Taxation of Permanent Establishment: Court of Appeal Confirms Reach of the “Force of Attraction” Rule

Introduction

Thales LAS France SAS is a company incorporated in France, engaged internationally in the design, manufacture, installation, operation, sale and rental of radar surveillance systems. It operates in Tanzania through a duly registered branch, Thales LAS France SAS (Tanzania Branch), which supervises installation and related activities.

In late 2017, the French head office contracted with the Tanzania Civil Aviation Authority (TCAA) to design, manufacture, deliver, install and commission four collocated primary and monopulse secondary surveillance radar systems at Julius Nyerere International Airport, Kilimanjaro International Airport, Songwe Airport and Mwanza Airport.

The contract was structured into two components:

• the supply of equipment: designed, manufactured and delivered from France, with revenue recognised in the head office’s books; and
• the installation and supervision, carried out locally in Tanzania (with on-the-ground installation performed by Camusat Tanzania Limited under the appellant’s supervision), with revenue recognised in the branch’s books as onshore income.

Following an audit in March 2021, the Tanzania Revenue Authority (TRA) reallocated the offshore equipment-supply revenue to the Tanzania branch and, in March 2022, issued an additional corporate tax assessment for the 2018 year of TZS 745,461,916.10. The taxpayer objected on the grounds that the offshore revenue had been wrongly allocated to the branch and that the resulting taxable income had been miscalculated.

TRA did not respond to the objection within the statutory six-month period. The taxpayer’s subsequent appeals to the Tax Revenue Appeal Board and the Tax Revenue Appeals Tribunal were both dismissed. The Court of Appeal, sitting at Dodoma, dismissed the final appeal on 3 February 2026, upholding the assessment in its entirety.

As a decision of the Court of Appeal, Tanzania’s highest court, this judgment is binding on the TRA, the Tax Revenue Appeals Tribunal, the Tax Revenue Appeal Board and the High Court, and it will shape how similarly structured cross-border contracts are assessed going forward.

Key Legal Principles Confirmed

The “Force of Attraction” Rule

Previously, taxpayers structuring cross-border supply-and-installation contracts often assumed that revenue from an offshore supply component, goods designed, manufactured and delivered entirely outside Tanzania, with title passing abroad could be kept outside the Tanzanian tax net, provided it was booked separately from the onshore installation revenue recognised by a local branch.

The Court has now confirmed that this separation does not, by itself, protect the offshore revenue. Where the offshore and onshore components form part of the same contractual arrangement and are “similar and interdependent,” the Court held that the “operations of a single company with two establishments are inseparable” meaning the head office’s offshore revenue is attributed to, and taxable through, the Tanzanian branch.

Section 71(5)(c) of the Income Tax Act, Cap. 332: “Other business activities of the owner conducted with residents of the country of the permanent establishment of the same or a similar kind as those effected through the permanent establishment shall be treated as conducted by the permanent establishment.”

A Broad Definition of “Permanent Establishment”

Section 3 of the Income Tax Act defines a permanent establishment to include, among other things: a place where business is carried on through an agent; a place where substantial equipment or machinery is installed or used; and a place where construction, assembly or installation projects including supervisory activities are undertaken for six months or more. On the facts, the Tanzania branch’s supervision of the radar installation was sufficient to anchor a permanent establishment, which in turn became the basis for attracting the offshore supply revenue under the force of attraction rule.

Source-Based Taxation of Non-Residents

The Court confirmed that the offshore revenue formed part of the appellant’s taxable income in Tanzania under section 6(1)(b) of the Income Tax Act, which taxes non-resident persons on income sourced in the United Republic. Because the head office and branch activities were treated as inseparable, the income received by the head office from TCAA was held to be Tanzania-sourced.

Timing of Income Recognition on Long-Term Contracts

On a separate ground, the appellant argued that TRA had wrongly imposed tax on repatriated income contrary to section 26(1) and (2) of the Income Tax Act. The Court confirmed that income relating to long-term contracts must be recognised on an accrual basis, determined by the percentage of completion of the contract in other words, income is taxed when it is earned, not merely when it is received or repatriated. The appellant’s failure to produce milestone schedules or similar evidence to substantiate its own computation meant that TRA’s adjusted computation, which included the offshore revenue, was accepted as justified.

