Tunisia's recent tax changes and regulations

A popular and lucrative destination for foreign investors, Tunisia combines a strategic geographical position with a highly skilled labour force at competitive costs. The North African nation aims to be a hub for investors looking for a foot in the African market, as well as those requiring business process outsourcing services. Committed to meeting such ambitious plans, the country has put in place an array of laws within its regulatory framework that support a positive investment climate. Incentives for investors were first introduced into domestic legislation during the 1970s, which was then replaced by a more attractive Investment Incentives Code during the 1990s. Then, in September 2016, Tunisia promulgated its new Investment Law, which is expected to further boost domestic and foreign investments. Effective January 1, 2017, the new law will bring down many barriers to launching businesses in Tunisia. It provides more flexibility, guarantees and a less restrictive administrative process for a broad range of qualifying businesses. Furthermore, it brings Tunisia in line with international standards regarding the management of disputes and litigation through the option of international arbitration. Additionally, high added-value projects may qualify for certain tax incentives. Further details on the Tunisian tax and legal investment framework are provided below.

Legal Framework for Corporations

Tunisia is revamping its investment regulatory framework. On September 17, 2016, the Tunisian Chamber of Representatives enacted the new 2016 Investment Law, which repeals previous Investment Incentives Code and went into effect on January 1, 2017. This law aims to boost investments within the country by strengthening guarantees offered to foreign investors.

The categories of qualifying sectors have been expanded, widening the scope by limiting conditions to open businesses in Tunisia. While qualifying businesses were restrictively listed under the previous rules, the new law reinforces investment freedom. Henceforth, restricted activities will be specifically laid down by presidential decree.

Administrative procedures have also been sped up. The new law aims to accelerate a number of processes, including those related to repatriation of funds by foreign investors to their home countries by tightening deadlines for the central bank to process transfer requests. The timeframe is now 15 days following the submission of the initial request. If the central bank fails to meet this deadline, the request will be considered authorised by the Tunisian authorities. Investors will also benefit from an easing of the rules on the acquisition of properties used for operational activities. Foreign investors can acquire immovable properties (excluding the agricultural sector) necessary to undertake their operating activities. Previously, only firms operating in the tourism and industry sectors qualified for such consideration. These incentives included increasing the number of expatriates that can be recruited. Foreign investors are now allowed to recruit foreign employees, with the number capped at:

• 30% of a firm’s entire staff during the first three years of business activity; and

• 10% of a firm’s entire staff number starting from the fourth year of operations. Under the previous regulations, only a few businesses were allowed to recruit foreign employees, and only under strict conditions.

International Arbitration

The new 2016 Investment Law also introduces an option for international arbitration, although there is also an option to resolve any litigation with the Tunisian state before going to international arbitration.

Non-Discrimination

Rules regarding non-discrimination between Tunisian and foreign investors have also been reinforced. The new law enshrined the principle of non-discrimination between Tunisian and foreign investors within domestic legislation. Under the previous rules, such a principle was generally only provided through bilateral treaties with other jurisdictions, not under Tunisian law.

Significant Projects

There are also incentives available to companies that qualify as significant projects, such as bonuses among other things. Tax incentives are also available for projects that are considered to be of interest to the national economy. The relevant Tunisian authorities will review, on a case-by-case basis, applications for these incentives. Financial incentives include:

• Corporate income tax breaks for a period of up to 10 years;

• Investment bonus of up to 33% of the investment cost, including the internal infrastructure cost; and

• A state contribution for infrastructure cost.

Business Entities

The most common structures set up by foreign investors are société anonyme, or joint stock companies, and société à as branches of foreign firms that have concluded a contract in Tunisia for a limited period.

Foreign Exchange Regulation

Under the new 2016 Investment Law profits realised through foreign investments, via both foreign-owned legal entities and the permanent establishments of foreign companies, may be freely repatriated to where such investments originate through the import of foreign currency. Payments abroad relating to other transactions are subject to prior authorisation by the Central Bank of Tunisia. Tunisian firms may borrow from abroad, with total value capped at TD3m (€1.3m) per year. The cap is increased to TD10m (€4.3m) per year when the borrower is a bank.

Corporate Income Tax

The 2016 Investment Law better defines the scope of corporate income tax, which covers companies established in Tunisia, as well as the Tunisian permanent establishments of foreign companies. Non-resident firms with no Tunisian permanent establishment are liable to taxation with respect to their Tunisian-sourced income. They are taxed under the withholding tax mechanism.

