INVESTMENT UPDATE: THINGS TO CONSIDER WHEN ACQUIRING A HOTEL BUSINESS IN ZANZIBAR

• How to verify land ownership and detect encroachment.
• How vital Community Relations are to your project
• Company Ownership and Management Structure
• Regulatory Compliance woes
• Tax issues and relevance in acquisition
• Miscellaneous issues to consider

1.0 Introduction

Zanzibar as an archipelago has reported a total number of Five Hundred Forty Eight Thousand Five Hundred and Three (548,503) tourists’ arrival in the year 2022 alone compared to Five Hundred Thirty Eight Thousand Two Hundred Sixty Four (538,264) that was recorded in the year 2019. In addition to that, Zanzibar has about Six Hundred (600) hotels that has been invested on which some are best luxury  five stars hotels and internationally recognized. To mention a few, these hotels include Sea Cliff Resort, Zanzibar Serena Hotels, Hotel Verde Zanzibar, Park Hyatt Zanzibar, Madinat Al Bahr, Golden Tulip Zanzibar Resort and the Residence Zanzibar.

Zanzibar is an archipelago in the sense that it consists of many small islands and two large onesi.e. Unguja and Pemba Islands. The capital is Zanzibar City, located on the island of Unguja. Its historic centre, Stone Town, is a World Heritage Site. There are many islands in Zanzibar including seventeen (17) already leased to different investors where many hotels are built and being built. For instance,Mnemba island, is often named as one of the top beaches in the world, certainly in Africa, with the ultimate definition of barefoot luxury and one of the few places where you can snorkel straight off the beach and onto pristine reef.

Zanzibar is also structured through its blue economy policy and ecotourism. Pemba Island is a shining example whereby it’s only reserved for eco-tourism. The beautiful investment like the Manta Resort a private island surrounded by coral which has under water rooms and suites is sufficient proof that Zanzibar is the right place for hotels business investment.  

Investing in Zanzibar is highly commendable and certainly, lucrative. Investments in Zanzibar are channeled mainly through the guiding and regulating arm of Zanzibar Investment Promotion Authority(ZIPA). The likelihood is for the hotel business to be at the seafront,hence ZIPA does not have much land bank for this type of investment and therefore, investors are expected to purchase such lands from other private owners and submit such lands for investment redesignation and land lease certification.

On this basis therefore, the main focus of this article is to point out the key issues to be considered by any investor before acquiring a hotel business in Zanzibar.

2.0 How to verify land ownership and detect encroachment

Before acquiring a hotel owning land in Zanzibar, an investor should conduct a due diligence to ascertain the veracity and encumbrance status of the land title. Things to consider at this point is to ascretatin the real owner of the land title via official search and physical verification.

Our experience shows that most land in Zanzibar contain issues on zoning, boundaries and ownership. In essence, before acquiring land in Zanzibar, engagement of stakeholders like land registry, village shehas (i.e local leaders), and neighbours to verify these issues andunderstanding the area, is crucial. To sum up, when an investor gets the details regarding the piece of land, the first step is to make sure an official search is done for  authentication of  land ownership.

Experience has proven that in acquisition of land, some lands might be encumbered withconflicts/or issues with regard to zoning, investment capacity, community engagement contracts, etc.,. It follows therefore that the investors should make sure all these land issues are resolved before acquisition of the hotel in Zanzibar.

3.0 How vital are community relations to hotel acquisition

Investor’s Community  relations play a big role in terms of successful hotel acquisition or even project cooperation from community members/villagers afterwards. Investors who wish to acquire a hotel in Zanzibar should make sure that they engage the acquired hotel in terms of understanding the community area and underlying community issues as well as community partnership and contracts in place.

In some transactions we have advised, we found some lands occupied by a hotel pegged with community issues such as sharing water sources, right of way (easements), usage of the public area such as the beach, graveyards area etc. These community issues must be anticipated and taken into consideration before and during the hotel acquisition. The investor must make sure all these are rightly in place and well resolved before the acquisition takes place.  

Further, in one of the projects we advised in Zanzibar we experienced issues  regarding a hotel business vis-à-vis seaweed farming. Upon facing  these issues we had to engage the women farming, the shehas of the area and the central government so as to afford the hotel the quiet and unencumbered access to the ocean for the guests, especially since the hotel was renown for water sports such as water surfing and the seaweed made it dangerous for the surfing guests.

