Talk of the town in the business community has been the regulations on beneficial ownership in Tanzania1 that operationalized the amendments of the Companies Act, through the Finance Act of 20202 which introduced beneficial ownership rules.
Undeniably, we live in a world where corruption and money laundering schemes go through financial institutions undetected. Part of the fight against this abuse, is the ability for authorities to identify and verify the identity of the beneficial owners who control companies and trusts. It is understandable that authorities' priority is to prevent the abuse of legal vehicles that rob countries of their dues and ultimately chip away at the trust in democracy and state institutions.
The rules in Tanzania apply to both private and public companies, with an exemption for companies incorporated outside of Tanzania and with a place of business in Tanzania, since such is not deemed to be incorporated in Tanzania3. Beneficial ownership is defined as a natural person who directly or indirectly owns or exercises substantial control over an entity or an arrangement; who has a substantial economic interest in or receives substantial economic benefit from an entity or arrangement; on whose behalf an arrangement is conducted or who exercises significant control or influence over a person or arrangement through a formal or information agreement.4
In the spirit of capturing everything under the sun, there are terms here that do not really make sense such as a person who "indirectly owns or exercises substantial control" and I expect that we will see some interesting case laws come up with regards to this time. Leaving that aside, the key terms to understand in this provision are "substantial control" and "substantial economic interest". In my opinion, the test for understanding "substantial control" lies in the definition of majority which means a person who influences decisions in the Company. Traditionally, majority would mean owning 50 percent of outstanding shares + 1 in the company with voting rights, however given that the term "substantial" is added, it is my opinion that the requirement for disclosure applies to a person that is having influence of decision with a Company beyond a 51% shareholding. We can imagine arrangements where a shareholder owns shares amounting to less than 51%, for example 49% but the board of directors is controlled by this shareholder in a substantial way therefore such a case would fall under the "substantial control" definition. Likewise, "substantial economic interest" would be for those persons who are getting over 51% of shares, with less than substantial voting rights.
Hence, in my opinion, one does not have to disclose beneficial ownership where a person owns less than 51% of the share capital since this cannot be deemed a "substantial economic interest" and coupled with the person not having any substantial voting rights that amount to substantial control of the company! Some colleagues have interpreted the law in a way where disclosure needs to be observed where an individual owns 1 percent of the shares in the Company and I find this is not only dangerous but very erroneous. How does someone who owns 1% of the share capital have substantial control over anything? How is this a substantial economic interest? Equally, some colleagues are preaching that that the terms "substantial control" be read using the imported definitions from the Income Tax Act and that substantial control equates to 25% shareholding. In my opinion, this is equally wrong. I do not subscribe to importing interpretations from other laws unless the law clearly refers to another legislation or the law the that is guiding is the law of interpretation5. With regards to the "beneficial ownership" definition, the law refers expressly to the Income Tax Act6 in interpreting the term "arrangement"7 and only that. There is no reason for us to go beyond!
In my opinion, these provisions and regulations on beneficial ownership further discourage investment in Tanzania as a primary destination for several reasons. The disclosure of information of beneficiary ownership should be a post-registration requirement with the Financial Intelligence Unit and not at the BRELA8 since it undermines to a large extent the doctrine of corporate personality. While it is an accepted fact that it is necessary to lift the corporate veil in the face of (suspected or commissioned) criminal activity of the corporation, Tanzania has gotten into the habit of enacting laws that erode at the principle of separation of legal personalities between the corporation and the shareholders and this for nothing other than the government's motivation to collect taxes.
Although there is a provision in the regulation that provides for non-disclosure of confidential information obtained within the context of the regulation for beneficial ownership9, it is difficult to define what confidential information is. The fact that to date Tanzania does not have any law that deals with data protection also adds to the level of discomfort investors may have in investing in Tanzania in addition to the above.
1. The Companies (Beneficial Ownership Regulations, GN No 391 OF 2021 Published on 14/05/2021
2. The Finance Act of 2020, Act Supplement No. 8 of 17 June 2020
3. Section 433 and 434 of the Companies Act Cap 212 as amended from time provides the conditions for establishing a place of business in Tanzania, none of which entail having to disclose a list of shareholders.
4. Section 2 of the Companies Act Cap 212 and Regulation 2 of The Companies (Beneficial Ownership Regulations, GN No 391 OF 2021 Published on 14/05/2021
5. Section 2 (2) of the Law of Interpretation Act, Cap 1 as amended from time to time
6. The Income Tax Act Cap 332 RE 2019 as amended from time to time
7. Section 2 of the Companies Act Cap 212 amended by section 7 of the Finance Act of 2020
8. Business Registration and Licensing Authority in Tanzania
9. Regulation 11 of the Companies (Beneficial Ownership Regulations, GN No 391 OF 2021 Published on 14/05/2021
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