Court rules in favour of BoU in Shs100m tax dispute 

The High Court has dismissed an appeal filed by the Uganda Revenue Authority (URA) against the Trustees of the Bank of Uganda Defined Benefit Scheme, upholding a decision made by the Tax Appeals Tribunal (TAT) that the Scheme is a Settlor Trust and should not be subject to direct tax assessments.

The three-year dispute centred on URA’s determination that the Bank of Uganda Defined Benefit Scheme, a retirement benefits fund, should be taxed, although its settlor, the Bank of Uganda, is tax-exempt under the Income Tax Act. The Scheme argued that it should also be exempt from tax under the same provision, given its close association with the Bank of Uganda.

The Bank of Uganda Defined Benefit Scheme receives contributions from both the Bank of Uganda (17.1 per cent) and its employees (4%). In 2016, the Scheme, through its lawyers of Ligomarc Advocates, sought a Private Ruling from URA, asserting that it was a Settlor Trust under Section 71 of the Income Tax Act, and therefore its income should be tax-exempt. However, URA disagreed, issuing tax assessments totalling UGX 106 million, arguing that the Scheme was a taxable entity under the Income Tax Act.

The matter was subsequently taken to the Tax Appeals Tribunal, which ruled in favour of the Scheme, classifying it as a Settlor Trust and shifting the tax liability to the Bank of Uganda, the Settlor. URA appealed the ruling to the High Court.

The High Court considered two central issues on appeal: whether the Bank of Uganda Defined Benefit Scheme qualifies as a Settlor Trust and whether the Scheme’s income is exempt from income tax.

On the first issue, the court agreed with the Tribunal’s decision, confirming that the Bank of Uganda retains a reversionary interest in the trust upon its termination, as outlined in the trust deeds. This met the legal criteria for a Settlor Trust under Section 70(f) of the Income Tax Act, which defines such a trust as one where the Settlor has a reversionary interest in the corpus or income.

Regarding the second issue, the court clarified that the Tax Appeals Tribunal did not declare the Scheme itself tax-exempt. Instead, it found that the tax liability should rest with the Settlor (Bank of Uganda), not the trustees or the Scheme itself. While the Court acknowledged the issue of whether a tax-exempt entity could be liable for Settlor Trust taxes, it refrained from addressing this matter due to procedural limitations.

Court Decision

In his judgment, Justice Phillip Odoki dismissed the appeal, affirming the Tax Appeals Tribunal’s decision in favour of the Trustees of the Bank of Uganda Defined Benefit Scheme. Justice Odoki ruled that the tax assessment against the Scheme was erroneous and should have been directed at the Bank of Uganda, as the Settlor.

This case has significant implications for tax law and retirement funds in Uganda. Tax practitioners should note that a trust qualifies as a Settlor Trust if the Settlor retains a reversionary interest upon termination, even if they do not hold revocation powers.

The tax liability of a Settlor Trust is borne by the Settlor, not the trustees or the trust itself.

Exemptions must be explicitly stated in the law; the tax-exempt status of the Settlor does not automatically extend to the trust.

The High Court, in its appellate jurisdiction, cannot rule on issues not raised in the Tax Appeals Tribunal.

This ruling highlights the importance of clear legal frameworks and procedural diligence in tax matters, especially when dealing with complex structures like Settlor Trusts.

The Trustees of the Bank of Uganda Defined Benefit Scheme were represented by Ligomarc Advocates, with a team led by Ruth Sebatindira SC, Olivia Kyarimpa, and Damalie Izaula.