What Does “Deeming” Mean?
Under the Income Tax Act of Botswana, the Commissioner General has the power under the transfer pricing and anti-avoidance provisions to treat certain transactions as giving rise to taxable income. This applies even where no income has been formally declared, provided the nature of the transaction indicates that an economic benefit has arisen.
How Does BURS Deem Interest?
One of the most common areas where BURS applies deeming principles is in relation to interest-free or low-interest loans. These financial arrangements are common between related companies or connected parties, such as shareholders.
If a company loans funds to a related company as an interest-free loan or at a significantly lower interest rate, BURS will deem that interest as taxable income in the hands of the lender at a commercially acceptable rate. Importantly, the corresponding interest expense may not automatically be deductible for the borrower where no actual interest was incurred or paid.
How Does BURS Deem Dividends?
BURS may deem a dividend to arise where a company transfers value to a shareholder without formally declaring a dividend. This typically occurs where a shareholder receives a benefit, advance, or payment that is not structured as a salary, repayment of a genuine loan, or reimbursement of legitimate business expenses.
For example, the Commissioner General may treat the amount as a dividend if a company:
- Settles personal expenses of a shareholder
- Writes off a shareholder loan
- Allows continuous withdrawals from a director’s loan account without commercial repayment terms
In such cases, the company may be required to account for the applicable 10% withholding tax, together with potential interest and penalties. As with deemed interest, the assessment depends heavily on the substance of the transaction rather than its form.
What is the Risk?
The absence of a market-related interest rate in related-party loans exposes companies to deemed interest calculations, leading to additional tax assessments that could give rise to potential interest and penalties.
On the dividends side, BURS may impose a 10% withholding tax on the deemed dividend, alongside additional penalties. Furthermore, engaging in these practices significantly increases the likelihood of a detailed tax audit or compliance review.
What is the Purpose of this Provision?
This provision acts as a vital tool to combat tax avoidance. It allows the Commissioner General to impute interest income on related-party transactions that are deliberately structured to shift or suppress taxable profits, ultimately helping to protect Botswana’s tax base.
Our Recommendation
While interest-free loans amongst related parties are not strictly prohibited, it is imperative that companies document the commercial rationale behind the interest-free loan agreement.
It is highly advisable that companies charge market-value interest rates on these loans, as they carry direct Transfer Pricing implications. Ensure that these transactions are accurately declared in your income tax returns to avoid audits and potential penalization.
If your business has related-party loans, shareholder transactions, or director accounts that may fall within these provisions, it is important to assess the potential exposure proactively. We encourage you to reach out to our tax team. We provide expert tax advisory and structuring advice , alongside the preparation of Transfer Pricing documentation, to ensure your structures remain compliant, reduce risk, and avoid unexpected assessments.
