Sophie Kayemba, the senior tax manager at PwC.
Uganda’s Small and Medium Enterprises (SMEs) may be ready to smile come July 1, 2025 because for the first time, the government is looking to incentivise and directly uplift small businesses, unlike in the past where incentives have mostly targeted strategic investors.
According to the Income Tax Amendment Bill, 2025, the income of a business established by a citizen after 1 July 2025, will be exempt from tax for three years (if the proposal is passed into law).
For any business to qualify, the following condition must be met:
First, the business must be established by a citizen after July 1, 2025. Unfortunately, this means only new businesses will qualify. Existing businesses will not qualify for the exemption.
The Income Tax Act, Cap 338 (which is the current tax law that governs the taxation of income of a person doing business in Uganda) defines a citizen to mean a natural person who is a citizen of a partner state of the East African Community (EAC); or a company or a body of persons incorporated under the laws of an EAC partner state in which at least 51 percent of the shares are held by a person who is a citizen of an EAC partner state.
This implies that in addition to businesses of Ugandan citizens, businesses in Uganda set up by citizens of Kenya, Tanzania, Rwanda, Burundi, Somalia, Democratic Republic of Congo, and South Sudan will also quality for the exemption, including any business in which a citizen of any of the above states holds at least 51 percent shareholding.
Secondly, to qualify for the exemption, the registered investment capital of the citizen must not exceed Shs500 million. This is perhaps the most exciting condition for any prospective small business because, until recently, most income tax exemptions granted to citizens have had conditions that include a requirement to invest a minimum capital requirement of at least $300,000 (or $150,000 if upcountry) in specific locations and in specific activities such as agro-processing, manufacturing of specific items, among others.
The proposed exemption applies to investments of Shs 500 million or less, with no restrictions on the type of business or location. However, the Bill does not clarify what happens if an investor increases their capital above Shs 500 million during the three-year exemption period.
The third condition requires that neither the citizen nor their associate has previously benefited from the exemption.
The Income Tax Act defines the term Associate to include, among others, a relative of the person, except where the Commissioner General is satisfied that neither person acts per the directions, requests, suggestions, or wishes of the other person.
While this condition seems straightforward, given our African family setting, it could complicate things for family members whose income tax exemptions may be denied simply because a sister, brother or father has already benefited from the exemption. Proving that they are not “associates” for tax purposes may be difficult, depending on the circumstances.
On the other hand, it implies that one cannot benefit from the exemption more than once. However, does this apply to different businesses registered by a citizen at the same time where the aggregate investment capital is below Shs500 million? To avoid complications with the taxman, would it be advisable to register a single business but operate these different businesses as branches?
The fourth and last condition for a citizen to qualify for the exemption is that the citizen should file tax returns, including a business information return in the format prescribed by the Commissioner General. Currently, the Uganda Revenue Authority (URA) has not yet issued or prescribed the business information return form.
Whereas the requirement to file tax returns sounds like a given, tax compliance has long been a hurdle for many small businesses. Many are informal and unregistered, do not keep proper records such as issuing invoices or obtaining invoices to support revenue earned or expenses claimed, and do not file tax returns. In short, an SME cannot operate under the radar and hope to benefit from the proposed exemption.
Consideration could be given to extending the three-year exemption period to five years, as many small businesses are typically loss-making in their early years. Additionally, increasing the investment threshold from Shs500 million could expand the scope of the exemption.
Also, the exemption alone may have little impact if other aspects of the general operating environment that increase the cost of doing business, such as high cost of accessing capital, high occupancy (rent) costs, and poor infrastructure, are not tackled; not forgetting mismanagement, and poor governance hurdles that often befall small businesses.
Sophie Kayemba is a senior tax manager at PwC Uganda.
