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Global tax guide to doing business in Uganda
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|Global tax guide to doing business in Uganda by Kenyans247(1): Sun 08, November, 2020 08:55am|
Uganda’s tax regime is geographical for all Ugandan residents and source-based for non-residents. Any non-resident who carries on business in Uganda, or is employed in Uganda, or sells certain types of properties will be subject to the tax system, provided they derive income from sources in Uganda. Uganda does not have a provincial tax system; the tax regime is the same nationwide. Every individual that is liable to pay tax is obliged to apply to the Uganda Revenue Authority for registration. Once this process is concluded, a certificate of registration is issued. The case is the same for any foreign investor seeking to operate in Uganda.
The Ugandan Income Tax Act Cap 340 (ITA) imposes income tax on income of corporations, partnerships, trusts and individuals residing or carrying on business within the country. The aforementioned is subject to various deductions and exemptions under the ITA.
The ITA also imposes a withholding tax on individuals and corporations, which is withheld at source at the time of payment. In Uganda, this tax is imposed while making certain payments, such as employment income (“pay as you earn”), payments on dividends and interests, professional fees and others. This tax is also imposed on every non-resident that derives interest, dividends and royalties from sources in Uganda. The rate of withholding tax on most payments in Uganda is 15%. However, in respect of goods and services, a withholding tax of 6% is levied.
Currently, Uganda has double- taxation treaties (DTTs) with nine countries: Denmark, India, Italy, Mauritius, the Netherlands, Norway, South Africa, the UK and Zambia. The main purpose of these DTTs is to eliminate double taxation and facilitate the allocation of taxing rights. All these treaties pose different legal provisions from those envisaged under the ITA. It is important to note that in the event that there is a conflict between the provisions of ITA and the terms of a particular DTT, the latter takes precedence owing to Uganda’s constitution, which enjoins it to respect international law and treaty obligations.
In addition to the above, Uganda levies consumption taxes on goods and services, save for those that are zero-rated or tax -exempt. These include value-added tax (VAT), import duty, export duty and excise duty. The standard VAT rate is currently 18%. Other consumption taxes vary depending on the particular goods or services.
In this chapter
Financing a company subsidiary
Corporate income tax
Taxation has always been a mandate of the Uganda Revenue Authority (URA), a semi-autonomous body of the central government. This is pursuant to articles 152 (i) of the Ugandan Constitution, which provides that no tax shall be imposed except under the authority of an Act of Parliament. Therefore, the Uganda Revenue Authority Act Cap 196 was put in place to provide the administrative framework in which taxes under various acts are collected, including:
Income Tax Act Cap 340
Value Added Tax Act Cap 349
Customs Tariff Act. Cap 337
East African Customs Management Act
Excise Tariff Act Cap 338
Stamp Duty Act 2014
The various Finance Acts.
The Uganda Revenue Authority Act Cap 196 created URA, the only tax collection and administration authority in Uganda. The URA enforces the numerous enacted tax laws.
A non-resident who wishes to establish their business in Uganda may either incorporate a Ugandan company or operate directly through a foreign entity by simply registering as a branch of the foreign company. Generally, Ugandan business vehicles include corporations (limited liability or unlimited liability), partnerships (general or limited), sole proprietorships and trusts. However, the most common business vehicle for investment is the private limited liability company.
Incorporation of a company usually takes a maximum of two days, depending on the availability of all necessary requirements.
The jurisdiction of incorporation does not impact a company’s income tax liability. However, the nature of tax liability will be determined by the nature of registration or operation in Uganda. Therefore, where a foreign company comes to operate in Uganda, it will be taxed depending on whether it is operating as a branch or a subsidiary of that company. This is irrespective of the nationality of the directors.
A corporation is not required to have received any capital at the time of its incorporation. However, it must have received a nominal amount of capital at the time it allots shares. Capital may be paid in any mode acceptable to the company.
A foreign corporation conducting business in Uganda is subject to taxation under the ITA. This is determined by whether that foreign corporation derives its business income from sources in Uganda. A foreign corporation that operates through a branch will be subject to the standard Ugandan corporate income tax as well as an additional tax on the profits repatriated to the country of origin or incorporation.
The ITA imposes a withholding tax of 15% on all payments made to non-resident persons who derive any dividend, interest, royalty, rent, natural resource payment or management charge from sources in Uganda. A withholding tax rate of 20% is imposed on income from government securities whose maturity period does not exceed 10 years and 10% for government securities whose maturity period is at least 10 years.
Income arising from activities conducted by a partnership is taxed in accordance with the ITA. Unlike corporations, partnerships, whether general or limited liability, are not liable for the payment of tax since they are not distinct legal persons. The partners are charged with fulfilling the tax obligations of the partnership. This is paid by both resident and non-resident partners.
The gross income of a resident partner for the year of income includes the partner’s share of partnership income for that year, less the allowable deductions incurred in the production of that income. The gross income of a non-resident partner for the year of income includes the partner’s share of income attributable to sources in Uganda.
