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MARK RUHINDI
The real estate sector is one of the key drivers of Uganda’s economy.
Until recently, commercial activities in this sector have not been subjected to the same level of tax scrutiny as other lucrative industries, largely due to the informal character of the bulk of transactions and real estate activities generally.
This is changing. The Uganda Revenue Authority (URA) has taken decisive steps to close tax leakages in the sector. One of the most significant developments is the recent gazetting of an instrument by the Commissioner General mandating taxpayers in the real estate sector — along with other key sectors named — to issue EFRIS e-invoices.
We therefore do predict that in the coming months, we will be seeing more and more tax controversy arising out of real estate commercial activities.
Here are critical points to note, Specifically for Tax Payers in Real Estate:
- Unlike under Capital Gains Tax, One-off Real-Estate transactions may be subject to VAT.
- However, one-off trades may also be subject to Capital Gains Tax as long as there’s a provable enterprise with both a capital and a revenue side. This may not necessarily be active buying and selling of property.
- It may be necessary for taxpayers in real estate to take a tax opinion prior to undertaking any high stakes real estate transaction henceforth.
What This Means for Real Estate Taxpayers
- Formalization of Activities
Taxpayers will now need to fully formalize their operations to ensure compliance under various tax heads, including Stamp Duty, VAT, and Income Tax/Capital Gains Tax. - VAT on One-Off Transactions
Unlike under Capital Gains Tax, certain one-off real estate transactions may still be subject to VAT. In the recent TAT decision of Nzeyi v URA, the deciding point was insufficient evidence to prove the existence of “an enterprise.” - VAT obligations should not be confused with Capital Gains Tax, which is levied under the Income Tax Act.
- VAT obligations in real estate transactions are hinged on whether a transaction a standard rated or or an exempt supply.
- A single transaction can put a taxpayer into the VAT Category.
- Capital Gains Tax Considerations
Even one-off trades can attract Capital Gains Tax if there is a provable enterprise with both a capital and a revenue side — this does not necessarily require active, ongoing buying and selling of property. - Transaction Structuring and Tax Opinions
Given these changes, it is now critical for taxpayers to seek professional tax opinions before engaging in any high-stakes real estate transactions. This will help mitigate liabilities both from a transaction structure standpoint and a broader long-term strategic perspective.
Expect More Tax Audits and therefore Disputes
We expect more audits in the Real Estate Sector, targeting transactions that have since been concluded and those to be concluded going forward. And so Taxpayers in real estate may now need to take steps to fully formalize their activities for compliance purposes under the different tax heads.
One of the critical initial steps of assessing the commercial viability of a transaction is to appreciate the tax implications likely to flow from the transaction on both sides.
Taxpayers may therefore need to take more interest in understanding tax implications likely to flow from transactions, across all tax heads including Stamp Duty, Income Tax/Capital Gains Tax, and VAT prior to transacting.
Taxpayers will also need to take advisory opinions on how best to mitigate those liabilities both from a transaction structure standpoint and an entity/taxpayer strategy standpoint.
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