The Court of Appeal has delivered a major ruling in favor of the Uganda Revenue Authority (URA), upholding a withholding tax assessment of UGX 24.2 billion against ATC Uganda Limited. The case involves a shareholder loan from ATC’s parent company, UTI B.V., in the Netherlands. The seven-year loan, valued at USD 124.5 million and carrying interest of 6.56% per annum, was used to acquire MTN Uganda’s communication towers business. The loan agreement allowed interest to accrue and be added to the principal rather than paid in cash immediately.
URA, following an audit for the period 2012 to 2017, assessed ATC for withholding tax on the accrued interest. ATC objected, arguing that tax should only be applied when interest is actually paid, not when it is capitalized. The Tax Appeals Tribunal and the High Court dismissed ATC’s objections, and the company appealed to the Court of Appeal.
The key issue was whether capitalizing deferred interest triggers withholding tax, even without cash payment. Lady Justice Stella Alibateese, in the lead judgment, explained that when ATC added accrued interest to the principal, it conferred value to the lender at the end of each interest period. This constituted payment of interest for tax purposes, triggering withholding tax, regardless of actual cash transfer. The court clarified that the phrase “when paid,” as used in Section 47 of the Income Tax Act, includes capitalization of interest.
ATC also argued that using the financial statements of a foreign parent company to justify Uganda’s tax assessment was inappropriate. The court disagreed, noting that under the Netherlands-Uganda Double Taxation Agreement, Uganda has the authority to tax interest and verify assessments using the lender’s records.
Justices Eva K. Luswata and Byaruhanga Jesse Rugyema agreed with the lead judgment, resulting in the dismissal of ATC’s appeal with costs awarded to URA.
Commenting on the decision, the Commissioner Legal Services and Board Affairs, Mrs. Catherine Donovan Kyokunda, said:
“This is a testament to the quality of assessments and work done by the URA, which has ensured victory right from the Tribunal up to the Court of Appeal.”
URA’s Commissioner General, Mr. John Musinguzi, further stated;
“This judgment underscores URA’s commitment to ensuring that all tax payable is identified, assessed and collected. In the instant case, the use of exchange of information enabled insight into dealings and financials of the parent company in the Netherlands which information was crucial in determining the tax payable. URA will continue leveraging all avenues of cooperation and information sharing to ensure that tax is paid where it is due regardless of where the transaction happens.”
This landmark ruling confirms that even when interest is not paid in cash but added to the loan principal, Ugandan law treats it as a taxable event. Businesses involved in cross-border loans must take note to avoid significant tax liabilities.
