Doing Business In: Uganda
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Strategically located in the heart of Sub-Saharan Africa, bordered by South Sudan in the north, Kenya in the east, the United Republic of Tanzania in the south, Rwanda in the southwest and the Democratic Republic of Congo in the west, Uganda enjoys a strategic position for regional trade and investment through its capital Kampala and other major cities of Arua, Gulu, Lira, Hoima, Mbarara, Jinja, Mbale, FortPortal, Soroti, Masaka and Entebbe.
Uganda’s economy is projected to bounce back growing by 3.5-3.8% in the FY2021/22 and 5.5-6.0% in FY2022/23, and an expected increase to 6.5-7.5% in the medium-term (2 to 3-years ahead). This is largely driven by the opening up of the economy and increased inflow of Foreign Direct Investment following the announcement of the Final Investment Decision (FID) by the Government of Uganda in collaboration with Total Energies Uganda and CNOOC Uganda Limited.
The country’s economy is fully liberalised and there are generally no industry-wide restrictions which apply to foreign direct investments. This favorable policy position means that investors enjoy free entry into the market subject to compliance with any applicable sector-specific licensing and permitting requirements. Such investments may be 100% foreign owned unless it is a restricted investment. There have been a number of revised laws to promote infrastructure development and a more vibrant public sector.
Uganda operates in a free-market environment and given its youthful population, open markets, abundant resources and expanding economy which offers multiple favorable investment opportunities. Uganda’s economy is made up of the agriculture (24.2%), industry (25.5%) and services (50.3%) sectors. The key growth sectors are services (tourism and science, telecommunications & technology), industry (oil and gas, mining, infrastructure, and construction).
Uganda’s natural resource prospects include significant oil reserves estimated at 6.5 billion barrels, with only 40% percent of the country’s oil rich areas being exploited.
Ease of doing business
In terms of the ease-of-doing-business environment, the 2019 Doing Business Report rates Uganda at 127 out of 190 countries, while the 2018 Global Competitiveness Index rates Uganda at 117 of 140 countries.
Nevertheless, despite certain bureaucratic processes, Uganda has a stable regulatory environment, predictable registration processes and highly consensual regulatory agencies. Some of the deliberate actions that have been taken to improve the doing-business environment are the Uganda Investment Authority One-Stop-Centre, Swift registration processes and trading across borders by putting in place and implementing the Centralized Document Processing Centre, and an electronic processing platform that centralizes all documentary checks.
Traders in Uganda have also began using the Uganda Electronic Single Window, which allows for electronic submission of documents as well as the exchange of information between trade agencies which has eased trade.
Uganda has also implemented the Automated System for Customs Data (ASYCUDA), which is a web-based application that supports paperless declaration processing through the use of scanned or electronic documents. This system was implemented to reduce the cost of doing business and clearance time and access to credit through the enactment of a law which permits the use of movable property for collateral for credit. The Security Interest in Movable Property Act 2019 allows the creation of security interests in various forms of chattels. The electronic registry also allows borrowers to leverage their movable property into capital for investment and growth.
Starting a Business in Uganda
Legal business structures available for foreign investment
- sole proprietorship;
- public company;
- private limited liability company;
- private company limited by guarantee;
- joint venture;
- public-private venture; and
- registered branch of a foreign legal entity.
The choice of investment vehicle is influenced by the legal and tax considerations. However, in certain circumstances, the law dictates the form of investment vehicle permitted for a particular business.
Generally, the most commonly used form of investment vehicle is the limited liability company. Typically, foreign companies seeking to establish presence, opt to do so through a limited liability company or through a branch.
The Companies Act, 2012 introduced the concept of a single member company. This company is akin to sole proprietorship however with limited liability protection.
Joint ventures (“JV”) may take a number of forms, but the basis on which they are formed is always a commercial collaboration in which two or more unrelated parties pool, exchange, or integrate some of their resources with a view to mutual gain, while at the same time remaining independent.
In Uganda, the venture can be for one specific project, or a continuing business relationship.
Even though the registration process still requires the submission of wet-ink original copies of documents, a new electronic processing system installed by the Uganda Registration Services Bureau ensures that company registration is completed within one to three working days.
Uganda’s fiscal incentive package for both domestic and foreign investors provides generous capital recovery terms for medium and long-term investors with a range of annual VAT exemptions, deductions and deferrals.
Investors often end up paying no tax at all in the first year of their investment, and usually paying less than the thirty percent corporate tax rate in the subsequent years of their investment. In addition, the government provides a ten-year tax holiday for investors engaged in export- oriented production.
Capital markets are open to foreign investors and there are no restrictions for foreign investors to open a bank account in Uganda. The Government enforces a 15% Withholding Tax (WHT) on interest and dividends of a company. Credit is allocated on market terms and is commercially available. Foreign-owned companies are allowed to trade on the stock exchange, subject to some share issuance requirements.
