This article is based on insights provided by Edwin Prosper (Partner) and Fredrickson Maboko (Tax Advisor), Bowmans, on a recent Tanzania Court of Appeal ruling concerning the taxation of offshore income connected to permanent establishments (PEs).
Tanzania Court Confirms Offshore Income Linked to Permanent Establishments Can Be Taxed Locally. Tanzania’s Court of Appeal has delivered a significant tax ruling that could reshape how multinational companies structure cross-border contracts involving Tanzanian operations.
In its judgment delivered on 3 February 2026 in Civil Appeal No. 228 of 2025, the Court confirmed that offshore income linked to activities performed through a Tanzanian permanent establishment (PE) may still fall within Tanzania’s tax net — even where part of the contract is executed outside the country.
The decision reinforces Tanzania’s increasingly expansive interpretation of PE taxation and signals heightened tax exposure for multinational enterprises operating through local branches or representative structures.
Background of the Dispute
The case arose following a tax audit conducted by the Tanzania Revenue Authority (TRA) involving a Tanzanian branch of a French company engaged in a radar system project.
According to the ruling, the contract covered several phases, including:
- Design of the radar system
- Manufacturing activities carried out in France
- Delivery of equipment
- Installation and commissioning activities in Tanzania
The taxpayer separated the arrangement into two components:
- An offshore segment executed in France
- An onshore segment handled in Tanzania
The company declared only the income relating to the Tanzanian activities for local tax purposes, while treating offshore earnings as foreign-source income not taxable in Tanzania.
However, the TRA challenged this structure during its audit review.
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TRA Applied the “Force of Attraction” Principle
The Tanzania Revenue Authority reportedly reclassified the contract as a single integrated commercial arrangement rather than separate offshore and onshore transactions.
Based on this interpretation, the TRA attributed offshore earnings to the Tanzanian branch and raised additional assessments for:
- Corporate income tax
- Tax on repatriated income
The authority relied on what is commonly referred to as the “force of attraction” principle under Tanzania’s Income Tax Act.
The taxpayer objected to the assessment, but after the statutory period expired without a determination from the TRA, the matter proceeded through Tanzania’s tax appeal system before eventually reaching the Court of Appeal.
Understanding Tanzania’s Permanent Establishment Rules
Although Tanzania’s Income Tax Act does not expressly use the phrase “force of attraction,” the principle is embedded within sections 70 and 71 of the legislation.
Under Tanzania’s framework:
- A permanent establishment is treated as a separate taxable entity
- Income from similar or related activities carried out by a non-resident entity may still be attributed to the Tanzanian PE
This allows the tax authority to examine the economic substance of transactions rather than relying solely on contractual separation.
Tax experts say this approach gives Tanzania broader taxing powers compared to jurisdictions that strictly follow the OECD Model Tax Convention.
Court of Appeal Upholds TRA Position
The Court of Appeal agreed with the tax authority and ruled that the offshore and onshore components formed one indivisible commercial transaction.
According to the Court:
- The offshore and Tanzanian operations were economically linked
- The activities were interdependent and connected to a single customer arrangement
- The contract functioned as one integrated business undertaking
As a result, the Court held that income generated from the offshore portion could legitimately be taxed in Tanzania because of its connection to the Tanzanian permanent establishment.
The ruling effectively confirms that offshore structuring alone may not shield income from Tanzanian taxation where business activities are commercially interconnected.
Departure from OECD Tax Standards
Tax analysts note that Tanzania’s approach differs from the OECD Model Convention, which generally limits source-country taxation to profits directly attributable to the PE itself.
Instead, Tanzania’s position appears more aligned with:
- The United Nations Model Tax Convention
- Tax approaches adopted in countries such as India
These systems allow broader taxation of income arising from related or similar activities connected to a local permanent establishment.
However, the Court did not provide detailed guidance on the exact threshold for determining what qualifies as “same or similar” activities under the law.
Experts say this leaves room for further interpretation in future disputes.
Key Implications for Multinational Businesses
The ruling is expected to have major implications for international companies operating in Tanzania through branches, subsidiaries, project offices or installation arrangements.
Key takeaways include:
Contract Splitting May No Longer Provide Protection
Separating contracts into offshore and local components may not prevent Tanzanian taxation if the activities are commercially connected.
Increased PE Risk Exposure
Once a permanent establishment exists in Tanzania, related offshore income could also become subject to review and possible taxation.
Greater Focus on Economic Substance
Tax authorities are likely to prioritise the commercial reality of transactions over their legal or contractual structure.
Higher Scrutiny of Cross-Border Transactions
Multinational groups entering into multiple agreements with Tanzanian customers may face increased audit attention from the TRA.
Growing Trend in African Tax Administration
The ruling reflects a broader trend across Africa, where tax authorities are increasingly expanding enforcement around:
- Permanent establishment rules
- Cross-border taxation
- Digital and offshore income
- Transfer pricing and profit allocation
As governments seek to strengthen domestic revenue mobilisation, multinational enterprises may need to reassess how regional contracts, supply chains and service arrangements are structured across African markets.
Attribution Notice
This article is based on insights provided by Edwin Prosper (Partner) and Fredrickson Maboko (Tax Advisor), Bowmans. The views expressed are for informational purposes and do not necessarily represent the views of Africa Tax Review.
Tanzania Court Confirms Offshore Income Linked to Permanent Establishments Can Be Taxed Locally