Limited Scope of Appeal to the Court of Appeal

The Court also declined to reconsider the Tribunal’s factual findings, confirming that under section 25(2) of the Tax Revenue Appeals Act, appeals to the Court of Appeal in tax matters lie only on questions of law. A ground of appeal that simply invited the Court to re-evaluate the evidence was held to be incompetent. This underscores that the evidentiary record built at the Board and Tribunal stages, not later legal argument is usually decisive in tax disputes.

Practical Implications by Stakeholder

Foreign Suppliers, EPC Contractors and Equipment Manufacturers

Any foreign company that structures a Tanzanian project as separate offshore-supply and onshore-installation components, while operating through a Tanzanian branch, agent, or supervisory presence, should assume that TRA may treat the entire contract value as taxable in Tanzania if the components are part of one arrangement and are similar in kind.

Tanzanian Branches and Agents of Multinational Groups

A branch that recognises only the “onshore” portion of a split contract as its taxable income carries real audit risk. Branches should maintain robust, contemporaneous documentation milestone schedules, completion certificates, delivery and passage-of-title records to support any revenue allocation they adopt, since the absence of such evidence was fatal to the taxpayer’s case in this appeal

Government Procuring Entities and Contract Drafters

Public bodies procuring equipment and installation services from foreign suppliers should be aware that how a contract is structured as one arrangement or genuinely separate agreements, with clear delivery and title terms can materially affect the counterparty’s Tanzanian tax exposure, and potentially the procuring entity’s own withholding obligations.

Investors and In-House Tax Teams

Bifurcated “offshore supply / onshore services” contract models are common in aviation, telecommunications, mining and energy projects. Groups using this structure in Tanzania should reassess their exposure now, rather than at the point of a TRA audit, and should ensure revenue recognition policies for long-term contracts follow the accrual, percentage-of-completion basis required by section 26.

Recommended Compliance Actions

This update is based on a Court of Appeal judgment rather than a new statute or regulation, so there is no statutory compliance deadline attached to it. The timeframes below are FIN & LAW’s recommended action windows for managing the risk this judgment creates.

• Immediately: Inventory all active and open (not yet time-barred) Tanzanian contracts that split offshore supply from onshore installation or services.
• Within 30 days: Assess, contract by contract, whether the offshore and onshore components are “of the same or similar kind” and interdependent the key test applied in this judgment.
• Within 30-60 days: Compile or reconstruct supporting evidence milestone schedules, percentage-of-completion records, delivery and title-transfer documentation for any historic filings that relied on an offshore/onshore revenue split.
• Ongoing: Align revenue recognition policy for all long-term Tanzanian contracts with the accrual, percentage-of-completion basis required by section 26 of the Income Tax Act.
• Before signing new contracts: Obtain legal and tax structuring advice on contract architecture including whether to use a single contract or genuinely separate agreements before committing to new Tanzania-linked supply-and-installation arrangements.
• If already under audit or assessment: Prioritise building a strong evidentiary record at the Tax Revenue Appeal Board and Tribunal stage, since the Court of Appeal will not revisit factual findings on a further appeal.

How FIN & LAW Can Assist You

• Tax: Reviewing existing and proposed cross-border contracts for permanent-establishment and force-of-attraction exposure, and advising on revenue recognition and transfer pricing positions.
• Corporate & Commercial: Structuring supply, installation and EPC contracts including entity choice and contract architecture to reflect an accurate and defensible allocation of Tanzanian tax exposure.
• Compliance & Advisory: Building the evidentiary and documentation practices (milestone schedules, completion records, accrual-basis revenue recognition) that TRA and the Tribunals expect to see.
• Litigation: Representing clients in tax objections and appeals before the Tax Revenue Appeal Board, the Tax Revenue Appeals Tribunal, and the Court of Appeal

For general information only - this material does not constitute legal advice.