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09 Jul 2024
BY Phillip Karugaba AND Renata Nyakairu

Key 2024/2025 tax amendments for investors in Uganda

Uganda’s Minister of Finance, Planning and Economic Development presented the national 2024/25 budget on 13 June 2024. Although the economy continues to endure the effects of internal and external shocks, the Honourable Minister portrayed an optimistic outlook for the next fiscal year, proposing a total expenditure of UGX 72.1 trillion (USD 19.5 billion). Steady economic growth is expected to be driven by projected oil production, increased exports and continued foreign direct investment.

The annual budget reading also highlighted amendments to the tax laws, which will come into effect if assented to by the President. We review these amendments for their impact on the investment climate in Uganda below.

Income Tax (Amendment) Act, 2024

Significant income tax exemptions have been introduced, including income earned by private equity and venture capital funds regulated by the Capital Markets Authority (“CMA”), manufacturers of electric vehicles, electric batteries or electric charging equipment, operators of specialised hospital facilities and profits from the disposal of Government securities traded on the secondary market.

The amendments intend to encourage investment, particularly a more robust private equity and venture capital market. This is timely given the Government’s goal to increase the uptake of market-based financing by Ugandan enterprises to 3% of GDP by 2026/2027, which may be realised through alternative financing avenues such as private equity and venture capital.

The exemption also seeks to improve Uganda’s declining deal performance, as reported by The East African Private Equity and Venture Capital Association (“EAVCA”) and highlighted in our previous update on the tax amendments.

The tax concept of a “branch” has been overhauled and replaced with the concept of a “permanent establishment” as a basis for establishing a taxable presence for purposes of income tax. The change aligns Uganda’s legislation with international best practice and seeks to minimize instances of tax avoidance by identifying specific circumstances where a non-resident person creates a taxable presence in Uganda.

A permanent establishment (“PE”) is defined as a fixed place of business through which the business of the enterprise is wholly or partly carried on. It includes a place of management, a branch, an office, a factory, a workshop, a warehouse providing storage facilities to others, a sales outlet, a mine, an oil or gas well, a farm, among others.

It is also specifically provided that an agent acting in an agent-principal relationship may create a PE for the principal where the agent’s activities include habitually concluding contracts or playing a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the principal. The provision goes further to include instances where an agent does not habitually conclude contracts nor play a principal role leading to the conclusion of contracts, but habitually maintains stock of goods or merchandise which is regularly delivered on behalf of the principal or habitually manufactures or processes goods or merchandise belonging to the principal or habitually secures orders in Uganda wholly for the principal or associates. Non-resident persons carrying out business activities in Uganda should carefully consider whether their activities establish presence based on the new provision.

The amendment also provides clarity in respect of sourcing rules in Uganda. An annuity paid by a non-resident through a business carried on through a permanent establishment in Uganda and income derived from the payment of insurance premium relating to an insured risk in Uganda is considered income sourced in Uganda and, therefore, liable to tax.

A withholding tax of 10% has been introduced on commission paid to a payment service provider. This includes banking agents and other agents offering financial services. The amendment broadens the scope of withholding tax mechanism in the banking sector.

Stamp Duty (Amendment) Act, 2024

Similar to the income tax exemptions, a stamp duty exemption is applicable on shares acquired by investors in a private equity or venture capital fund regulated by the CMA.

The amendment further exempts duty on nominal share capital and any increase or transfer of shares in a private equity or venture capital fund regulated by the CMA. The effect of the amendment is to shield private equity and venture capital funds from the 0.5% duty on formation or subsequent increase of share capital and 1.5% duty on the transfer of shares or other securities by the fund. The purpose of this amendment appears to be to create a hospitable environment to attract equity and venture capital funds to set up shop on ground in Uganda.

The Act also extends the stamp duty exemptions available to eligible investors in strategic investment projects. No duty shall be payable on instruments such as agreements or memoranda of understanding, executed for the sole purpose of implementing a project for the manufacturing of electric vehicles, electric batteries, electric vehicle charging equipment or fabricator of the frame and body of an electric vehicle. In order to qualify for the stamp duty exemption, an investor must meet a set of requirements, including a minimum capital investment of USD 10 million for foreigners or USD 300,000 for Ugandan citizens; utilising at least 80% locally produced raw materials (where available); and having a workforce consisting of at least 80% Ugandan citizens, earning an aggregate wage of at least 80% of the total wage bill.

Value Added Tax (Amendment) Act, 2024

A significant amendment is the inclusion in taxable supplies of goods or services provided by an employer to an employee at no consideration. The employer shall pay VAT of 18% on such a supply, which may have a significant impact on employers who provide free gifts and donations such as airtime or internet data to their employees. This amendment is intended to ensure that VAT is recovered on the free supply of goods and services where the employer has claimed a VAT input credit on the purchase or production of those goods or services.  

Cash refunds are now limited to claims exceeding UGX 10,000,000 (USD 2,700). For smaller claims, the amount must be carried forward to subsequent periods and be offset against future liabilities. The amendment is intended to reduce the instances where a taxpayer may receive a cash refund.

The Act also clarifies that the supply of goods during an auction is a taxable supply of goods by the recipient of the proceeds of the auction.

Tax Procedures Code (Amendment) Act, 2024

Taxpayers who pay their outstanding principal taxes by 31 December 2024 may benefit from a waiver of interest and penalties outstanding as at 30 June 2023. The deadline for payment of outstanding principal taxes has been extended to the end of 2024, allowing an opportunity for taxpayers to reconcile their ledgers and benefit from the waiver.

Conclusion

The changes introduced by the Amendment Acts are welcome developments for investors, particularly private equity and venture capital funds and investors eyeing investments in electric vehicles, electric batteries, and electric charging equipment.

The introduction of the definition of a PE aligns Uganda’s Income Tax Act with global tax principles as underpinned by the OECD and United Nations Model Double Taxation Conventions, providing useful consistency with the provisions in other jurisdictions. The extension of tax amnesty offers non-compliant taxpayers some welcome relief.

The Government’s initiatives are a positive step to incentivising investment, supporting green initiatives, and enhancing revenue collection, however, only time will reveal their true impact on the economy.

 

Phillip Karugaba

Partner | Uganda 

pkarugaba@ENSafrica.com

 

Renata Nyakairu

Associate | Uganda 

rnyakairu@ENSafrica.com