Corporate Tax Rate

The standard corporate income tax rate is 25%. The rate increases to 35% for oil and gas service companies, banks, insurance and reinsurance institutions, debt collection firms, telecommunication operators, companies carrying out production and transport activity of hydrocarbons under particular conventions, firms transporting hydrocarbons via pipeline, and companies carrying out oil refining activity and the wholesale of hydrocarbon products. Profits derived from export sales are subject to a corporate income tax rate of 10%. Companies operating in crafts, fishing and agriculture are also subject to a 10% rate. The 2017 budget introduced a temporary solidarity levy, calculated at a rate of 7.5%, on taxable profit for 2016. The levy is subject to the following minimum payments:

• TD5000 (€2140) for companies subject to the corporate income tax rate of 35%;

• TD1000 (€429) for companies subject to the corporate income tax rate of 20% or 25%; and

• TD500 ($214) for companies subject to the corporate income tax rate of 10%. Furthermore, the temporary solidarity levy covers profits that are tax exempt under the current rules in force, subject to a minimum of TD1000 (€429).

Corporate Minimum Tax

The corporate minimum tax is calculated at the following rates:

• 0.2% on annual gross domestic turnover for companies subject to rates of 25% or 35%; and

• 0.1% on annual turnover for companies subject to the rate of 10%.

Capital Gains

Capital gains made by resident companies are subject to corporate income tax at the rate applicable on the whole company’s profit. The same rules are applicable to Tunisian permanent establishments of foreign companies. With respect capital gains realised by non-resident corporations with no Tunisian permanent establishments, and subject to a more favourable treatment under an applicable tax treaty, such gains are subject to tax with respect to capital gains derived from the disposal of shares held in Tunisian companies and immovable properties situated in Tunisia.

With respect to shares held in Tunisian companies, such gains will be subject to a final withholding tax at a rate of 25% on the difference between the selling price and the acquisition cost. However, the corresponding tax should not exceed 5% of the selling price. The seller may elect to submit a tax return corresponding to the operation and be taxed at the net gain. In such cases, withholding tax incurred may be credited against the corporate tax due. Any excess may be refunded upon application.

Regarding immovable properties situated in Tunisia, the corresponding final withholding tax is levied at a rate of 15% of the selling price. The seller may elect to submit a tax return corresponding to the operation and be taxed on the net gain. In this case, withholding tax incurred may be credited against the corporate tax due, with any excess refunded.

Compliance Requirements

The financial year generally corresponds to the calendar year. The Tunisian tax authorities may authorise taxpayers to adopt a different tax period upon application. Corporate income tax returns should be submitted by the 25th day of the third month following the closing date of the company’s financial year. The deadline is March 25 for companies with a financial year corresponding to the calendar year. Such a return is considered temporary for firms subject to mandatory external audit and which are authorised to submit another regularising return adjusting the taxable profit as disclosed under the previous temporary return. The deadline is the 25th day of the sixth month following the closing date of the company’s financial year.

Any corporate income tax liability should be settled upon submission of the corresponding tax return. However, any advance payment of tax may be credited against the tax liability. Advance payment of tax may be undertaken as follows:

• For withholding taxes incurred, the rates range between 0.5% and 20%, depending on the nature of the remuneration;

• In the case of provisional instalments, three provisional instalments should be submitted annually by companies commencing from their second year of operating activities. Advance payments under each instalment are calculated at 30% of the previous year’s corporate income tax liability.

The deadlines to submit the provisional instalment are the 28th day of the sixth, ninth and 12th months following the closing date of the financial year; and

• Advance payment upon importation of specific consumption products are required as set out under ministerial decree. E-filing of tax returns is mandatory for companies with turnover exceeding TD1m (€429,000).

Taxable Profit

Taxable profit is based on the net profit and/or loss resulting from accounting records. Such net profit and/or loss is adjusted to take into consideration non-allowable expenses and non-taxable incomes. Under the current regulations, the annual depreciation of fixed assets should be calculated in accordance with the straight-line method on the basis of a maximum depreciation rate. Any amount exceeding such rate will be disallowed for deduction. Some of the depreciation maximum rates are detailed as follows:

• 20% for patents, trademarks and capitalised research and development costs;

• 5% for buildings;

• 2.5-25% for other constructions;

• 15% for equipment and machinery;

• 20% for transport vehicles; and

• 33.33% for computer hardware and software.

