Highlights of Income Tax (Amendment) Bill, 2024

Expansion of the definition of retirement fund

The bill proposes to expand the definition of retirement fund to include a pension or provident fund established as a permanent fund maintained solely for the provision of benefits for members of the fund in the event of termination of service or upon the occurrence of an event specified in the written law, agreement or arrangement. The current definition recognizes retirement funds set up for the provision of benefits to members of the fund in the event of retirement or for the provision of benefits for dependents of members in the event of the death of a member.

Imposition of tax on disposal of nonbusiness assets

The bill proposes to impose tax on the gains realized from the disposal of nonbusiness assets at a rate of 5%. The tax is specifically levied on gains from the disposal of shares of a private company, rental property that is subject to rental tax and land in cities or municipalities, except the principal place of residence. It is important to note that the bill does not provide a definition for what amounts to a “principal place of residence.”

The bill further excludes from income tax any gains from disposal of nonbusiness assets in these circumstances:

• Involuntary disposal of nonbusiness assets through auction, court order, mortgages, divorce settlement or spousal separation agreement
• Transmission of the deceased’s nonbusiness assets to a trustee or beneficiary
• Disposal of investment interest of a registered venture capital fund or private equity

The bill proposes to impose the 5% tax as a final tax, which must be paid within 15 days after the disposal or transfer of a nonbusiness asset. A person who fails to pay the tax within 15 days shall be liable to pay interest at 2% per month. Additionally, a person who disposes a nonbusiness asset must also notify the Commissioner General in writing of the details of the disposal within 15 days from the date of disposal.

The proposed bill refers to Sections 50(1) and (2), 51, 52 and 53 of the Income Tax Act as applicable to computations of gain or loss on disposal of assets with modifications. For instance, indexation of the cost base of the nonbusiness asset for purposes of determining the capital gains subject to tax will not apply because it is provided in Section 50(3) of the Income Tax Act but not specified in the bill as applicable.

Expansion of the general exemption regime

The bill proposes to exempt from tax:

• Income derived from or by private equity or venture capital fund regulated under the Capital Markets Authority Act, Cap. 84
• Income derived from the disposal of government securities on the secondary market

The bill proposes to expand the list of exempt income from qualifying investments by an operator in an industrial park, free zone or any other person carrying on business outside an industrial park or free zone who meets the stipulated investment capital thresholds and conditions by adding the following investment activities:

• Income of a manufacturer of an electric vehicle, electric battery or electric vehicle charging equipment or fabricates the frame and body of an electric vehicle
• Income of an operator of a specialized hospital facility

Streamlining the capital gains tax exemption regime in relation to venture capital funds

The bill proposes to repeal the provisions regarding no gain or loss on chargeable income in relation to capital gains arising from the sale of investment interest of a registered venture capital fund where at least 50% of the sales proceed were reinvested within a year of income and the proportionate entitlement for nonrecognition of a gain or loss where only a percentage of the sales was reinvested. This proposed repeal is intended to align the capital gains tax treatment of venture capital funds with the current proposed amendment that wholly exempts a disposal of investment interest of a registered venture capital fund or private equity from capital gains tax.

Repealing the definition of a branch

The bill proposes to repeal the definition of a branch in the Income Tax Act. The proposal seeks to adopt the term permanent establishment. The proposed amendments seek to align the Income Tax Act with international principles in double taxation treaties pertaining to definitions and concepts of taxation of permanent establishments.

