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MARK RUHINDI
This fiscal year’s tax amendments included certain key amendments that have been hailed as a critical step in the right direction for tax administration, and particularly the tax exemptions provisions targeting start-ups and similar fledgling businesses.
The amendments introduced new tax law aimed at fostering and supporting well formalised entrepreneurship, in the form of an income tax exemption for Uganda Citizen owned businesses started after 1st July 2025, for three-years.
Its practical application however requires a precise understanding of how the Uganda Revenue Authority (URA) interprets “new business,”, “associated entities,” and “Compliance” among other tax nomenclature. Yes, as with all incentives, opportunity lies in the detail. This article seeks to address this detail.
Timely and Commendable Amendment
The exemption is in my opinion very sound tax policy and a positive legislative agenda towards ensuring a smother entrepreneurship journey for new entrepreneurs and will address some of the quarrels we have had between government and the business community, at least as far as unfavorable taxation policies are concerned.
This is the most direct tax relief ever extended to small Ugandan businesses. Registrations and timely application for exemption status is therefore critical for businesses falling under the category.
Prior to the amendment, the Income Tax Act did not contain any tax exemptions for new businesses deemed ‘’start-ups’’ in the general sense. The bulk of exemptions in law were targeted at medium to large investors in the form of investment incentives.
Historically, fiscal incentives in Ugandan law have been sector focused or geared at promoting investment in what are considered strategic economy sectors. These have included promoting both domestic and foreign investment, industrialization, job creation, value addition to local raw materials, export promotion, promotion of tourism, development of industrial parks or free zones. Investors establishing new factories, hotels and tourist facilities among others, have benefited from these exemptions.
Perhaps the only incentives we had in the law targeting start-ups worth mentioning are those introduced last year targeting Private Equity and Venture Capital funds providing capital to Start-Ups.
The exemption is however contingent upon these conditions:
- The business is majority owned by a citizen or citizens and registered with an investment capital not exceeding five hundred million shillings.
- The citizen or their associate has not previously benefited from the exemption; and
- The citizen files tax returns, including business information returns as required elsewhere in the law.
A citizen in this case is a natural person with Ugandan Citizenship or an Entity which is majority controlled by Ugandan Citizens.
‘Starting Afresh’ Isn’t Actually Starting Afresh
What happens if an entrepreneur seeks to “reset” their tax exposure by transferring lucrative sole trader or partnership activities to a new entity, effectively qualifying as a business commenced after 1st July 2025.
Where the “new” company is effectively a continuation of an existing business through the same ownership, management, assets, or clientele.
URA might disregard the separation and treat the new entity as a continuation of the old operation, through the long-standing anti-avoidance rules which empower the Commissioner to re-characterize transactions designed primarily to avoid tax. URA would thus deny exemption status on this basis.
However, for the reason that the new law contains no separate guard rails against any such tax avoidance attempts, my speculation is that a large number of well advised taxpayers are likely to get away with this kind of restructuring.
Failure to comply with requirements for tax exemption
This exemption is by no means a blanket tax exemption. Only those businesses that are able to discharge the compliance burden cast upon them elsewhere in the law will be able to benefit, and to receive the Commissioner’s Exemption certificate.
The Tax Procedure Code Amendment introduced new provisions in Uganda’s tax procedure that will deny exemption status to exempt taxpayers who fail to discharge their compliance burden elsewhere in the law.
Perhaps most important to note is that these amendments collectively, are a trojan horse that enables the government to collect third party transaction information from exempted taxpayers, which may be relied upon by the Taxman to assess their third party trading partners to tax; and most importantly, to ensure transparency and to weed out tax avoiders.
You can read my recent commentary on the role of third party transaction data in tax administration here.
Comply or Lose the Exemption
It follows therefore that citizens who are sought to be exempted will still be under an obligation to furnish a tax return for the period sought to be exempted. A taxpayer who fails to discharge this obligation will be liable to pay the tax due for the period for which the taxpayer fails to comply.
URA Tax administrators are often under immense pressure to meet targets and therefore, the conditions tied to these exemptions will often almost by default, always be invoked, even on a whim, in order to assess a qualifying businesses to tax.
Taxpayers will without a doubt need hand holding by professionals in order to be able to navigate the exemptions regime in a manner that ensures they are able to discharge the compliance burden cast upon those intending to pursue exemption status.
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