On the 27th March 2024, the Ministry of Finance, Planning and Economic Development (“MoFPED”) gazetted the 2024 tax amendment bills. The tax laws the MoFPED seeks to amend include; Income Tax Act, Value Added Tax Act, Stamp Duty Act, Tax Procedure Code Act and the Excise Duty Act. The bills have now been tabled before parliament for debate. In this tax alert, we highlight the key provisions of the bills.
1. THE INCOME TAX (AMENDMENT) BILL, 2024
Expansion of the definition of retirement fund
The Income Tax (Amendment) Bill 2024 (“ITAB 2024”) seeks to expand the definition of the term “retirement fund”. Under the pro- posed regime, a pension or provident fund established as a permanent fund maintained 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 will qualify as a retirement fund.
Capital gains tax on disposal of non-business assets
Under the Income Tax Act, capital gains from disposal of non-business assets are exempt from income tax (Section 21(1)(k)). Under the current regime, for capital gains to be taxed, they must (i) form part of business income, (ii) result from the sale of shares in a private lim- ited liability company, and/or (iii) be derived from a sale of a commercial building.
The ITAB 2024 seeks to change this. Clause 3 of the ITAB 2024, if passed, will insert a new section 5A in the Income Tax Act. Under the proposed section 5A, a 5% tax will be imposed on a capital gain derived from the disposal of non-business assets.
This tax will apply to a disposal of three things:
- shares of a private company;
- land in cities or municipalities except the principal place of residence. (The ITAB 2024 does not define the principal place of residence).
- rental property that is subject to rental tax under section 5 of the Income Tax Act.
Under the proposed regime, the gains from the disposal of non-business assets will not be taxed if they are arrive from: - disposal of land in cities and municipalities that qualifies as a person’s principal residence.
- involuntary disposal of a non-business asset through auction, court order, mortgages, divorce settlement or spousal separation agreement.
- transmission of a non-business asset of a deceased to a trustee or beneficiary.
- the disposal of an investment interest of a registered venture capital fund or private equity.
Under the proposed regime, the capital gains tax on non-business assets is a final tax and is separate from any other tax imposed under the Income Tax Act. This tax is payable within 15 days after the disposal of the non-business asset.
The proposed regime will impose an obligation on every person who disposes of a non-business asset to notify the Commissioner General of Uganda Revenue Authority (“commissioner”), in writing, of the details of the disposal within 15 days from the date of the disposal.
Failure to pay the capital gains tax will result in payment of the interest.
Exemption of income
Clause 4 of the ITAB 2024 seeks to amend section 21 of the Income Tax Act. If this amendment is allowed by Parliament, the following income shall be exempted from income 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.
- income of a person who manufactures an electric vehicle, electric battery or electric vehicle charging equipment or fabricates the frame and body of an electric facility.
- income of a person who operates a specialized hospital facility.
Changes in provisions dealing with non-recognition of disposals for capital gains purposes
Section 54(1)(e) of the Income Tax Act provides that no gain or loss is taken into account in determining chargeable income in relation to capital gains arising from the sale of investment interest of a registered venture capital fund if at least fifty percent of the proceeds on sale is reinvested within the year of income. Clause 5 of the ITAB 2024, if passed, will repeal this provision. Moreover, clause 5 of the ITAB 2024 seeks to repeal section 54(1a) which provides that a registered venture capital fund shall be entitled to a non-recognition of a gain or loss equivalent to the percentage of reinvested proceeds.
Repeal of definition of a branch for international tax purpose
Clause 6 of the ITAB 2024, if passed by parliament, will repeal the definition of a branch.
Introduction of Permanent Establishment into the domestic tax laws
The phrase “permanent establishment” is key in the application of tax treaties. Under tax treaties, business profits (active income) of an enterprise of a contracting state cannot be taxed by states where the income is sourced unless the enterprise has a permanent establish- ment in the latter state.
The principles pertaining to the permanent establishment are, there- fore, necessary in establishing taxing rights of a country in respect of the business profits of the non-resident enterprises, usually in cases where the taxing rights are limited by the presence of a tax treaty.
Clause 7 of the ITAB 2024 seeks to introduce an extended definition of a permanent establishment by inserting a new section 78A into the Income Tax Act. The clause also seeks, in the intended section 78B, to impose a tax on a non-resident person’s income attributable to a permanent establishment in Uganda.
Under the new regime, proposed under the ITAB 2024, the word branch will be repealed from every section contained in part IX of the Income Tax Act (which deals with international taxation) and replaced with the words permanent establishment.
