriving against a subscription letter and an allotment is share capital, and it stays until a lawful distribution or a statutory reduction takes it out. Money arriving against a dated facility with a rate, a tenor, a repayment schedule and a default clause is debt. Money arriving against nothing is neither: the auditor parks it in a director’s current account, and nobody can send it home because no document names a creditor.

Screen the activity before the structure. GN No. 487A of 2025 reserves business classes for citizens, and the shape of the capital opens no door that list has closed. Security is the second limit: section 20 of the Land Act, Cap. 113 bars a non-citizen from holding land except for investment purposes, so a mortgage over the subsidiary’s plot may be refused registration in the parent’s name. Charge plant, stock and receivables instead.

Section 12: the 7:3 gate on deductible interest

Cap. 332 defines an exempt-controlled resident entity as one where a quarter or more of the underlying ownership sits with tax-exempt persons, approved retirement funds, charitable organisations or non-resident associates. A foreign parent’s subsidiary is inside it from the first allotment, not after a grace period.

Section 12 caps the interest such an entity may deduct in a year of income at the interest attributable to borrowing of no more than seven parts debt to three parts equity. Interest above the line is not destroyed: it carries into the next year of income and meets the identical test. Equity here is paid-up share capital plus retained earnings, so a loss-making year narrows the gate rather than widening it.

Withholding on the coupon, and what the dividend route costs

Interest going to a non-resident carries withholding at 10%. The agent is the borrower: the subsidiary deducts at payment, pays over within seven days after the month of payment ends, and issues the certificate the parent needs to claim relief at home. The charge bites on the whole coupon, including the slice section 12 refused. A disallowed deduction is not an exempt payment.

The equity route is not free. An unlisted resident company’s dividend carries 10%; one from a company listed on the Dar es Salaam Stock Exchange with the required public float carries 5%, as does a dividend between resident corporations where the recipient holds 25% or more. That profit has already met corporation tax at 30%. The arithmetic pushes parents toward debt, and section 12 exists because it is obvious.

A treaty with the parent’s jurisdiction can reduce the charge, against a certificate of residence and a beneficial-ownership position: claimed on evidence, never netted down at payment.

Equity against shareholder loan, line by line

Getting the facility onto the external-debt record

Borrowing from abroad stops being private once it crosses the border. External debt is recorded: the borrower registers the facility through its commercial bank, a debt reference is issued, and drawdowns, interest and repayments are reported against it. An instruction on an unregistered facility is the commonest reason money sits unexecuted while a relationship manager asks for a paper that belonged at signing.

The Foreign Exchange Act, Cap. 196 and the regulations under it govern classification: the pack a bank builds for subscribed shares is not the pack it builds for a drawdown. Confirm the current registration form and reporting cycle with the Bank of Tanzania before the first tranche moves.

BRELA, BPRA, and turning the loan into shares

Equity leaves a trail on the register; debt does not. Allot the shares, write up the members’ register, and deliver a return of allotment to the Registrar within one month. For a Zanzibar company that filing goes to the Business and Property Registration Agency, not to BRELA: separate files, and a Mainland extract proves nothing there.

Income tax runs the other way. As a Union tax it reaches a Zanzibar company through the Tanzania Revenue Authority on identical terms: same ratio, same withholding, same corporation rate. Stamp duty is not a Union tax: an instrument executed and operating in Zanzibar goes to the Zanzibar Revenue Authority.

Capitalising the debt later is a corporate act, not a bookkeeping entry. The board resolves, the parent subscribes for shares in satisfaction of outstanding principal, the allotment is filed as consideration other than cash, and the debt reference is closed out so nobody reports a repayment that never left. Accrued interest swept into the conversion is still interest: withholding falls due then, not on a cash date that never comes.

The order the desks actually take it

1. Screen the activity: reserved list and sector licence first; funding cannot cure an ownership bar.
2. Size the equity first: set paid-up capital so the intended borrowing clears the ratio in year one.
3. Draft the instrument: subscription letter, or a facility stating rate, tenor, repayment dates, security and governing law.
4. Stamp the loan document: at the stamp-duty desk, before anyone needs to rely on it.
5. Register through the bank: obtain the debt reference ahead of the first drawdown.
6. Receive funds with matching narration: one purpose per wire; capital and drawdown never share a transfer.
7. File at the registry: the allotment return for shares, and particulars of any charge taken as security.
8. Run the tax calendar: withholding paid over monthly, the ratio tested at year end.

