14 Oct 2019
Section 4: Regulations & Tax Incentives in Rwanda
Fitch Solutions Trade and Investment Risk Index
- The Rwandan government has adopted a relatively business-friendly environment in recent years. However, Rwanda's trade volumes and inward FDI stock levels remain among the lowest in the East Africa region.
- Investors face significant financial barriers due to the country's high credit costs and limited access to international financial markets.
- Overall, Rwanda scores 52.7 out of 100 in the Trade and Investment Risk Index, ranking in first position out of 11 East African states.
Trade and Investment Risk Index: Methodology and Components
- Trade and Investment Risk Index quantitatively compares the challenges of operating in 201 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest risk. Each country has a headline Trade and Investment Risk Index score, which is made up of three categories, further broken down into sub-categories. The individual categories and sub-categories are also scored out of 100, with 100 the best. The overall Trade and Investment Risk Index score is calculated using the average of the Economic Openness, Government Intervention and Legal sub-component scores.
- Economic Openness: Analyses a country's openness to foreign investment and international trade. This is generated from indicators such as import, export and foreign direct investment (FDI) values as a percentage of GDP, which are used as a barometer of openness. A country that is more open to private and foreign businesses will score more highly on this indicator.
- Government Intervention: This score is composed of information on taxation and the availability of financing. The scoring system favours countries which offer lower taxation and open, sophisticated financial markets with easy access to loans.
- Legal: This score reviews the strength, transparency and efficiency of the legal system and bureaucracy in a given country. It measures the extent to which the rule of law is upheld, the prevalence of corruption, and the delays and costs involved with the bureaucratic procedures required to set up a business.
Foreign Investment Climate Overview
The Rwanda Development Board (RDB) was established in 2006 to fast track investment projects by integrating all government agencies responsible for the entire investor experience. Nonetheless, implementation can be challenging due to delays in government payments for services or goods delivered and bureaucratic inconsistencies. Investors often cite tax incentives included in deals signed by the central bank that are not honoured by the Rwanda Revenue Authority (RRA), Rwanda's tax authority, as a serious problem.
The law allows private entities to acquire and dispose of interests in business enterprises. Foreign nationals may hold shares in locally incorporated companies. Foreign investors can acquire real estate, though there is a general limit on land ownership. While local investors can acquire land through leasehold agreements that extend to a maximum of 99 years, foreign investors are restricted to leases up to a maximum of 49 years with the possibility of renewal.
The country offers a highly competitive tax environment, both in terms of the burden of red tape as well as tax rates. Rwanda offers a total tax rate of only 33.2% of profit, relative to 46.8% in Sub-Saharan Africa and 39.8% in the OECD countries. Additionally, businesses benefit from a highly efficient tax bureaucracy, which offers a low number of tax payments, as well as a short timeline for paying taxes. Rwanda made paying taxes easier for companies by reducing the property tax rate and business trading license fee and introducing electronic filing and making its use compulsory.
Incentives for Manufacturing Relocation
Expatriates benefit from an open environment regarding land and foreign ownership. There are no statutory limits on foreign control or ownership, no mandatory screening for foreign investment and foreign investors do not face discrimination within any official economic or industrial strategy. Further incentives for foreign investors include outreach and tax incentives. Investors are able to start a new business irrespective of the initial capital requirement.
Investors also benefit from proactive government efforts to promote the country's SEZs. Rwanda has an SEZ that is an amalgamation of the free trade zone and industrial park outside the capital city of Kigali, which promotes current and planned future communications infrastructure, among other activities. Additionally, bonded warehouse facilities are accessible both within and outside Kigali for businesses that import duty-free materials.
The government offers preferential tax incentives to investors who generate significant export-oriented growth. Eligibility for such favourable rates requires exports to be at least 80% of production and capital investment to be more than US$250,000 for non-Common Market for East and Southern Africa (COMESA) member states. This will favour big manufacturing companies.
Free Trade Agreements
Currency and Finance
Credit: Accessing affordable credit is challenging in Rwanda. Apart from high credit costs, Rwanda's credit terms are not particularly attractive for investor's looking to fund big, long-term projects. Foreign investors do have a few alternatives to secure credit in Rwanda. Local lending institutions are open to negotiate credit facilities for investors with collateral and bankable projects. In some cases, investors may obtain preferred financing from the country's Development Bank or Export Growth Fund.
Currency: In 1995, the government abandoned the dollar peg and established a floating exchange rate regime. The central bank (BNR) sets the exchange rate on a daily basis and the resulting market exchange rate is typically within a 2% range of the official rate. The Rwandan Franc depreciated 10% against the U.S. dollar in 2016, but depreciation has since stabilised. We expect gradual depreciation of 1%-2% annually over the coming years.
Capital Control: Transacting locally in foreign currency is prohibited in Rwanda. Regulations set a ceiling on the foreign currency that can leave the country per day. In addition, regulation limits companies from sending money outside the country beyond certain thresholds before the government regulator, BNR, approves it.
Remittance Policies: Investors can remit payments from Rwanda only through authorised commercial banks. There is no limit on the inflow of funds, although local banks are required to notify BNR of all transfers over US$10,000 to mitigate the risk of potential money laundering. A withholding tax of 15% to repatriate profits is considered high by a number of investors given that a 30% tax is already charged on profits, making the whole tax burden 45%. Additionally, there are some restrictions on the outflow of export earnings. Companies generally must repatriate export earnings within three months after the goods cross the border.