The Free Trade Zones Act authorizes the development, marketing, maintenance, and supervision of free trade zones in Uganda. Under this Act, foreign companies have the same opportunities as local companies. The government has provided for a comprehensive package of fiscal and non-fiscal incentives for holders of free zone developer, operator, or manager licenses.
Under the fiscal incentives, the Act provides for exemption from taxes and duties on all export processing zone imported inputs that are for the exclusive use in development and production output of the business; 10-year tax holiday on exportation of finished consumer and capital goods; exemption from tax on income from agro-processing; exemption from capital gains tax on plant and machinery used in the free zone for 5 years and 1 day upon disposal; exemption from all taxes, levies and rates on exports from the free zone; exemption on personal income of a person offering technical assistance under a technical assistance agreement, among others.
While under the non-fiscal incentives, the investors enjoy economies of scale for the businesses resulting from well-planned zoning and clustering of the business activities in free zones; land for development dependent on availability; timely turnaround period during business registration, work permits processing and secondary licensing.
Foreign ownership restrictions
There are no restrictions on foreign ownerships of businesses in Uganda. Uganda encourages capital inflow in various forms. Foreigners are free to operate businesses in Uganda subject to limited regulatory requirements. They are also free to hold investments in the country. Additionally, foreigners are also able to acquire lease interests in land.
Uganda has entered into 16 bi-lateral investment treaties, of which only 6 are in force – with France, Denmark, the Netherlands, the UK, Switzerland and Germany.
The treaties make provision for the promotion and protection of investments of nationals and companies of the counterparty countries in Uganda and provide standard commitments in relation to:
- protection of investments;
- prohibition against expropriation or nationalisation;
- compensation for loss;
- repatriation of investments and returns;
- dispute resolution under the auspices of the International Centre for Settlement of Investment Disputes (the Convention on the Settlement of Disputes between States and Nationals of Other States, passed in Washington on 18 March 1965); and
- residual protection of investments.
Uganda is a contracting party to the Agreement on Trade-Related Investment Measures (TRIMS), being a member of the World Trade Organisation with effect from 1 January 1995. TRIMS places a general obligation on member states not to impose parochial and discriminatory investment measures which violate the objective purpose of the General Agreement on Tariffs and Trade 1994.
However, both the General Agreement on Tariffs and Trade and TRIMS permit developing countries to deviate temporarily from the national treatment and nondiscrimination provisions and enact discriminatory investment measures that are necessary to, for example, promote the local industry.
The employment laws impose several statutory obligations on the employer such as payment of wages, taxes (payroll and local service tax) and social security while according a number of rights to employees including annual leave, sick pay, severance allowance and fair hearing among others.
Independent contractors are not employees. However, to avoid any liabilities that arise from the re-characterisation of an independent contractor relationship as an employment relationship, an employer should always ensure that independent contractors are easily distinguishable from employees based on terms of services and the level of control exercised by the employer.
General Tax considerations in Uganda
Uganda’s tax system is administered under the Uganda Income Tax Act (Cap 340), VAT Act (Cap 349), East African Customs Management Act, Excise Duty Act and Stamp Duty Act. The administration is managed by the Uganda Revenue Authority (URA) which was set up by an Act of Parliament in 1992. Income Tax is handled under Domestic Taxes Department and Customs taxes under the Department of Customs and Excise.
Uganda has streamlined the assessment and collection of taxes through a self-assessment basis and use of Tax Identification Numbers (TINs) for every taxpaying individual, body of persons and organization.
Taxation of individuals
Different tax regimes apply to individuals but the most common is employment income tax charged on individuals who are in gainful employment.
Income tax is based on source and residence with resident individuals taxed on income generated from all geographical sources while non-resident individuals are taxed on only the income they source in Uganda. This means that determination of the residency status of an individual is a key yardstick in determining the appropriate tax payable.
One is a resident individual for tax purposes if they have a permanent home in Uganda or if they present in Uganda for a period of, or periods amounting in aggregate to, 183 days or more in any twelve-month period that commences or ends during the year of income; alternatively one is a resident individual if they are present in Uganda during the year of income and in each of the two preceding years of income for periods they average more than 122 days in each such year of income.
The income tax levied on individuals is progressive depending on the amount of income generated with a higher limit of 40% subject to the allowable non-taxable thresholds.
Taxation of Companies
Companies that generate taxable income in Uganda are subject to an income tax at a rate of 30%.
Corporate taxation is based on a self-assessment regime and is payable in two equal installments. The first installment is payable six months after the start of the accounting period of the company and the second installment at the end of the accounting period.
