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5.1. Tax Base for Resident Entities

Resident companies are taxed on income derived or deemed to be derived from any business operation in Equatorial Guinea. The law in theory allows for the inclusion of foreign-source income in the taxable base unless the taxpayer justifies that the relevant income has been subject to a comparable tax abroad and “subject to reciprocity” by the source country. In practice, however, the taxable base is limited to income sourced from Equatorial Guinea. This includes, inter alia, income from the licensing or transfer of intellectual property rights to the extent exploited in Equatorial Guinea.

Capital gains are treated as ordinary business income and taxed at the corporate income tax rate. However, the tax on gains on the disposal of fixed assets can be deferred if the sale proceeds are reinvested in the acquisition of new fixed assets within the three years following the end of the relevant tax year.

Capital gains on the transfer or discontinuation of business are taxed in different manner (see Sec. 11. below).

Dividends are considered as ordinary business income and taxed at the standard corporate income tax rate. However, dividends received from domestic and foreign sources are eligible for a partial exemption under the participation exemption regime whereby only 10% of the amount of the dividends received are subject to tax, whilst the remaining 90% are exempt. The recipient qualifies for the participation exemption regime if it has held at least 25% of the capital of the payer for a continuous period of at least 2 years.

Inventory and work in progress must be evaluated at cost. A provision for depreciation may be booked if the market price of the inventory is lower than the cost price.

Business expenditure is allowed to be deducted for the determination of taxable income on condition that the expenditure is necessary for the production of, or the preservation of an income source, is duly documented and is not fully or partially disallowed by specific rules (see Sec. 6.5.).

Cost Oil expenditure is generally ringfenced to those relating to the perimeter governed by the relevant production sharing agreement and the deductible percentage is generally prescribed by the agreement. As a general rule, excess non-deductible expenditure in a year is allowed to be carried forward indefinitely. Also, as a general rule and unless a request to the contrary is filed and granted, the deduction of excess Cost Oil is disallowed if the costs exceed the projected budget by more than 5%.