Introduction of the definition of Permanent Establishment

The bill proposes to introduce the definition of a Permanent Establishment to mean a fixed place of business through which the business of the enterprise is wholly or partly carried on and includes:

1. A place of management
2. A branch
3. An office
4. A factory
5. A workshop
6. A warehouse, in relation to a person providing storage facilities to others
7. A mine, an oil or gas well, a quarry or any other place of exploration for or extraction or exploitation of natural resources
8. A farm, plantation or other place where agricultural, forestry plantation or related activities are carried on
9. A sales outlet
10. A building site or a construction, installation or assembly project, or supervisory activities in connection with the site, project or activity that lasts for at least ninety days in any 12 months period
11. The furnishing of services, including consultancy services, by a person through employees or other personnel engaged by the person for such purposes provided that such activities continue in Uganda for a period of, or periods amounting in aggregate to, 183 days or more in any 12-month period that commences or ends during the year of income
12. Substantial equipment or machinery that is operated, or is available for operation, in Uganda for a period of, or periods amounting in aggregate to, 90 days or more in any 12-month period that commences or ends during the year of income

Permanent establishment considerations for associates

The bill proposes that the duration of activities referred to under subsection (1) (j), (k) and (l), above, shall be determined by aggregating the period during which activities are carried on in Uganda by associates, provided that the activities of such associate in Uganda are connected.

The bill further proposes that where there are two or more associates carrying on concurrent activities, the period referred to under subsection (1) (j), (k) and (l) shall be counted only once for the purpose of determining the duration of activities.

Nonqualifying activities for permanent establishment

The bill proposes to exclude the following from the definition of Permanent Establishment, if the character of the activity, or in the case of subparagraph (f), the overall activity of the fixed place of business, is preparatory or auxiliary:

1. The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the person
2. The maintenance of a stock of goods or merchandise belonging to the person solely for the purpose of storage or display
3. The maintenance of a stock of goods or merchandise belonging to the person solely for the purpose of processing by another person
4. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the person
5. The maintenance of a fixed place of business solely for the purpose of carrying on, for the person, any other activity
6. The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e)

The bill proposes to include in the definition of a permanent establishment a fixed place of business that is used or maintained by a person if the same person or associate carries on business activities at the same place or at another place in Uganda, provided that the business activities carried on by the two persons at the same place, or by the same person or associates at the two places, constitute complementary functions that are part of a cohesive business operation, and either:

1. One of the two places constitutes a permanent establishment for the person or the associate under this section
2. The overall activity resulting from the combination of the activities carried on by the two persons at the same place, or by the same person or associate at the two places, is not of a preparatory or auxiliary character

Permanent establishment by way of principal agent relationship

The Bill proposes that a permanent establishment is considered to have been established by a principal where a person is acting in Uganda on behalf of the principal, that principal shall be deemed to have a permanent establishment in Uganda in respect of any activities which the agent undertakes on behalf of the principal, if such agent:

1. Habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the principal, and these contracts are:
   1. In the name of the principal
   2. For the transfer of the ownership of, or for the granting of the right to use, property owned by the principal or that the principal has the right to use
   3. For the provision of services by the principal unless the activities of the agent are limited to non-qualifying activities for permanent establishment that, if exercised through a fixed place of business other than a fixed place of business to which subsection (5) would apply, would not make this fixed place of business a permanent establishment under subsection (5)
2. Does not habitually conclude contracts nor plays the principal role leading to the conclusion of such contracts, but habitually maintains in Uganda a stock of goods or merchandise from which the agent regularly delivers goods or merchandise on behalf of the principal
3. Does not habitually conclude contracts nor plays the principal role leading to the conclusion of such contracts, but habitually manufactures or processes in Uganda for the principal, goods or merchandise belonging to the principal
4. Does not habitually conclude contracts nor plays the principal role leading to the conclusion of such contracts, but habitually secures orders in Uganda wholly or almost wholly for the principal or associates

It is important to note that a deemed permanent establishment is not created where the agent acting in Uganda on behalf of the principal carries on business in Uganda as an independent agent and acts for the principal in the ordinary course of that business.

The proposed bill defines an “independent agent” to mean an agent who acts exclusively or almost exclusively on behalf of one or more principals to which the agent is associated.

