The jackpot in the 2024 tax proposals

While presenting the National Budget for the 2024/25 Financial Year, the Minister of State for Finance, Planning and Economic Development (General Duties) accompanied the same with proposed amendments to the various tax laws. 

Generally, the tax proposals have drawn mixed reactions among different tax policy analysts, however, that notwithstanding, the proposal to exempt income derived from or by private equity or venture capital funds regulated by the Capital Markets Authority (CMA) will greatly influence and shape the private investment landscape in Uganda.

If this proposal is passed into law, it will significantly reform the taxation framework of private equity and venture capital funds in Uganda, there-by aligning the Ugandan tax regime with the principle of tax neutrality which should eliminate the tax disadvantages currently faced by private equity funds, but at the same time provide an effective tax incentive to encourage both local and foreign investment in the Ugandan private equity space.

Many private equity and venture capital funds logically tend to domicile in countries that offer tax incentives for private capital investments, some analysts choosing to call them “tax havens”. 

A unique feature of “tax havens” is the presence of a tax system that offers very low effective tax rates on certain forms of investments. I would argue that they do so to achieve a certain end goal. 

In fact, a fund manager faced with a decision on where to domicile a private equity fund will most certainly opt for a country, whose policies and laws are intentional about attracting that private equity investment. It is therefore necessary for any country that seeks to achieve particular policy objectives to align the same with its regulatory framework.

The Ugandan government has always been intentional about encouraging public and private investments that align with national development priorities. 

Private equity and venture capital funds provide that much needed capital to stimulate private investment in a country and by domiciling in a country, they make access to that capital easy.

Notably though, domiciling a private equity and venture capital fund in any country is largely driven by its regulations, tax, reputation, macroeconomic changes among so many others factors.

Currently, the law requires private equity and venture capital funds to be registered as limited liability companies, and since they do not have a special taxation regime, will be taxed like any other corporation doing business in Uganda. 

However, given the nature of their business structures, these entities are normally holders or pass-throughs for capital, and by taxing them as any other corporation potentially results in double taxation of their income. This is what discourages structuring private equity, and venture capital transactions in companies domiciled in Uganda. 

According to the Capital Markets Quarterly Bulletin for the Quarter ended June 2023, there is only one venture capital fund registered with the Authority.

The proposals to exempt income of private equity and venture capital funds regulated by the Capital Markets Authority (CMA) as well as a parallel forward-looking proposal to exempt from stamp duty, transfer of shares or other securities to an investor in a private equity or venture capital fund, are a welcome move by the government since this will give private equity and venture capital funds a tax neutral status but most importantly incentivize their domiciliation in Uganda.

With these proposals passed into law, we should expect a reduced initial cost barrier for investors, making it financially more viable to invest in Ugandan start-ups and SMEs. 

We anticipate seeing a drastic increase in private equity and venture capital funds domiciling and operating in Uganda which, as a result, will not only avail the much-needed capital for private investment but also ease access to alternative capital.

Mr Augustine Kiggundu is a partner at Ortus Advocates.