NAMIBIA | structuring investments in renewable energy

Namibia as a future hub for renewable energy

Namibia has positioned itself as a future hub for renewable energy and is drawing on its abundant solar, wind and land resources to achieve this goal. The national renewable energy strategy aims to cover around 70 percent of electricity generation from renewable sources by 2030. Green hydrogen is a cornerstone of Namibia’s economic strategy. These ambitions are to be realised through international partnerships, for example through the EU’s Global Gateway initiative and projects such as the Belgian-German-Namibian joint venture Cleanergy.

For investors, Namibia offers attractive incentives, including planned tax and customs concessions, land lease opportunities and the proposed Synthetic Fuels Act. Early engagement with local authorities, such as the Namibia Investment Promotion and Development Board, and with local advisers is strongly recommended, in order to clarify available incentives and any requirements that may apply, for example in relation to local job creation, training or infrastructure commitments. The environment in Namibia offers many opportunities for foreign investors in the renewable energy space. At the same time, the Namibian tax rules need to be taken seriously. Non-compliance can quickly lead to significant penalties.

Permanent establishment and taxable presence

Because there is no double tax treaty between Austria and Namibia, it is Namibian domestic law that determines when a tax liability arises. Namibia applies the source principle, as set out in sections 1 and 15 of the Income Tax Act 1981. Any person who carries on business in Namibia or maintains an office, branch, factory, mine or construction site in Namibia is treated as “doing business in Namibia” and will, as a rule, create a taxable presence under the Companies Act 2004 (section 327) and the Income Tax Act (section 15). There is no minimum time threshold for corporate income tax purposes. This triggers registration and filing obligations, for example registration as an external company under section 327 of the Companies Act 2004, the filing of annual financial statements and the taxation of attributable profits.

Where activities are carried out through a local company, that company is subject to Namibian corporate income tax on its profits. Dividends paid to non residents are subject to Non Resident Shareholders’ Tax (NRST).

In addition, Namibian customers may be required to withhold 10 percent tax on payments of management or consultancy fees to non resident service providers, in accordance with section 35A of the Income Tax Act.

Exchange control and profit repatriation

Namibia’s exchange control regime, administered by the Bank of Namibia (BoN), can involve hidden risks. Two common pitfalls are unapproved foreign shareholder loans and delays in processing cross border payments. Foreign shareholder loans require prior approval. If this approval has not been obtained, commercial banks will block interest and principal payments abroad. The loan can be treated as unauthorised and the interest deduction may be denied for tax purposes.

For dividend distributions or capital repayments, banks will require evidence that the original investment was registered as non resident capital, for example share certificates stamped as non resident, and that all relevant taxes have been paid. For larger remittances you should allow one to two weeks for processing, as commercial banks often seek clearance from the Bank of Namibia before releasing significant outflows.

Documentation errors, such as funding an investment from a local Namibian account in NAD instead of registering an inbound foreign capital contribution, can significantly complicate future profit repatriation. Together with our Namibian partner firm, we can help you remain compliant, obtain the necessary BoN approvals and tax clearance certificates and secure the smooth repatriation of capital and profits.

Local management and place of effective management

Although a local company is not mandatory for renewable energy activities in Namibia, it is often a sensible option. Where a local company is established, it is important to ensure that the place of effective management is in Namibia. The most straightforward way to achieve this is through the appointment of locally based directors who manage the business on a day to day basis. If foreign directors are also appointed, it must be ensured in practice that key management and commercial decisions are made in Namibia and that the day to day management of the business is exercised from Namibia.

Additional compliance obligations

Companies that operate or invest in Namibia need to observe a number of ongoing compliance requirements. The most important of these are set out below.

• Ongoing tax compliance: In Namibia, corporate income tax prepayments must be made twice a year. In addition to annual returns for corporate income tax and value added tax (VAT), withholding tax returns for cross border payments, VAT returns (every two months) and monthly PAYE returns (Pay As You Earn, payroll tax) must be filed. Penalties and interest in Namibia are high. Interest on tax arrears can be up to 20 percent per annum. We recommend setting up a clear compliance calendar and involving a local adviser, particularly in the first year.
• Withholding taxes: Namibian withholding tax obligations are often overlooked. For example, where a service fee is paid to an Austrian adviser, 10 percent withholding tax must be deducted and remitted to the Namibia Revenue Agency (NamRA) within 20 days.
• VAT: Namibia levies VAT at 15 percent on most supplies of goods and services. Imports of equipment for renewable energy projects are in principle subject to VAT. Depending on the project, VAT or customs exemptions or zero rating for certain investment goods may be available. VAT registration is required where annual taxable turnover exceeds NAD 500,000, which is approximately EUR 24,800.
• PAYE regime: Where local employees are engaged, registration under the PAYE regime is mandatory. Payroll taxes withheld must be remitted monthly. Namibian income tax is progressive up to a top rate of around 37 percent. Social security contributions are relatively low, at 0.9 percent of remuneration, split equally between employer and employee. Income tax liability arises as soon as employment services are physically performed in Namibia. There is no minimum presence threshold. Caution is therefore required. Intra group secondments, even if recharged on a pure cost basis, can trigger withholding tax obligations.
• Immigration and employment law: Expatriate staff require work visas or work permits. Local employment law requirements apply, for example training levies and the need to file an Affirmative Action report.
• Transfer pricing: Where Austrian group companies charge the Namibian entity for equipment, services or loans, pricing must be at arm’s length. NamRA can request transfer pricing documentation, intercompany agreements, benchmarking studies and similar supporting evidence.
• Permanent establishment documentation: In particular where staff are seconded to Namibia, travel dates, the purpose of the assignment and the activities performed should be documented. This is important to demonstrate, if necessary, that the activities were merely preparatory or auxiliary in nature or of short duration, and to avoid inadvertently creating a taxable permanent establishment.

Conclusion

Renewable energy is a central pillar of Namibia’s economic strategy. For foreign investors, this creates a wide range of compelling opportunities. Any engagement in the sector must, however, be aligned with the Namibian tax and regulatory framework. Failure to do so can lead to penalties and over taxation that may seriously undermine the viability of an otherwise successful project.

If you have not yet read the first article in our “Namibia Tax & Investing Insights” series on the tax framework for infrastructure projects, we recommend doing so. In future issues of “Namibia Tax & Investing Insights” we will examine, among other things, the tax aspects of investments in agriculture and forestry and in Namibia’s tourism industry.

ICON has around thirty years of experience in advising on international projects around the globe. Our International Tax team will be pleased to support you with your projects in Namibia.