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19 Sep 2023
BY Phillip Karugaba

Why companies need to properly document the loans they receive

Financing company operations often involves borrowing from commercial lenders, private lenders and even the company’s own shareholders. Whether or not formal documentation of the loan is done is determined by the company size, the loan size and tenure, whether the company operates in a sector that is regulated or not, and the nature of the lender.

The recent Tax Appeals Tribunal decision in Bullion Refinery v Uganda Revenue Authority serves as a stark reminder of the importance of documenting loans. A loan without proper documentation may be re-characterised as undeclared income and taxed, potentially landing the borrower in hot water.

The background

Bullion Refinery received tax assessments from the Uganda Revenue Authority (“URA”) on a sum that it claimed was a loan and, as a result, not taxable. URA claimed that the amount was not documented as a loan and that it would, therefore, be re-characterised as undeclared income and liable to tax. URA pointed out that there were no company resolutions by Bullion to support the borrowing, no signed loan agreement and no credits on the company bank accounts to reflect the inflow of the loan proceeds. The claimed loan sums were only recorded in the company's financial statements.

The loan agreement (translated from Arabic to English) showed that another company was the borrower. The name of the Bullion director who had allegedly signed the loan agreement was also shown as “Caromona” instead of “Karumuna”. Bullion further claimed that their director brought the loan monies into Uganda in cash whenever he  travelled from Dubai.

The decision

The Tribunal found that since the loan agreement was written in Arabic at the time of signing, there was no evidence that the Bullion director, who claimed to have signed the agreement understood Arabic or that the agreement had been explained to him in a language that he understood. Consequently, the Tribunal declared the agreement void.

The Tribunal also found that URA was correct to doubt the authenticity of the loan agreement, given the inconsistencies in the names of the borrower and the names of the director signing for the borrower. There was also no evidence of movement of the loan proceeds to the accounts of Bullion. Also, the receipts tendered by Bullion were made out to an individual and not to the stated lender. The Tribunal upheld the re-characterisation of the loan as undeclared income.

The lessons

We surmise that crucial evidence to support a loan to a company would be:

  • A resolution made by the company to borrow
  • A signed loan agreement between the lender and the company
  • If required, documents relating to provision by the company of security for the loan
  • Evidence of credits of the loan proceeds to the company bank account
  • Acknowledgement of receipt of loan proceeds from the borrower to the lender
  • Entries of the loan proceeds in the company financial statements

While loan documentation will seldom be an issue for commercial lenders, care should be taken to  document loans taken from shareholders and less formal lenders.


Phillip Karugaba

Partner | Uganda


Hannah Baluka

Trainee | Uganda