It must be noted that the depreciation rate on equipment and machinery may be increased by 50% when such assets are used at least 16 hours a day. It can be doubled when the use of such assets lasts 24 hours a day. No deduction is allowed on depreciation of goodwill and lands. The tax deduction of donations granted to charities and public interest organisations engaged in philanthropic, educational, scientific, social or cultural activities is capped to 0.2% of annual gross turnover. With regards to gifts and meal expenses, the tax deduction rate is 1% of annual gross turnover, but limited to TD20,000 (€8580). Provision expenses are tax deductible only when they relate to the following:

• Doubtful debts where the taxpayer appealed in court to recover such debts;

• Inventory of final products, excluding semi-finished products, raw materials, spare parts, etc.;

• Shares of listed companies; and

• Deduction of provisions expenses is limited to 50% of the taxable profit. Such limits do not apply to banks. Additionally, a specific additional deduction is allowed for Tunisian permanent establishments of foreign companies. The additional deduction relates to overhead expenses which are attributable to a Tunisian branch. The allowable deductible amount is calculated proportionally to the turnover of the Tunisian branch compared to the whole turnover of the head office. Sumptuary expenses, including the amortisation of highly powered passenger cars, yachts, etc., are considered non-allowable expenses. The tax deduction of expenses settled in cash is excluded when the value of such expenses exceeds TD5000 (€2140). Penalties incurred following the breach of any applicable law are not considered allowable expenses.

Loss Carry Forward

Losses may be carried forward for the subsequent five tax years. Losses resulting from fixed assets’ depreciations may be carried forward for an unlimited period. However, no carry back of losses is allowed. There are currently no rules regarding controlled foreign companies.

Thin Capitalisation

Under the current regulations, interest on loans granted by shareholders are deductible for corporate income tax purposes only when the following conditions are met:

• The share capital is fully paid up;

• The interest rate does not exceed 8%; and

• The loan value does not exceed 50% of the total share capital.

Transfer Pricing

Under the rules in force, transactions undertaken with related entities should meet the arm’s length principle. Otherwise, the Tunisian tax authorities are empowered to introduce adjustments to the taxable profit.

However, the domestic legislation does not provide any details regarding the transfer pricing documentation or the acceptable transfer pricing methods. The current practice generally accepts the cost plus and the CUP methods, which are OECD methods. Advance pricing agreements are not allowed under the current rules.

Consolidated tax returns are only allowed for group of companies when the share capital of the parent company is listed on the Tunis Stock Exchange. Other restrictive conditions apply that make the possibility to benefit from such a consolidated tax return very difficult.

Dividends & Profit Remittance

Subject to a more favourable treatment under an applicable tax treaty, dividends paid for by a Tunisian company to non-resident shareholders, whether a legal entity or natural person, are subject to withholding tax at a rate of 5%, where the relating profits result from transactions carried out as of January 2014. Furthermore, profits remitted abroad by the Tunisian permanent establishments of foreign companies are subject to a 5% withholding tax. The rate is increased to 25% if the recipient is based in a tax haven.

Interest & Royalties

Interest that arises in Tunisia and is paid to non-residents is subject to a withholding tax rate of 20% on the gross amount of interest, unless a more favourable treatment is available under an applicable tax treaty. Where the beneficiary recipient of the interest is a non-resident bank, the applicable withholding tax rate is 5%.

Royalties arising in Tunisia and paid to non-residents are subject to withholding tax in Tunisia at a rate of 15%, unless a more favourable treatment is available under an applicable tax treaty. Tunisia has an extensive network of tax treaties in force with more than 50 treaties already being implemented, including a number of OECD countries.

VAT

Value-added tax (VAT) is levied on the supply of goods and services in Tunisia, as well as on the import of goods and services. For the purpose of VAT, territory rules are as follows:

• The supply of goods is deemed to have taken place in Tunisia when such goods are delivered in Tunisia; and

• The supply of services is deemed to have taken place in Tunisia when such services are consumed or used in Tunisia, even though they may be rendered abroad.

VAT Rates

The standard VAT rate is currently 18%. Reduced rates of 6% and 12% are applicable for specific goods and services that are enumerated under the list appended to the VAT code. A list of transactions, goods and services which are VAT exempt is also appended to the VAT code. Export sales are eligible for a zero rate.

Input VAT

Under current regulations, input VAT may be credited against output VAT. Any excess may be credited during the subsequent months or refunded under specific conditions. VAT is refundable within three years following the date from which the VAT in question became claimable. Export-oriented businesses qualify for VAT suspension with respect to their purchase of goods and services required for their operating activities.

VAT Returns & Withholding

Companies are currently required to submit VAT returns and make payments on a monthly basis. The deadline is the 28th day of the month following the month of reference in the case of legal entities and the 15th day of the month following the one of reference for individuals carrying out business activities. E-filing VAT returns is required for taxpayers with an annual turnover that exceeds TD1m (€429,000).

