Introduction

Six months have passed since Zambia introduced the Anti-Fragmentation Rule through the Income Tax (Amendment) (No. 2) Act, No. 17 of 2025, effective 1 January 2026. The amendment to Section 81AA of the Income Tax Act forms part of Zambia's continued efforts to align its domestic tax framework with international standards aimed at preventing the artificial avoidance of Permanent Establishment (PE) status.

While the amendment may have appeared to be a technical legislative change, it has significant implications for multinational enterprises, foreign contractors, mining service providers, logistics businesses, and professional service firms operating in Zambia. As businesses reach the six-month mark since implementation, now is an appropriate time to reassess whether their activities in Zambia could unintentionally create a taxable presence.

 

What is the Anti-Fragmentation Rule?

The Anti-Fragmentation Rule is designed to prevent businesses from dividing their operations among related entities or locations to benefit from Permanent Establishment exemptions intended only for genuinely preparatory or auxiliary activities.

Under the rule, the Zambia Revenue Authority (ZRA) may consider activities carried out by closely related enterprises collectively rather than individually. Where those combined activities form an essential and significant part of the overall business operation, they may constitute a Permanent Establishment, even if each activity, when viewed independently, appears to qualify for an exemption.

The amendment reflects international best practice under the OECD Base Erosion and Profit Shifting (BEPS) Action 7 recommendations, which seek to prevent the artificial avoidance of Permanent Establishment status.

 

Objective of the Amendment

The primary objective of the Anti-Fragmentation Rule is to ensure that businesses cannot avoid Zambian tax obligations by artificially splitting business activities among related entities or locations. The amendment strengthens Zambia's ability to tax business profits where there is sufficient economic substance within the country, while promoting fairness, transparency, and consistency within the international tax framework.

 

Why This Matters

A Permanent Establishment is more than simply a technical tax concept. It generally refers to a fixed place of business through which a foreign enterprise carries on its business activities, either wholly or partly. Once a Permanent Establishment exists, Zambia generally acquires taxing rights over the profits attributable to that presence.

This may result in:

  • Corporate Income Tax obligations;
  • Tax registration requirements;
  • Additional tax compliance and reporting obligations;
  • Transfer pricing considerations; and
  • Potential exposure to assessments, penalties, and interest where a PE should have been recognised in earlier periods.

The Anti-Fragmentation Rule changes how Permanent Establishment risk is assessed. Rather than considering each activity independently, businesses must now evaluate whether their activities collectively amount to a substantive business operation in Zambia.

 

The End of "Divide and Conquer"

Historically, some multinational groups structured their Zambian operations so that individual activities could each qualify as preparatory or auxiliary and therefore fall outside the Permanent Establishment rules.

The Anti-Fragmentation Rule significantly limits this approach.

The focus has shifted from legal structure to economic substance. Even where separate entities perform different functions, the ZRA may examine the overall commercial arrangement to determine whether the combined activities represent a cohesive business operation.

In practice, the question is no longer whether each activity is exempt in isolation, but whether all related activities together constitute an essential and significant part of the enterprise's business.

 

The Zambia Revenue Authority's Likely Focus

Although the Anti-Fragmentation Rule is still relatively new, businesses should expect increased scrutiny in areas such as:

  • Shared business functions across related entities;
  • Warehousing and distribution arrangements;
  • Contract negotiation and conclusion activities;
  • Local personnel supporting foreign operations;
  • Service delivery involving multiple group companies;
  • Supply chain structures; and
  • Arrangements designed around Permanent Establishment exemptions.

The Zambia Revenue Authority is likely to assess whether these activities, when viewed collectively, amount to a substantive business presence rather than merely preparatory or auxiliary functions.

 

Compliance Implications for Businesses

The introduction of the Anti-Fragmentation Rule has practical implications for businesses operating across borders.

1. Permanent Establishment Risk

Businesses should reassess whether their combined activities in Zambia create a Permanent Establishment under the revised legislation.

2. Corporate Income Tax Exposure

Where a Permanent Establishment exists, profits attributable to the Zambian operations may become subject to Zambian Corporate Income Tax.

3. Registration and Compliance Obligations

Businesses may be required to register for tax purposes, maintain additional records, and comply with local filing and reporting obligations.

4. Transfer Pricing Considerations

Businesses should ensure that transactions between related entities remain consistent with the functions, assets, and risks associated with any Permanent Establishment.

5. Documentation and Governance

Robust documentation demonstrating the commercial rationale for operating structures will become increasingly important in supporting a business's tax position during a ZRA review or audit.

 

Recommended Actions for Businesses

Businesses with cross-border operations should consider:

  • Mapping all activities performed in Zambia by related entities;
  • Reviewing contractual arrangements and service agreements;
  • Assessing the functions performed by local personnel and dependent agents;
  • Evaluating warehousing, logistics, and supply chain structures;
  • Considering the application of any relevant Double Tax Agreements;
  • Reviewing transfer pricing documentation to ensure consistency with operational structures;
  • Maintaining comprehensive documentation supporting the commercial purpose of existing arrangements; and
  • Seeking professional advice where Permanent Establishment exposure may exist.

The objective is not necessarily to conclude that a Permanent Establishment exists, but rather to understand and manage the risk before it becomes the subject of a tax audit.

 

RSM Commentary

The introduction of the Anti-Fragmentation Rule reinforces the global trend towards taxing businesses based on economic substance rather than legal form. While the amendment aligns Zambia with international best practice, it also signals a more rigorous approach to assessing Permanent Establishment risk.

Businesses should not assume that activities previously regarded as preparatory or auxiliary will continue to qualify for exemption where those activities form part of a broader business operation.

RSM Zambia recommends that multinational groups undertake proactive Permanent Establishment reviews to identify potential risks, strengthen documentation, and ensure compliance with Zambia's evolving tax framework before issues arise during a Zambia Revenue Authority audit.

 

Prasitha Prasad
Associate Director – Audit & Assurance 

 

For more information or tailored advice, please contact your usual RSM advisor or reach out to the RSM Zambia Tax Team. This alert is for general information purposes only and does not constitute professional advice. Specific circumstances should be discussed with a qualified advisor.

Prasitha Prasad
Associate Director - Audit and Assurance
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