Calculation of chargeable income of permanent establishment

The bill proposes to include that the income of a nonresident person attributable to activities of a permanent establishment shall be taxed in Uganda including, either:

1. The income derived from the sales of goods or merchandise in Uganda of same or similar kind as those sold through the permanent establishment
2. The income of other business activities carried on in Uganda that are of the same or similar kind as those carried out through the permanent establishment

Additionally, the bill provides that a permanent establishment shall not be allowed a deduction in respect of amounts paid by the permanent establishment to the head office of the nonresident person or any of its other offices by way of:

1. Royalties, fees or other similar payments in return for the use of patents or other rights
2. Commission, for specific services performed or for management
3. Interest on moneys lent to the permanent establishment, except, in case of a financial institution

The bill also proposes that in the determining the chargeable income of permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment. A permanent establishment shall be a distinct and separate entity from the nonresident person and transactions between the permanent establishment and nonresident person should be at arm’s length.

Further, the bill proposes that the gross income of a permanent establishment, shall not include charges by the permanent establishment to the head office of the nonresident person or any of its other offices, by way of

1. Royalties, fees or other similar payments in return for the use of patents or other rights
2. Commission for specific services performed or for management
3. Interest on moneys lent to the head office of the permanent establishment or any of its other offices except, in case of a financial institution

Expansion of sourcing rules

The bill proposes to expand the sourcing rules by including:

1. A pension or annuity where the annuity is paid by a nonresident person as expenditure of a business carried on by the nonresident person through a permanent establishment in Uganda
2. Income derived from the payment of insurance premium if the premium relates to the insurance or reinsurance of a risk in Uganda

Streamlining taxing provisions on annuity income earned by nonresidents from sources in Uganda

The bill proposes to introduce a 15% withholding tax on every nonresident person who derives any annuity from sources in Uganda.

Modification of exemption regime on payment of interests to nonresident lenders

The bill proposes removing the tax exemption on interest that a resident company outside Uganda pays in respect of debentures issued by a company outside Uganda to raise a loan outside Uganda for which debentures were widely issued to raise funds for use by the company in a business carried on in Uganda or in cases where interest is paid to a bank or financial institution of a public character.

The bill proposes to impose withholding tax of 2% on interest paid by resident persons in respect of debentures, where the following conditions are satisfied:

1. The interest is paid by a resident person to a financial institution.
2. The financial institution referred to above is unrelated to, and dealing wholly independently from, the resident person who is the borrower.
3. The interest is not paid as part of an arrangement involving a back-to-back loan or other arrangement that is economically equivalent and intended to have a similar effect to a back-to-back loan.

The bill also proposes to exempt from income tax interest the Government pays to a nonresident person in respect to debentures.

Amendment to tax on payments to nonresident contractors or professionals

The bill seeks to exclude an amount attributable to the activities of a permanent establishment of the nonresident in Uganda from withholding tax where the amount is subject to the operation of section 17 of the Act, which stipulates that the gross income of a nonresident person includes only income derived from sources in Uganda.

Replacing the word “branch” with “permanent establishment”

The bill proposes to amend Part IX of the Income Tax Act on International Taxation by substituting the words “permanent establishment” for the word “branch” wherever it appears. For instance, this would imply that Section 82 on “Taxation of branch profits” will be construed as “Taxation of permanent establishment profits.”

Introduction of additional transfer pricing obligations for transactions between associates

In addition to the current regulatory framework requiring related parties to prepare and maintain appropriate transfer pricing documentation, the bill proposes to introduce a requirement for taxpayers to submit their transfer pricing information at the time of filling returns in a format prescribed by the Commissioner. The proposed bill does not indicate the precise filing timelines on which the transfer pricing information should be submitted (i.e., whether during filing of a provisional tax return or filing of the final income tax return).

Taxation of commission paid to payment service providers

The bill seeks to introduce the obligation to withhold tax by a person who pays a commission to a payment service provider. Withholding tax at a rate of 10% will apply on the commissions paid to payment service providers including banking agents or any other agent offering financial services.

Expanding the list of Listed Institutions

The bill seeks to expand the list of listed institutions under the first schedule to the Income Tax Act to include:

1. African Reinsurance Corporation (Africa Re)
2. International Regulatory Board of the East African Power Pool
3. Islamic Cooperation for the Development of the Private Sector