Companies are generally allowed deductions for expenses which they incur wholly and exclusively in the production of income which is included in their gross income. Expenses specifically allowed by the Act include:
- Bad debts written off. Bad debts are deductible only to the extent that the Commissioner of Domestic Taxes Department is satisfied that they have become irrecoverable. The Department normally requires evidence either of inability by the debtor to pay, for example, bankruptcy, or insolvency, or that the company has taken significant legal steps to recover the debt to no avail;
- Capital allowances; which include initial investment deductions, industrial buildings allowance, and farm works allowance;
- Expenses incurred prior to the commencement of business that would have been deductible if incurred after the date of commencement otherwise classified as startup costs;
- Interest paid on borrowings made to generate investment income;
- Legal and other costs incurred in issuing shares or debentures to the general public;
- Scientific research expenditure;
- Training expenditure for a citizen or permanent resident of Uganda; and
- Repairs and minor capital equipment expenditure.
On the other hand, companies are not allowed a deduction of certain expenses regardless of whether they were incurred in the generation of income or not. Under the Income Tax Act, these include:
- Personal expenses: these include personal or private expenses, including entertainment, hotel and restaurant expenses, vacation expenses, education fees for employees’ children, and club subscriptions;
- Capital expenditure or losses;
- Income taxes;
- Fines and penalties levied for breach of any law;
- Expenditure or loss which is recoverable under any insurance, contract or indemnity;
- Any income carried to a reserve fund or capitalized in any way; and
- Gifts to an individual where the gift is not included in the individual taxable income;
Business with non-resident persons
Profits from businesses carried on in Uganda by non-resident persons are generally liable to tax at the rate of 15% withholding tax on gross income.
Uganda has Double Taxation Agreements with the following countries: United Kingdom, Norway, Denmark, Italy, India, Mauritius, South Africa and Netherlands which provide for reduced treaty rates on various income streams subject to certain conditions.
Other tax considerations
Uganda imposes various customs duties on goods imported into the country. The rates levied on each good depend on its classification as per the Universal Harmonized Tariff System. The applicable rates now are as highlighted in the East African Customs Union tariff book. The general external tariffs are 0% for raw materials, 10% for semi-finished goods, and 25% for finished goods.
Uganda also has Value Added Tax (VAT) which is levied on supply or importation of taxable goods and taxable services. There are however goods which are exempt. The VAT rate is either 18% or 0% depending on the type of supply.
There is also Stamp Duty that is levied on a wide range of instruments and documents under the Stamps Duty Act. Duty is charged either ad valorem (1%-2%) or at a rate (UGX 15,000 – 100,000).
Foreign Exchange Regulation
Uganda does not have strict foreign exchange regulation. There are therefore no specific rules that relate to repatriation of funds. Payment of dividends and/or repatriation of funds in any form has no restriction for as long a one meets the substance of the transaction that leads to the flow of funds.
Following the enactment of the Anti-Money Laundering Act, together with the Anti-Money Laundering Regulations, the Financial Intelligence Authority (FIA) requires declaration of source of funds for purposes of preventing money laundering in order to meet its objective.
Therefore, persons intending to transport or carry into Uganda currency or negotiable monetary instruments equivalent to or in excess of UGX 30,000,000/= are required to declare the particulars of such currency or instruments to Uganda Revenue Authority at the port of entry or exit.
Data Protection and Privacy
Uganda’s Data Protection and Privacy Act (DPPA) 2019 commenced on 3 May 2019. In terms of application/territorial reach, the Act applies to entities which collect and process personal data in Uganda, and outside Uganda in relation to Ugandan citizens. For entities outside Uganda, no business threshold test applies, and the compliance trigger is simply the collection of personal data relating to a Ugandan citizen. The DPPA creates a registration requirement. The Act provides that the regulatory authority (National Information Technology Authority) shall keep and maintain a data protection register.
Uganda’s legal system is closely aligned to the English legal structure and system due to historic ties. The supreme law in Uganda is the Constitution of the Republic of Uganda, 1995 (as amended), followed by Acts of Parliament and accompanying statutory instruments made under the respective Acts of Parliament. English common law and English doctrines of equity retain a privileged position in Uganda’s legal system and are specifically recognised as sources of law (subordinate to written law).
The main courts of record are the High Court, Court of Appeal and Supreme Court. Subordinate courts include the Magistrates Courts, while several tribunals exercise significant judicial and quasi-judicial functions.
Ugandan law protects foreign investors, with the exception of a few globally recognised deviations in strategic sectors such as oil and gas. Foreign investors also enjoy constitutional and statutory protection, expropriation and deprivation of property, and such foreign investors have unrestricted equal access to the courts of law to enforce legal rights.
Uganda is under a multi-party democratic dispensation. Uganda follows the universal suffrage system where all adult citizens, regardless of wealth, income, gender, social status, race, ethnicity, political stance, participate in the electoral processes.
Uganda’s legal and policy framework supports the existence and free operation of civil society organisations but with increasing regulation to ensure their activities are not subversive. Uganda acknowledges and promotes gender equality and women’s rights. It has a number of policy frameworks that promote affirmative action.
If you have any questions to the above or if you are considering doing business in Uganda, please contact Ms. Birungi Kaburara at email@example.com, a partner or firstname.lastname@example.org or visit www.ortusafrica.com to read more about Ortus Advocates.