Understanding Tax on Interest in International Payments in Uganda


Financing is a core part of running business and in Uganda, debt financing is a popular one.

Currently, Uganda’s Central Bank lending Rate is at 10% which implies that Commercial Banks’ Rates are higher. This induces businesses to look elsewhere for more affordable loans (usually foreign sources).

It is also common knowledge that loans attract interests and such interest payments attract taxes. The uncertainty is when this tax is due.

Section 83(1) of the Income Tax Act imposes a tax on every non-resident who derives any interest from sources within Uganda. This interest is deemed to be sourced from Uganda if the debt obligation giving rise to the interest payment is secured by either movable or immovable property used or located in Uganda, the payer is a resident of Uganda or the borrowing relates to a business carried on in Uganda.

Generally, Section 83(2) of the Act imposes a 15% withholding tax on such an interest payment and in cases where there is a Double Taxation Treaty with a country where the non-resident is and in Uganda, the rate is usually 10%.

So when does the duty to pay this tax on interest sourced by a non-resident in Uganda arise? Section 47(2) of the Income Tax Act provides that such tax will be paid or payable when the interest is paid.

This provision has been in controversy and subject to interpretation on several occasions by both the Tax Appeals Tribunal and Kenyan Courts. A review of these decisions follows.

In ATC vs. URA TAT Application No.17 of 2019, the applicant had obtained a $124,500,000 loan at a 6.5% from its holding company UTI incorporated in Netherlands.

Per the Shareholder loan agreement, it had been agreed that whenever the interest accrued it would be capitalised and added to the outstanding principal amount.

The applicant (ATC) argued that it never paid any interest to UTI while URA contended that withholding tax was due as soon as it accrued or became payable.


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In determining this issue, the Tribunal noted that withholding tax is due when the interest is paid and not when it accrues.

It further noted that the conversion of interest into capital amounted to payment as this increased the value or conferred a benefit to UTI.

The Tribunal emphasized that payment is not limited to exchange of monies from a debtor to a creditor but this had evolved and includes a relief of a debt, a swap of a debt of obligation or even conversion of a debt to equity among several others.

In another case, AFGRI (U) Ltd vs. URA TAT Application No.18/2019, the applicant had obtained a loan from its holding company AFGRI Agri Services Mauritius. The Tribunal having found that the debentures that had been issued by the applicant were taxable, it had then to determine whether the applicant was liable to withhold tax on the interest paid.

While citing ATC vs. URA, the Tribunal noted that since the applicant had expensed the interest in its income statements of 2015, 2016, and 2017 as a financial cost, the interest had been paid and the duty to withhold tax on it had accrued then.

In neighbouring Kenya, the Court of Appeal in Kenya Revenue Authority vs. Republic (EX-Parte Fintel Ltd) Civil Appeal No.311 of 2013 also addressed a similar issue.

The respondent had provided for the accrued interest payable to a Chinese company in its statement of profit or loss for the year which resulted into KRA’s demand for withholding tax.

Court observed that the word “paid” as used in the Income Tax Act would be given a technical meaning and not the ordinary one. It also noted that payment does not only mean exchange of money and that Kenya’s Tax accounting system is an accrual one like Uganda’s.

The Court then concluded that by accounting for the interest in its Statement of Profit or Loss, the respondent had reduced its tax liability and thus should have withheld tax on that payment.

Having reviewed some of the leading authorities in Uganda and Kenya, it is concluded that the duty to withhold tax on an international payment of interest arises when it is paid.

It has also been seen that payment not only means exchange of money but can also take other various modes such as conversion of a debt into equity and set offs among others.


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