In 2018, government implemented a policy known as deemed disposal that sought to tax offshore transactions that significantly change the structure of a Ugandan company. Photo / File
In 2018 government designed the “deemed disposal” rules to tax offshore deals that quietly shift control of Ugandan companies.
The rules sought to close a sneaky loophole through which billions were slipping out to offshore markets through a complicated web of share transfers.
These rules, tucked inside the Income Tax Act, were based on a global rule of thumb: if you’re effectively selling Ugandan assets - even if it’s behind a curtain - Uganda wants its cut.
Nearly seven years later, the rules finally faced their first big courtroom showdown in Enviroserve Vs Uganda Revenue Authority (URA).
The case didn’t just interpret the law - it pulled back the curtain on how tricky it is to catch tax when ownership is hidden behind secretive companies, nominee directors, and layers of corporate smoke.
The case that cracked the surface
At the center of the case is Enviroserve, a local waste management company partly owned by South Africa-based EnviroServ Waste Management.
Like many modern firms, EnviroServ Waste Management sits in a web of parent companies, investors, and holding structures.
In 2022, one of those investors, Rockwood Fund I, a private equity firm, exited. But instead of selling shares in the Ugandan company, it sold its stake higher up the chain - in a South African parent company - to Umzuwili Environmental Solutions, another South African firm.
It looked like a purely offshore deal, but URA saw it differently.
Citing Section 74(2) and 78(h) of the Income Tax Act, URA argued that even though the deal happened offshore, it still triggered a taxable event in Uganda.
Why? Because more than 50 percent of Enviroserve’s indirect ownership in Uganda had changed hands.
Thus, URA issued a tax bill of Shs9.27b, but as expected, Enviroserve objected because the law doesn’t apply to indirect ownership changes - only direct ones, the Uganda-South Africa tax treaty protects such capital gains from being taxed and that even if tax was due, URA’s method of calculating the gain was flawed.
The Tax Appeals Tribunal backed URA, ruling that the deal may have been offshore, but still changed who controlled the Ugandan company.
“The sale of shares in EH Pty, the parent company of EnviroServ Waste Management, resulted in an indirect change of control in Enviroserve Uganda exceeding the 50 percent threshold,” the Tribunal ruling reads in part.
A fiction with real consequences
Uganda’s law creates a bold legal idea: If a company’s ownership changes in a big way - even indirectly - it’s as if the company sold everything it owns.
On paper, it’s a smart way to catch hidden sales and tax them. But in reality, it’s tricky to apply.
So the Tribunal agreed, arguing that even indirect ownership changes can trigger tax. It dismissed the idea that only direct sales matter.
But then came the catch. While URA was right in principle, it made a mistake.
The Tribunal said the method URA used was “technically flawed” - because it didn’t look at the full value of Enviroserve’s assets. Instead, it may have picked numbers that made the gain look bigger than it was.
And that opened up a surprising twist: If URA had followed the law, Enviroserve might not have owed any tax at all - or might even have shown a loss.
So, the law itself held up. But the case raised a deeper question: Can Uganda apply this powerful tax rule correctly, or is it at risk of hurting its case by getting the details wrong?
The dilemma
One of the trickiest parts of the Enviroserve case is where Uganda’s hunger to tax meets the restraint of international treaties.
Under the Uganda–South Africa Double Taxation Agreement, capital gains are generally taxed in the seller’s country of residence - unless the deal involves immovable property or a permanent establishment in Uganda.
Since the seller here was South African, Enviroserve argued that Uganda had no taxing right. The gain, they said, should be taxed in South Africa, not Uganda.
But the Tax Appeals Tribunal took a different view, pointing out that the tax wasn’t being imposed on the South African seller - it was being charged to Enviroserve, a Ugandan tax resident.
Since the legal target was a company based in Uganda, the Tribunal ruled that the Double Taxation Agreement didn’t apply.
From a technical legal standpoint, Uganda was well within its rights. But tax lawyers at Cristal Advocates note that this approach creates a clever but controversial workaround.
“By using a legal fiction to shift the tax burden from non-resident seller to a resident company, Uganda may be seen as achieving indirectly what it could not do directly - taxing a capital gain that - under the treaty, it had foregone to tax,” they argue in an analysis on the case.
And that is where the real tension is. Tax treaties exist to prevent double taxation and give investors certainty.
If countries begin to sidestep treaty limits by simply moving the tax burden onto local entities, the entire treaty framework becomes shaky.
Investors rely on these treaties to manage risk, and when their spirit is stretched - or ignored - it can create hesitation, confusion, and added costs.
This is where the Vienna Convention on the Law of Treaties becomes relevant. It says treaties must be interpreted “in good faith,” not just by what’s written, but also by what was intended, something that brings the agreement’s deeper purpose up for debate.
If Uganda is seen as taxing from the shadows, it risks damaging investor confidence, triggering treaty disputes, and inviting retaliation.
The valuation vacuum
The ruling also exposed a major gap in Uganda’s tax law: there is no clear guidance on how to value assets when applying the deemed disposal rule.
The law says tax should be paid based on the market value of a company’s assets and liabilities when ownership changes significantly. But it never explains how to figure out market value.
Should URA use an independent third-party valuation, take the actual price paid in the offshore deal, or simply come up with its estimate?
In practice, URA has done a bit of everything, but this opens the door to over - or under-taxation, hurting fairness and investor confidence.
And when tax bills are based on unclear or changing methods, it’s hard for companies to know what to expect - or to plan.
And without clear rules, the risk of unfair or mistaken tax assessments grows, and so does the chance of long, expensive disputes.
Trickier corporate restructuring
This isn’t just a one-off tax dispute. The Tribunal confirms that Uganda’s deemed disposal rules can reach through offshore holding structures, piercing corporate veils and chasing ownership changes across borders.
For multinational groups and private equity investors, that means Uganda is watching, even if your deal is offshore.
But the ruling also exposes a shaky foundation because without clear valuation guidelines, rules for apportioning value in consolidated group sales, and defined conditions for rollover relief, both taxpayers and URA are navigating a legal fog - armed with powerful tools, but without a map.
As tax lawyers - Denis Yekoyasi Kakembo, John Teira, Dickens Asiimwe Katta and Bill Page argue: “Whether URA and government will take cue from this … remains to be seen. What is clear … is the current framework leaves room for misapplication and needs attention.”
“Until that comes, corporate restructurings involving Ugandan assets may have to brace for more turbulence - not just from the market, but from URA too,” they add.
The Tribunal’s cautious ruling showed the hard truth: Uganda’s law gives it the power to chase offshore deals, but turning that power into actual tax cash is no walk in the park.
