Rent vs. Service Charges: The Withholding Tax Dilemma Explained, 10% or 5%?

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In most scenarios, landlords bill their tenants separately for rent and service charges. Service charges mainly include the provision of water and other utilities. Sometimes, landlords prepare separate invoices for rent and service charges, while other times, they prepare one invoice and itemize the bill.

It has been observed that tenants often withhold 10% of the rent value and 5% of the service charge value, remitting the net amount plus VAT (where applicable) to the landlord. The main purpose of this article is to evaluate whether this approach to Withholding Tax is correct.

Let us begin by exploring what the law says. Section 82 of the Income Tax Act (R.E. 2019) states:

82.-(1) Where a resident person-
(a) pays a dividend, interest, natural resource payment, rent or royalty; and
(b) the payment has a source in the United Republic and is not subject to withholding under section 81, the person shall withhold income tax from the payment at the rate provided for in paragraph 4(b) of the First Schedule.

The rate in paragraph 4(b) of the First Schedule to the Income Tax Act (R.E. 2019) is 10%. Hence, it is straightforward to assume that the Withholding Tax rate on rent payments is 10%. However, the situation is different for service charges.

Read Related: Did You Know Withholding Tax Isn’t a Cost but a Benefit?

The Income Tax Act on Withholding Tax rate for service fees states:

83.-(1) Subject to subsection (2), a resident person who-
(a) is conducting business of extractive industry in mining, oil or gas pays a service fee to another resident person in respect of management or technical services provided wholly and exclusively for the business;
(b) pays to a non-resident an insurance premium with a source in the United Republic;
(c) pays to-
(i) a non-resident a service fee with a source in United Republic; or
(ii) a resident person a service fee for provision of professional services.
(d) pays money transfer commission to a money transfer agent,
shall withhold income tax from the payment at the rate provided for in paragraph 4(c) of the First Schedule.

Payments made by individuals unless conducting a business or payments that are exempt amounts are exceptions. The rate defined in paragraph 4(c) of the First Schedule is 5%. Hence, Withholding Tax on service fees is chargeable at 5%.

But what is a service fee? The Income Tax Act defines “service fee” as:

“Service fee” means a payment to the extent to which, based on market values, it is reasonably attributable to services rendered by a person through a business of that person or a business of any other person and includes a payment for any theatrical or musical performance, sports or acrobatic exhibition, or any other entertainment performed, conducted, held, or given.

This definition does not cover the service fees paid to landlords for utilities and other charges. The Act defines “Professional Services” under Section 83 (3):

“Professional service” means services rendered by a person licensed as a practitioner by any recognized professional body and includes other services or activities of an independent business character including consultancy, legal, architectural, engineering, supervisory, accounting, auditing, medical, artistic, survey, theatrical performance, sports, exhibition, private security services, private investigation, and consultancies in various disciplines or any entertainment held or given other than those for remuneration under the contract of employment.

This does not encompass the service charges paid to landlords.

There is no direct requirement within the Income Tax Act stating that all service charges payable to landlords shall attract Withholding Tax at the rate of 5%. However, the Act defines “Rent” as:

“Rent” means any payment made by the lessee under a lease of a tangible asset including any premium and any other payment for the granting of the lease but excludes a natural resource payment and a royalty.

The phrase “and any other payment for the granting of the lease” includes service charges, as they are part of the rental agreement. One cannot rent without agreeing to service charges.

With this analysis, it is prudent to conclude that both rent and service charges payable by a tenant to their landlord should be subjected to 10% Withholding Tax. It would be incorrect to withhold 5% tax from service charges payable to the landlord.

Also Read: Government Targets Non-Religious Organizations with New Tax Scheme


The professional opinion expressed herein is subject to change based on changes in relevant Tanzanian Tax Laws and Regulations. The information is for guidance only and does not substitute relevant Tanzanian Tax Laws and Regulation

Hanif Fattehali Habib has an extensive auditing, tax and  accounting career with experience in various roles  spanning over 18 years. Prior to establishing his audit and  tax consultancy firm M/S Hanif Habib & Cco., he served in leading audit firms in Tanzania. Hanif’s solid experience, across various functions, is a testament to his diverse background within Audit, Tax and Finance.

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