An investor who wishes to invest in Zanzibar must must be aware and adhere to the regulations in place for the usage of common or public spaces such as the beaches, for example in Zanzibar’s shoreline area the investment must be thirty (30) meters from the beach and the public still has the right to  access.

Further, the regulations and laws regulate matters relating to conducting a hotel business such as construction of a beach bar, beach umbrella sheds etc. These matters can be conducted after obtaining necessary permits from the relevant authorities in Zanzibar.

4.0 Company Ownership and Management Structure

There are number of laws and regulations that govern Hotel business in  form of a company in Zanzibar. These includes, the Companies Act, No. 15 of 2013; Business Names Regulation Decree Cap 168 and the Zanzibar Business License Regulation, 2017.;

An investor operating a hotel business through a Company, must have had the Company incorporated in Zanzibar. Registration of companies is done through the Zanzibar Business and Property Registration Agency (ZBPRA) which upon payment of the relevant registration fees a Certificate of Registration/Incorporation is issued.Therefore, BPRA is vested with regulation of companies registered in Zanzibar and a custodian of all information pertaining to the registered companies in Zanzibar.

On the other hand, one of key issues to be considered by an investor while investing in a hotel business, is to make sure the registered Memorandum and Articles of Association (MEMARTS) of the acquired company are explicit on the governance structure and equity issues. Precisely, the MEMARTS stands as the regulation that internally governs the affairs of the Company.

The MEMARTS supported by a latest BPRA Search Report provides for the shareholding structure and/or ownership of the company, the share capital, the names of Company’s directors,and the Company’s management mode and so forth.

Further, the information on decision making and the acquired hotel company’s management can also be reflected in the Shareholders Agreement (SHA) (if the same is in place). The experience shows that there might be inserted clause(s) in the SHA which demand for a due approval from the shareholders and directors prior to acquisition of the hotel company.

In summation, the investor should make sure that the kind of resolution and the required percentage of shareholders required to pass a resolution to sell the hotel/ company is obtained, thus the investor will need to consider  if there’s any existing SHA in place with terms which could affect the whole acquisition process.

5.0 Regulatory Compliance woes

There are number of laws and regulations that regulates the running of hotel business in Zanzibar. These includes, the Hotel Levy Act No. 1 of 1995; Zanzibar Tourism Act No. 6 of 2009 (“Zanzibar Tourism Act”); Zanzibar Tourism (Amendment) Act, No. 7 of 2012, Zanzibar Investment Promotion and Protection Act, 2008; Zanzibar Tourism Regulations 2014; and the Zanzibar Local Government Authority Act, 2014.

Before acquiring the hotel business in Zanzibar the investor should ascertain whether the acquired hotel is registered with ZIPA. If it has then investor will need to check compliance status on ZIPA requirements whether if the hotel to be  acquired has been compliant with filing ZIPA’s Quaterly Progress Reports, complied with annual renewal of interim  investment certificate,  annual renewal of Investment Service Licence and confirm on kind of incentives that are accorded to the acquired hotel.

In the scenario  the investor ascertains  the hotel to be acquired is registered  with ZIPA, and has been issued with the Investment Certificate, thus in that case the upcoming investor will need  to have the initial investment threshold of USD 2.5 million concomintantly as per the law to  have  100% of its company’s shares owned by foreigners.

The upcoming investor together with the acquired company will also be required to make application for merger clearance to acquire shares or assets of the hotel business at  the ZFCC only if  if such merger and acquisition transaction involves a combined turnover or assets which is, or more than Five Hundred Millions TZS (500,000,000/=) which ever greater.

Alternatively, if the investor does’nt want  to register the hotel project with ZIPA then he may wish to register its business with the Zanzibar Commission of Tourism (ZCT), however in such circumstances the Zanzibar law requires 70% of shares of the hotel business registered under the ZCT to be held by the local citizen, at this scenario the investor/acquiring firm will need to secure a Tourism Certificate from the  ZCT.

The upcoming investor must also consider whether prior to acquisition of the hotel business  theacquired hotel has sought for approval from ZIPA about the change of management/control, ownership or transfer of shares. This is vital as it will help the investor not to be deemed to have agreed, accepted and assumed all obligations of the acquired hotel be it dues against Zanzibar Revenue Board (ZRB), Tanzania Revenue Authority (TRA), the employees and other related labour issues related to the acquired hotel, Zanzibar Social Security Fund (“ZSSF”) and National Health Insurance Fund (NHIF).