Different regulations apply in cases involving foreign firms. When a foreign service supplier that has no Tunisian permanent establishment provides services that fall under the scope of Tunisian VAT, the Tunisian debtor is required to withhold the full amount of VAT and remit it to the Tunisian tax authorities. However, the foreign service supplier is allowed to register for the purpose of VAT, but only on a temporary basis, in order to be qualify for the deduction of input VAT incurred on purchases of goods and services required for operating activities.

Local Tax

The local municipality tax, more commonly known as the TCL, is a tax on turnover levied at the following rates:

• 0.1% on export sales; and

• 0.2% on domestic sales.

Registration Duties

Various tax rates are applicable on documents that fall under the scope of registration duties. Rates are as follows:

• Business contracts are subject to registration duties at a 0.5% rate on the gross value of the contract;

• Documents relating to setting up, winding up, capital increase/decrease, merger or de-merger of companies are subject to a fixed rate of TD150 ($64.33) per document.

Payroll Taxes

A vocational training tax is calculated at a rate of 2% levied on gross wages. The rate can be reduced to 1% for companies operating in manufacturing industries. Contributions to Le Fonds de Promotion de Logements Sociaux (FOPROLOS) are calculated at a rate of 1% levied on gross wages. Currently, Banque de l’Habitat provides state-subsidised loans to low-income households offering interest rates of between 2.5% and 7.5% under the FOPROLOS social housing programme.

However, this scheme has seen low uptake rates for affordability reasons, due to the fact that the loan ceiling has not risen in tandem with purchase costs for homes. For this reason, in 2012 the government approved a budget programme for social housing, which allows soft financing for low-income households. A new budget allowance has been set in 2017 in order to help middle-income households finance their first housing unit.

Incentives

The new 2016 Investment Law also offers financial incentives including bonuses for specific qualifying companies. Furthermore, tax incentives are available for projects that are considered to represent an interest for the national economy. The relevant authorities will consider, on a case-bycase basis, applications for such incentives, which may reach a period of up to 10 years for corporate income tax breaks. The new 2016 Investment Law offers financial incentives including:

• Investment bonuses of up to 33% of the investment cost, including costs related to internal infrastructure; and

• A state contribution for infrastructure costs. Other tax incentives are also available for companies operating in the agriculture sector, export activities and firms based in developing areas.

Personal Income Tax

An individual is considered to be tax resident in Tunisia if they meet any of the following criteria:

• He or she has a permanent home in Tunisia; and

• He or she is present in Tunisia for more than 183 days during the calendar year. Tax-resident individuals are generally taxed on their worldwide income regardless of where that income is derived. They are also subject to income tax in Tunisia according to a progressive rate system, with an upper tax rate of 35%. The rates are as follows:

• Less than TD5000 (€2140) – 0%;

• Between TD5001 (€2140) and TD20,000 (€8580) – 26%;

• Between TD20,001 (€8580) and TD30,000 (€12,900) – 28%;

• Between TD30,001 (€12,900) and TD50,000 (€21,400) – 32%; and

• Over TD50,000 (€21,400) – 35%. Non-residents are subject to Tunisian tax on income from Tunisian sources. Tunisian-source income is defined as all remunerations paid for a job or an activity carried out in Tunisia. Non-resident individuals, which is people staying in Tunisia for less than 183 days, are taxable at the flat tax rate of 20%. This tax rate of 20% is subject to specific conditions and covers expatriates working for Tunisian oil and firms.

Other tax rates will also apply depending on the nature of the revenue, unless covered by tax exemptions or relief, such as capital gains on transfer of shares. The income tax return should be submitted annually by resident individuals. Deadlines depend on the nature of income realised. Resident individuals with only employment income or pensions, should submit their tax return by December 5 of the year following the year of taxation. Non-resident individuals are exempt from the annual return submission requirement. It is the employee’s responsibility to withhold and remit the tax to the tax authority when his or her employer is not established in Tunisia.

Social Security Contributions

As a common rule, social security contributions are calculated according to the following rates:

• 16.57% on gross wage for the employer contribution to social security;

• 0.5-4%, depending on the nature of the activity, on the gross wage for the employer contribution for work injuries; and

• 9.18% on the gross wage for the employee contribution to social security. Tunisia has signed several social security agreements with other countries to determine the social security system with which an employee should be affiliated, offering the possibility of relief payment in Tunisia.

Visa

Except for the citizens of certain countries, such as those of EU members, individual entering Tunisia must apply for and receive a visa before entry. The type of visa required will depend on the purpose of the individual’s travel to Tunisia.

Work Permit & Residence Visa

Employees are required to obtain work permits to start working in Tunisia in accordance with the requirements of national labour law. Where the stay exceeds three continuous months, a foreigner should apply for a residence permit, which is granted by the Ministry of Interior for a period of one renewable year.