Introduction
For a long time, taxpayers operating registered branches of their foreign parent offices have disputed the interpretation of the legal provisions triggering the “Force of Attraction” rules.
For context, the “Force of Attraction” rules are triggered when other business activities of the parent office, conducted with the locals in the country where the branch is located, are similar or of the same kind as the branch’s activities carried out through a permanent establishment (PE).
Once such rules are triggered, the offshore income earned by the parent office is re-allocated to the branch, thereby giving rise to the imposition of additional corporate tax and income tax on the repatriated income.
Background of the Case
Thales LAS France SAS (“Thales France” or the “Head Office”), an entity incorporated under French law, had a registered branch in the country, namely Thales LAS Tanzania SAS (“Thales Tanzania” or the “Branch”).
In 2017, the Head Office entered into a contractual agreement with the Tanzania Civil Aviation Authority (“TCAA”) to design, manufacture, deliver, install and commission four (4) collocated PSRs with MSSR Mode S-Capable systems at Julius Nyerere International Airport (JNIA), Kilimanjaro International Airport (KIA), Songwe and Mwanza Airports.
The design, manufacture, and delivery of the equipment were carried out in France, giving rise to “Offshore Revenue” earned by the Head Office, while the installation was carried out locally by a local company under the supervision of Thales Tanzania, giving rise to “Onshore Revenue” earned by the Branch.
During the audit of the Branch’s tax affairs, the TRA invoked the “Force of Attraction” rules, prompting the imposition of additional corporate tax and income tax on the repatriated income to the Branch.
Aggrieved by the TRA’s decision, Thales Tanzania objected, but to no avail, thereafter sought redress before the Tax Revenue Appeals Board and Tax Revenue Appeals Tribunal (“Tribunal”).
Aggrieved by the Tribunal’s decision, Thales Tanzania appealed to the Court of Appeal of Tanzania (“Court”) for redress under Civil Appeal No. 35 of 2024.
Gist of the Dispute
Banking on the provisions of section 71(5)(c) of the Income Tax Act (ITA), 2004 (now section 92(5) of the ITA, 2004, R.E. 2023), TRA asserted that the activities conducted by the Head office with residents were similar to, or of the same kind to those conducted by the Branch through its permanent establishment, thereby invoking the “Force of Attraction” rules.
Thales Tanzania disputed such assertions, arguing that its supervisory function carried out through the permanent establishment was neither similar to nor of same kind as the activities conducted by the Head office with the residents.
Court’s Decision
In deliberating the above dispute, the Court reiterated the following:
- The contract between Thales France and TCAA was structured into two distinct components, i.e., the supply of equipment by Head Office, and installation and supervision by Thales Tanzania.
- The activities of the Head Office and the Branch form part of the same contractual arrangement with the Tanzania Civil Aviation Authority (TCAA); and
- Such activities are similar and interdependent, meaning TRA was correct to invoke the “Force of Attraction” rules,
The Court dismissed the appeal in its entirety, holding that TRA was correct to invoke the “Force of Attraction” rules.
Our Commentary
The Court’s ruling on Appeal No. 35 of 2024 between Thales LAS France and Commissioner General (TRA) pronounced on 03rd February 2026 is a wake-up call for all registered branches executing their activities through a permanent establishment (PE) to revisit their activities and confirm the applicability of the “Force of Attraction” rules and construe effective tax planning to address any potential inherent tax exposure.