Partnerships in their own right are required to file a return of income. However, it is the partners of the partnership, rather than the partnership itself, that are subject to income tax under the ITA. A partnership in Uganda is considered a resident partnership if any of the partners is a resident person in Uganda during the year for tax purposes under the ITA. The finding of a resident partnership has nothing to do with the nationality or origin of the partners.
Financing a corporate subsidiary
Contributions for shares
Equity investment into a Ugandan company is made in exchange for shares for the capital contributed. Where the equity financer is to take up new shares, the company will have to allot new shares, thereby increasing its number of shares. The sale and transferability of shares is governed by the company’s articles. The amount of the investment into the company then forms part of its paid-up capital. The transfer of shares is subject to a stamp duty of 1.5%. At the time of payment of dividends to the equity financer, the company is required to withhold tax at 15% of the gross amount of the dividend paid.
Distributions of paid-up capital
Distribution of a company’s paid- up capital always takes place once it is paid for. This occurs by issuing shares to a person who has made payment. The issuance of such shares does not carry tax implications except in the case of an equity financer acquiring shares for their capital contribution to the company.
Withholding tax implications
Debt financing of companies involves the company borrowing or getting credit from different lenders, such as banks. No tax is levied on the repayment of the loan principal. At the time of repayment, the ITA levies a 15% withholding tax on the gross amount of the interest paid.
Thin capitalization refers to the situation in which a company is financed through a relatively high level of debt compared to equity. Currently, section 25 of the ITA permits a deduction for interest incurred in respect of a debt obligation during the year to the extent that the debt obligation was incurred in the production of income included in gross income.
The thin capitalization rules that were earlier provided by the ITA were repealed by the Income Tax (Amendment) Acts of 2018 and 2019, which introduced new interest deductibility rates under section 25 of the ITA. The Amendment Acts state that:
The amount of the deductible interest in respect of all debts owed by a taxpayer that is a member of a group shall not exceed 30% of the tax earnings before interest, depreciation and amortization (EBIDA)
A taxpayer whose interest exceeds 30% may carry forward the excess interest for not more than 3 years and the excess interest shall be treated as incurred during the next year of income.
The amendment defines EBIDA to mean the sum of the gross income less allowable deductions, depreciation and amortization. It also defines “group” to mean persons other than individuals with common underlying ownership.
The Stamp Duty Act imposes varying duty rates depending on the nature of transaction.
Corporate income tax
A standard 30% income tax rate is imposed on corporations. This applies to both resident and non-resident corporations. A company is resident in Uganda if it is incorporated or formed under Ugandan law, if it has management and control of its affairs exercised in Uganda or if the majority of its operations are carried out in the country during the taxation year. Residents are taxed on their worldwide income whereas non- residents are taxed only on income sourced in Uganda.
In the case of non-resident corporations, in addition to payment of the standard 30% corporate tax, a withholding tax rate of 15% is levied on a branch of a foreign company on the profit repatriated to the head office.
Capital gains tax arises from the disposal of a business asset, such as stock investments, land and buildings. Disposal of an asset occurs when an asset has been sold, exchanged or transferred by the taxpayer. A capital gain is calculated as the total sale price minus the original cost of the asset.
Capital gains tax under the current Ugandan tax regime is provided for under Part VI of the ITA. Under the ITA, a taxpayer is deemed to have disposed of an asset when an asset has been sold, exchanged, redeemed, distributed, transferred by way of gift, destroyed or lost. Capital gains are therefore included in the gross income of the taxpayer and assessed as a business income. Capital gains are taxed at the standard corporate tax rate of 30%.
A non-resident who becomes a resident person will be deemed to have acquired all assets other than those owned by such an individual, at the time of becoming a resident.
The ITA imposes the standard corporate tax rate of 30% on a branch of a foreign company. The branch has to pay an additional 15% tax on its total profits repatriated to its country of origin. If Uganda has a DTT in place with the country of origin, the branch will only be liable to pay the tax prescribed in the DTT. Before a non-resident can enjoy the benefits of a DTT, they must fulfill the three conditions imposed by the ITA:
The non-resident must be the beneficial owner of the income
The non-resident must have full and unrestricted ability to enjoy the income as well as determine its future use
The non-resident must have economic substance in the treaty country.
Individual income tax
Rates range from 10% to 45%, depending on the individual’s income. An individual is a tax resident if they have a permanent home in Uganda, spend at least 183 days in any 12-month period in Uganda or are present in Uganda for an average of more than 122 days during three consecutive tax years. A taxpayer is generally subject to tax on their income from carrying on their business. The income that is subject to tax is that derived after subtracting any allowable deductions. When computing business income, a taxpayer is generally permitted to deduct expenses and losses incurred in the production of income. As a rule, capital expenditures are not deductible. However, depreciation expense is an allowed capital deduction. Depreciable assets are allowed a deduction as specified in the Sixth Schedule of the ITA.
