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Income earned on loans cannot be taxed, court rules
Money earned from a loan contract, court says, is a refund and cannot be treated as an income. Photo / File
What you need to know:
- According to court, proceeds of a loan agreement cannot be treated as an income to a financial institution, but a refund in fulfilment of a loan contract
The Commercial Division of the High Court has ruled that money repaid for a loan facility cannot be subjected to withholding tax since it is a refund of cash advanced to a customers.
The ruling by Justice Thomas Ocaya also indicated that such money cannot be treated as an income to a financial institution, but a mere refund in fulfilment of a loan contract between the financial institution and the borrower. The loan agreement, court held, is classified as a financial instrument or a non-financial asset, depending on the nature of the mortgage.
“This court hereby makes a declaration that interest income is exempt from withholding tax under … the Income Tax Act,” Justice Ocaya ruled, noting that if a mortgage is classified as a financial instrument, then the accounting guidance for financial instruments, as set out in law, would have recognise loan as a financial asset and the borrower’s obligation to pay as a financial liability.
The ruling resulted from an appeal, in which Luwaluwa Investments had challenged a decision of the Tax Appeals Tribunal that had held that the sale of Afrique Suites was a business asset, saying the tribunal disregarded the mode of acquisition of the property, which was through a public auction.
On September 23 2022, the Tax Appeals Tribunal ruled in favour of Uganda Revenue Authority and ordered Luwaluwa Investments to pay more than Shs965m as withholding tax.
The Shs965m had been assessed against Luwaluwa by URA in respect of purchase of Afrique Suites in Mutungo, Nakawa in Kampala.
In his ruling Justice Ocaya said that Section 118B (2) conflicts with Section 117 (2) (b) of the Income Tax Act in as far as it seeks to impose withholding tax on interest collected by way of sale of mortgaged property.
Court has now ordered URA to refund Luwaluwa Investments the amount paid as 30 percent tax in accordance with Section 15 of the Tax Appeals Tribunal.
Through its lawyers, Luwaluwa Investments had appealed to the High Court faulting the Tax Appeals Tribune for holding that purchase price is interest in complete disregard of the Income Tax Act, which states that interest retains its character for the purpose of any section of the same law.
Court documents indicate that Luwaluwa acquired Afrique Suites by way of public auction from Equity Bank, which had sought to recover outstanding loan amounts from mortgaged property formerly owned by Simbamanyo Estates.
Simbamanyo Estates had borrowed more than $10m from Equity and as part of the various securities pledged to secure the said loan, Simbamanyo registered five properties among them Afrique Suites.
Court document show that Simbamanyo defaulted on its loan obligations, which forced Equity to foreclose on the mortgage, before placing adverts for the sale Afrique Suites by way of a public auction to recover the outstanding loan amounts.
The case
The ruling resulted from an appeal, in which Luwaluwa Investments had challenged a decision of the Tax Appeals Tribunal that had held that the sale of Afrique Suites was a business asset, which disregarded the mode of acquisition of the property, which was through an auction.
