Your withholding tax obligations when purchasing real estate property

If you have recently bought a piece of land, a house or any kind of real estate, you probably have found yourself at the receiving end of a phone call from the Uganda Revenue Authority (URA).

A friend was recently excited about purchasing a home from a property developer. When she found out about her obligation to withhold 6 percent from the purchase price, she raised the matter with the developer. Let’s say it was a deal breaker.

This is not an isolated case. Withholding tax on property purchases is an area that is misunderstood by many, some deliberately and others mistakenly.  Questions that are often asked include: Who should bear the withholding tax and under what circumstances is withholding applied?

Financial intermediaries such as banks have also not been spared. For example, where a bank sells mortgaged property to recover the balance of a loan from the borrower. Who should bear the withholding tax burden? Should it be the bank or borrower?

First, one has to consider how withholding tax works. Withholding tax is imposed on suppliers of goods and services that is persons earning or generating income from a business activity. The withholding tax is applied to income earned in circumstances where the recipient might otherwise avoid declaring the income earned. The person who withholds the tax (the purchaser) is merely a collecting agent. Their role is to collect the tax and remit it to the revenue authority on behalf of the seller.

In 2019, the tax law was amended to require every resident person who purchases a business asset to withhold tax at a rate of 6 percent on the gross payment. A business asset is defined by the tax law to mean an asset which is used or held ready for use in a business, and includes any asset held for sale in a business and any asset of a partnership or company. Therefore, for the withholding tax to apply, the seller must be carrying out a business and the land, house or asset that they are selling must be one that is used or held ready for use in the business (an amendment to this law has been proposed by the Income Tax Bill, 2022)

Take the example of my friend who wanted to purchase a home from the property developer. In this scenario, the developer is in the business of developing properties for sale. Therefore, the home for sale falls within the definition of a business asset above as they were holding the house(s) for sale in their property development business. This is a straightforward scenario where the seller (the developer) is carrying on a business, he disposes of a business asset and the purchaser is required to withhold part of the proceeds and remit them to the URA as tax paid by the seller. 

Would it be different if the seller was not a developer but an individual selling their family home? I believe it would be.  An individual selling their home is not selling a business asset because owning a home is not a business activity.

In the case of the mortgaged property, establish the nature of the property being sold. Nonetheless, it is the borrower who is the seller and should bear the withholding tax cost and not the bank, which is an intermediary.

The author, Crystal Kabajwara, is a business advisor with PwC Uganda.