Taxation of Dividends in Uganda: An overview of regulation and tax Implications

Introduction.

The Companies Act 2012 provides that a company shall not pay a dividend or any other distribution to its members except out of the realized profits available for that purpose. Dividends are declared and paid to shareholders who have paid for their shares. Therefore, a dividend can be defined as a portion of a company’s declared profits relative to the members’ shareholding.

Dividends under Income Tax Act

The Income Tax Act gives a broad definition of what amounts to a dividend for tax purposes which captures payments which may not fit within the company law definition. This is intended to limit tax avoidance which may arise by disguising dividends as other payments. Dividends are defined under the tax statute to include:

• Where a company issues debentures or redeemable preference shares to a shareholder for no consideration, then the amount equal to the greater of the nominal or redeemable value is considered as a dividend, or if there is less consideration, then the amount equal to any excess.
• ?Any distribution upon redemption or cancellation of a share, or made in the course of liquidation, in excess of the nominal value of the share redeemed, cancelled, or subject to liquidation.
• ?In the case of a partial return of capital, any payment made in excess of the amount by which the nominal value of the shares was reduced.
• ?In the case of a reconstruction of a company, any payment made in respect of the shares in the company in excess of the nominal value of the shares before the reconstruction.
• ?The amount of any loan, the amount of any payment for an asset or services, the value of any asset or services provided, or the amount of any debt obligation released, by a company to, or in favour of, a shareholder of the company or an associate of a shareholder to the extent to which the transaction is, in substance, a distribution of profits, but does not include a distribution made by a building society.
• ?The issue of bonus shares to shareholders. However, bonus shares shall only be taxable upon disposal.

Withholding tax Obligations

1. Dividends paid to resident shareholders

The Income Tax Act places a withholding obligation on a resident company which pays a dividend to a resident shareholder at a rate of 15% on the gross amount of the payment.

Where the resident company is listed on the stock exchange and is paying dividends to resident individuals the company would withhold 10% on the gross payment.

For individual shareholders, the withholding tax is a final tax while for corporate shareholders, the dividends are included in the gross income from which allowable expenses are deducted to ascertain the chargeable income of a person which would be taxable. The tax withheld is a tax credit to the corporate shareholder.

There is, however, an exemption for dividends paid by a resident company to another resident company where the company receiving the dividend controls directly or indirectly 25% or more of the voting power in company paying the dividend.

In the case of Rwenzori Highlands Tea company v URA TAT 10 of 2001, TAT observed that withholding tax on dividends is due and payable when the dividends are declared and not when paid. This is in tandem with the accrual method of accounting.

2. Dividends sourced in Uganda

These are dividends paid by a resident company to a non-resident person. The Income Tax Act imposes a 15% tax on the gross amount of the dividend derived by a non-resident person. The Income Tax Act further obliges the resident company paying a dividend to withhold the tax on the payment.

However, the statutory tax rate is subject to international double tax agreements (DTAs) which may provide for lower rates. For example, an Indian resident shareholder in a Ugandan Company would be charged at a rate of 10% based on the DTA between Uganda and India.

Dividends and Anti avoidance rules

In a business world characterized by complicated tax avoidance schemes, the Income Tax Act grants the Commissioner powers to recharacterize any tax avoidance transaction for purposes of determining liability to tax. This power was used in the case of URA v Downtown Forex Bureau Ltd and others HCCA No 23 of 2013, where the company paid the directors exorbitant bonuses while the declared profits were low. The court held that these payments were rightly recharacterized as dividends by URA.

Conclusion.

A declaration of dividends by a company gives rise to the tax implications explained above. It is therefore advisable for any company to consult a tax advisor on the implication of a given declaration and payment of dividends or related distributions out of the company’s profits.