The primary legislation regulating transfer pricing is the ITA. It empowers the commissioner general of URA to distribute, apportion or allocate income, deductions or credits between the parties to any transaction who are associates or are in an employment relationship. This is necessary for the purposes of reflecting the chargeable income that the taxpayers would have realized in an arm's length transaction. In so doing, the commissioner general can determine the source of income and the nature of any payment or loss as revenue, capital or otherwise.
The secondary legislation regulating transfer pricing in Uganda is the Income Tax (Transfer Pricing) Regulations 2011. These regulations apply to controlled transactions, defined as transactions between two associated enterprises.
Withholding tax on passive income
A resident who makes payments to another resident person in respect of certain types of interest payments, rents, royalties or dividends is required to withhold tax at 15% of the gross amount of the interest paid. A tax is also imposed on every non-resident person who derives any dividend, interest, royalty, rent, natural resource payment or management charge from sources in Uganda. A tax is withheld by the payer at a rate of 15% of the gross amount before the payment or remittance of the amount is made. However, this does not apply to income received from activities of a Ugandan branch of the non-resident. The rate may be reduced under an applicable DTT.
Withholding tax on service fees
Withholding tax (WHT) is imposed on every non-resident person who derives any professional fees or management fees from sources in Uganda. This tax is imposed on specified payments made to both residents and non-residents. The tax is withheld by the payer at the rate of 5% on the gross amount before payment in the case of a professional fee payment from a resident to another resident. A 15% tax is withheld on the payments made to a non-resident. WHT on payments to non-residents may be reduced or eliminated by an applicable DTT.
Uganda pension plan
Employers paying employment income to employees must make monthly contributions under the National Social Security Fund Act of Uganda. The employer makes a standard contribution of 5% while the employee makes a contribution of 10%, which is withheld from the employee’s paycheck at the time of payment.
Uganda does not require employers to contribute to employment insurance. The Employment Act of Uganda, 2006, excludes an employee’s insurance from the wages an employee is entitled to for the work done or to be done under a contract of service.
However, employers often offer employment insurance as an employee benefit. This insurance is handled by private service providers. Payment for these services is not subject to withholding tax.
Goods and services tax
Indirect taxes levied on the consumption of goods and services include VAT, excise duty and import duty. These are regulated by, respectively, the Value Added Tax Cap. 349, the Excise Duty Act, 2014, and the East African Community Customs Management Act (EAC-CMA).
Value-added tax (VAT)
Currently, the standard VAT rate is 18% of the gross amount paid. Some goods and services are exempt from VAT or zero-rated.
Exempt goods or services are neither zero-rated nor subject to the standard rate. Exemptions include livestock, unprocessed foods and agricultural products, and financial services, among others as listed under the Second Schedule of the VAT Act.
Zero-rated goods or services attract a zero (0%) VAT rate. These include drugs, medicine and medical services exported from Uganda, among others, as per the Third Schedule of the VAT Act.
Some imports are exempt from customs duty under the Fifth Schedule of EAC-CMA. Imports may also be exempt if the imported good or service would be exempt under the Second Schedule of the VAT Act had it been provided domestically.
Excisable goods and services are stipulated under the Second Schedule of the Excise Duty Act, 2014, in accordance with the excise duty specified therein. A person providing such an excisable service is liable to pay the duty on that service, and the liability arises on the date of provision.
A manufacturer of an excisable good is liable to pay the duty on the manufactured good when it leaves the manufacturer’s premises. An importer of excisable goods pays excise duty at the time of import, as per Section 4 of the Excise Duty Act.
A person liable to pay excise duty shall do so on the date of filling the annual return with the URA commissioner, or in the case of an assessment, pay within 45 days after receiving the notice of assessment. For services, a person becomes liable to pay on either the date on which the performance of the service is completed, the date on which payment of the services is made or the date on which the invoice is issued. An importer pays duty at the time of import.
Rates of import duties and export duties are set out in the schedules of the EAC-CMA. Such duties and taxes are payable through self-assessment procedures. Taxpayers use Direct Trader Input centers to make declarations, which are captured in the Automated System for Customs Data system to enable payment of tax in designated banks.
This refers to the tariff levied on goods at the time of importation into the country. Therefore, everyone who imports goods into Uganda, depending on their classification, is liable to pay import duty. However, certain goods which are classified as duty free have a zero percent duty levied on them.
Most finished products are subject to a 25% duty, while intermediate products face a 10% levy. Raw materials (excluding food stuffs) and capital goods may still enter duty free.
Imported goods are also charged VAT of 18% and a withholding tax of 6%. Imports are also subject to a charge of 1.5% infrastructure tax to finance railway infrastructure development.
Almost all exports in Uganda are tax- free, save for fish and unprocessed hides and skins.
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