On 3 February 2026, the Court of Appeal of Tanzania (CoA) delivered its judgment in Civil Appeal No. 228 of 2025, confirming that offshore income derived from a contract comprising both offshore and onshore elements may be taxable in Tanzania, even where part of the performance occurs outside the country.
The facts
The dispute arose following a tax audit conducted by the Tanzania Revenue Authority (TRA) on the appellant company, a Tanzanian branch of a French company. The appellant company’s head office had entered into a contract for the design, manufacture, delivery, installation, and commissioning of a radar system. The contract was structured into:
- An offshore component (design, manufacture, and delivery carried out in France); and
- An onshore component (installation and commissioning carried out in Tanzania).
The Tanzanian branch treated the income from the offshore component as taxable outside Tanzania, while declaring only the income from the onshore component.
During the audit, the TRA recharacterised the arrangement as a single transaction, reallocated the income from the offshore component to the Tanzanian branch, and issued an assessment for corporate income tax and tax on repatriated income. The TRA based this recharacterisation on the ‘force of attraction’ rule.
The appellant objected. However, the statutory period for determination lapsed without a response from the TRA, resulting in a deemed determination. The appellant subsequently appealed to the Tax Revenue Appeals Board, which dismissed the appeal. A further appeal to the Tax Revenue Appeals Tribunal was also unsuccessful. Hence the matter was escalated to the CoA.
The ‘force of attraction’ rules in Tanzania
The Tanzanian Income Tax Act, Cap. 332 (ITA) does not expressly use the term ‘force of attraction’. However, the principle is embedded within the statutory framework governing the taxation of permanent establishments (PEs), particularly under sections 70 and 71 of the ITA.
Section 70 establishes the foundational rule that a PE is to be treated as a separate and independent entity for tax purposes. However, this separate entity principle is expanded by section 71(5), which provides that business activities conducted by the non-resident owner with residents of Tanzania, of the same or similar kind as those carried out through the PE, shall be treated as conducted by the PE.
In effect, this provision extends Tanzania’s taxing rights beyond income strictly attributable to the PE, to include income derived by the head office from similar activities within Tanzania. This reflects a limited force of attraction principle, allowing the tax authority to disregard the formal structure of transactions and instead focus on their economic substance.
The Court of Appeal’s decision
The CoA upheld the decision of the Tribunal and confirmed that the offshore and onshore components of the contract constituted a single, indivisible contractual arrangement. The Court found that:
- The activities of the head office (design, manufacture and delivery) and the Tanzanian branch (installation and supervision) were ‘similar and interdependent’ and formed part of one integrated transaction.
- The operations of the head office and the branch were inseparable, being part of a single business undertaking with the same customer.
- Consequently, the income earned by the head office from the offshore component was properly attributable to Tanzania and taxable under section 6(1)(b) of the ITA.
The position adopted by the CoA reflects a departure from the OECD Model Convention, which limits taxation in the source state to profits directly attributable to the PE. By contrast, the Tanzanian approach is more closely aligned with the UN Model Convention and jurisdictions such as India, both of which incorporate a limited force of attraction principle. These frameworks allow the source state to tax income from similar or related activities carried out within its territory, even where such income is not formally routed through the PE.
It should be noted that, the CoA did not undertake a detailed analysis of what constitutes ‘same or similar’ activities under section 71(5) of the ITA. Instead, it relied on the broader finding that the contract was a single, integrated arrangement with interdependent components. This leaves open questions as to the precise threshold for similarity in future cases, particularly where transactions are more clearly separable.
Practical implications for taxpayers
- Contractual separation is no longer sufficient – The case confirms that structuring contracts into offshore and onshore components will not, in itself, prevent taxation in Tanzania.
- Increased scrutiny of head office transactions – The decisions signals that even where a non-resident has a PE in Tanzania but enters into separate contracts with Tanzanian customers through its head office, there is now a heightened risk that such arrangements will be scrutinised and potentially brought within the Tanzanian tax net.
