Zimbabwe has limited investment opportunities particularly for those just starting out or on lower incomes. One of the few available organised investments are shares both listed and unlisted. It may be within some investors strategies to choose shares that have the potential to earn dividend income. Our financial reporting season was delayed due to the COVID-19 pandemic and its effects. ZSE listed companies have now declared results and for lucky shareholders, dividends. Where there is income, the taxman is sure to follow. In Zimbabwe that is ZIMRA. We should always be aware of the tax rules and implications of owning shares and receiving dividend income.
First things first Zimbabwe’s taxation system operates on a source-based manner. That is to say, that income is considered earned where it comes from. This distinction is important for foreigners or diaspora based investors as the income will be treated as having been created in Zimbabwe and therefore tax will be due in Zimbabwe. There are a few exceptional circumstances which we will highlight later. If you happen to invest offshore, dividend income will be treated as income where the shares are registered.
Withholding tax system
Taxes on dividends are deducted in a withholding system, this means that the tax is deducted as part of the transaction. This differs from other income which is calculated as part of your income tax calculation. You can see why ZIMRA would be motivated to choose such an arrangement.
Where a Zimbabwe Stock Exchange-listed company pays a dividend to an individual the amount of withholding tax is 10% of the dividend, this is to be paid to ZIMRA by the dividend issuer. A non-listed company is required to apply a withholding tax rate of 15% of the dividend. The company is required to provide a withholding tax certificate that clearly identifies the transaction, withholding tax applied and the identity of the taxpayer.
Where the dividend income is not subjected to withholding tax, which may occur in private companies, the dividend will be taxed in the hands of the individual at the appropriate percentage.
Some exceptions do exist in the tax system for specific dividend income transactions
Where a Zimbabwean domiciled company pays a dividend to another Zimbabwean domiciled company there is no withholding tax applied to the dividend. So a Zimbabwean company pays tax to another Zimbabwean company tax-free.
Individuals over 55 years of age are entitled to refund on withholding tax for dividends applied on a sliding scale. The lower the dividend the greater the refund. Please consult with ZIMRA for current figures.
Finally, where dividend income is paid to a Zimbabwean from a foreign source the dividend is considered gross income according to the income tax act. The dividend is taxed at 20% of the gross income (before tax and fees). This applies where the dividend is paid into Zimbabwe.