In addition to that, the incoming investor will need to be availed with the Tax Clearance Certificate from the acquired company in order to be assured  that the acquired company has been compliant in terms clear of its tax obligations. This part is lenghtly covered in 6.0 below.

Further to item 2.0 above, during the  acquisition process of the hotel business in Zanzibar, the incoming investor will need to do a health check regarding the property/land of the acquired company by lodging for an official search at the Land Commission in order to ascertain ownership and unveiling  encumbarances/land conflict over the property if any.

Thereafter, the incoming investor will also need to initiate the process of transfer of ownership of the Land Lease initially granted to the acquired Company in order for the same to be granted under the name of the incoming investor.

In addition, in the event the acquired company/hotel is in possession of the property granted under the Certificate  of Right of Occupany (CRO), the the incoming investor will be required to convert such CRO in form of a transfer in order to be granted with the Government Lease, this is because under Zanzibar law foreigners cannot own land under the CRO as this is only reserved for local citizen precisely the Zanzibaris.

6.0 Tax issues and relevance in acquisition

On a separate note, tax matters should be equally taken into consideration by the investor when acquiring hotel in Zanzibar. The incoming investor  must make sure that the acquired company has been compliant in terms clear of its tax obligations. As Zanzibar is part of the union countries forming the United Republic of Tanzania, there are some union taxes and non-union taxes. In relation to tax administration, the TRA collects union taxes, while the ZRA collects all non-union taxes in Zanzibar.

Union Taxes are taxes on income and customs duties which include Employment Tax (PAYE); Corporate Income Tax (CIT); Withholding Tax (WHT) and Import Duties. On the other hand, non-union taxes are taxes on domestic consumption, including Value Added Tax (VAT), Excise Duty, Hotel Levy, Infrastructure Levy, Skills and Development Levy (SDL), Stamp Duty, etc.

Therefore, it will be best for the investor to look into the level of tax compliance that the hotel was operating at and establish if there are any unresolved issues/disputes with the revenue authority. Having a green light on the tax issues can assist the investor to acquire a clean hotel which is free from incumbrances with the revenue authority. The issuance of a Tax Clearance Certificate from the revenue authority can also be used as a mark on the compliance level of the acquired company, although such Certificate do not entail a total clearance from taxes that might be owed by the hotel.

Furthermore, the investor should take note of the taxes that might accrue on the transfer of ownership in the hotel and on which party will be liable for the payment of such taxes. For instance, when acquiring shares in the hotel from the existing shareholders, taxes such as capital gain tax (CGT) and stamp duty will be applicable on the transaction and also considerations should be placed on the income tax implications arising from any change in control where the underlying ownership has changed by more than 50%. In case, an acquisition of assets is to take place, then taxes such as CGT, VAT and stamp duty will be triggered as applicable on specific basis.

In summary, the CGT base is determined by the fair market value or selling price of the shares/land/building decreased by acquisition costs and any other incidental costs, any gain that will arise is subject to tax at a rate of 30%. VAT and stamp duty are chargeable on the value of the consideration paid or payable.

Therefore, in order for the transaction to be complete in a tax-efficient manner, the investor ought to seek good advice and professional guidance throughout the whole process in order to avoid any unforeseen hiccups from the revenue authority once in operation.

7.0 Miscellaneous issues to consider

Briefly, in these kind of acquisition transactions the incoming investor will need to have trusted advisors to assist on conducting a thorough legal due diligence on the acquired company owning the hotel and to be guided through the nitty-gritties of legal and internal compliance, managing engagement with stakeholders including community relations and so forth.

Finally, before structuring a deal the investor must make sure that he/she has advisors whom he/she can rely to and are strong in land acquisitions transactions. The experience shows that some consultants may not be as forthcoming  and as authentic hence the investor must be careful when engaging a consultant. The issue of capacity is different from the issue of unscrupulous.

Breakthrough Attorneys-Zanzibar boasts the mastery of handling the both land and business acquisition transactions that will remove the pressure on investors on the legal and admistrativewoes inherent in business acquisistion transactions. Our Firm through its Corporate Commercial Department is vested with experience in handling mergers and acquisistion of all kind of businesses including multinational companies venturing in hospitality businesses

Considering the flourishing nature of hospitality business industry in Zanzibar, it is the interest ofevery investor to acquire a hotel business as smoothly as possible including adhereing to all the legal and administrative hurdles pertaining to the acquisistion.

 

Important Notice:

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.