Papers the file needs, and what gets stamped

Packs vary by bank and registry; this spine is what every desk asks for.

• Board resolutions of both companies, signed by the people the bank mandate names, with the subscription letter and allotment resolution or the executed agreement and its repayment schedule.
• The stamped instrument. Cap. 189 charges duty by class; pay what the Schedule sets, not a rate quoted for a conveyance. Unstamped paper fails the moment you enforce it.
• Certified registry extract, taxpayer identification certificate, memorandum and articles.
• Source-of-funds evidence for the parent, and its chain to ultimate beneficial owners.
• Inward SWIFT narrated to match the instrument, plus the bank’s capital-account or debt-reporting forms.
• Withholding certificates for each coupon, and the periodic statement agents file.
• Transfer-pricing documentation supporting the rate: a related-party facility is a controlled transaction.

Illustrative arithmetic on a thin equity base

Illustrative arithmetic, not a quotation. A parent subscribes TZS 1,200,000,000 of share capital in year one and advances TZS 4,000,000,000 under a facility at an assumed contract rate of 9%. Retained earnings are nil, so equity for the ratio is TZS 1,200,000,000 and borrowing able to carry deductible interest is capped at seven-thirds of it: TZS 2,800,000,000.

Interest for the year is TZS 360,000,000. Seventy per cent of the debt sits inside the gate, so TZS 252,000,000 is deductible and TZS 108,000,000 is disallowed. At the 30% corporation rate that disallowance costs TZS 32,400,000 of additional tax. Withholding is computed on the full coupon regardless: TZS 36,000,000.

Lift paid-up capital to TZS 1,714,285,714 and the entire TZS 4,000,000,000 clears the ratio. The structuring decision therefore belongs before the first transfer, not in the audit file.

Where this file stalls

• The facility is dated after the cash arrived. An agreement signed in November for money received in March reads as a repair.
• Interest accrues in the ledger and is never paid, so nobody withholds. Test the trigger before the year-end journal.
• One transfer carries the subscription money and the first drawdown. Neither bank nor auditor can split it afterwards.
• A coupon well above what an unconnected lender would charge invites an arm’s-length adjustment on top of the ratio disallowance.
• Repayment goes to an account the facility never named: a routine remittance becomes a compliance file.
• Capital is “reduced” by wiring money back. Reduction is a formal process under Cap. 212, not a transfer.

What moved in 2025

The Finance Act 2025 amended the Bank of Tanzania Act, Cap. 197 to require domestic transactions to be quoted and settled in Tanzanian shillings, subject to prescribed exemptions. A foreign-currency facility from a non-resident parent is cross-border rather than domestic, but the subsidiary’s own local pricing is caught and currency clauses in older templates deserve a read. Confirm the exemption list before signature.

GN No. 487A of 2025 reset the activities reserved for citizens. It does not touch the debt-or-equity question, but it decides whether the subsidiary may hold the licence the funding is meant to support.

Which desks own what this page does not

The Tanzania Revenue Authority rules on deductibility, withholding, recharacterisation and stamping. The Bank of Tanzania owns the debt register and the foreign-exchange classification; the commercial bank applies both and may decline a remittance this page calls routine. BRELA and its Zanzibar counterpart own the company register, and nothing they accept changes a tax outcome. The Land Registry rules on security over land, a licensed auditor signs the accounts a dividend is paid from, and an advocate drafts the facility. Zatra prepares and coordinates, and issues no approval.

What to confirm before you act

• The section 12 definition, ratio and measurement points in the current revised edition.
• The live withholding rate and payment window for non-resident interest, and whether a treaty covers the parent.
• The debt-registration form and reporting cycle in force this month, taken from the bank in writing.
• The duty payable on this instrument class under the Schedule to Cap. 189.
• Whether the activity appears on the reserved list, and whether the security can be registered in a non-citizen’s name.
• Which registry holds the company file, and which authority stamps a Zanzibar instrument.