25 Nov 2019
Section 4: Regulations & Tax Incentives in Uganda
Fitch Solutions Trade and Investment Risk Index
- Uganda is an East African outperformer in terms of the comparatively low levels of trade and investment-related risks that businesses will face when operating in this market.
- The country performs well in terms of its openness to foreign investment, competitive tax regime and the benefits from the competitive advantage for exports in key markets by virtue of its East Africa Community (EAC) membership.
- Downside risks include Uganda's continued difficulty in trading with non-EAC member states, by virtue of various tariff and non-tariff related barriers. Moreover, widespread corruption and high levels of bureaucratic red tape for business operation still exist.
- Uganda scores 39 out of 100 for Trade and Investment Risk, which puts the country in fourth place out of 11 East African states and 14th in Sub-Saharan Africa (out of 48 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
Uganda has one of the better investment climates in the East African region and there has been consistently high levels of growth in the state's foreign direct investment (FDI) stock, on account of perceived political stability and consistent macroeconomic policy for the past three decades.
In 2001, the government created the Uganda Investment Authority (UIA) to assist investors and promote investment in Uganda. Although doing business in Uganda remains relatively cumbersome, these administrative changes have gone a long way to streamline business operations.
Ugandan laws, policies and regulations are generally favourable towards foreign investors, but reforms are needed. The Investment Code allows foreign participation in any industrial sector except those involving national security or requiring ownership of land. Licensing from the UIA requires investors to commit more than US$100,000 over a period of three years.
The various taxes on profits are high on both regional and global scale. The highest corporate income tax rate – and in this case, the standard rate – is 30%. This is above the global average of 28.1%.
Incentives for Manufacturing Relocation
Uganda offers a number of fiscal and non-fiscal incentives to investors. However, manufacturing is not one of the four priority sectors that receive particularly favourable treatment. The priority sectors are information and communication technology, tourism, value-added agriculture and value-added investments in mineral extraction.
The country's fiscal incentive package for both domestic and foreign investors provides generous capital recovery terms, particularly for medium-to-long-term investors whose projects entail significant plant and machinery costs and involve substantial training. In Kampala, 50% of capital allowances for plants and machinery are deductible from a company's income on a one-time basis; elsewhere in Uganda, 75% of those capital allowances are deductible. Up to 100% of training costs are deductible on a one-time basis.
A range of annual VAT deferments, deductions, exemptions and depreciation allowances also exist, resulting in investors often paying no tax at all in the first year of their investment, and usually paying substantially less than the 30% corporate tax rate in the subsequent years of their investment. The government also provides a 10-year tax holiday for investors engaged in the export-oriented production and, if the investment is located more than 25km away from Kampala, for agri-processing investors.
Free Trade Agreements
Currency and Finance
Currency: The Ugandan shilling fluctuates based on market conditions without interference from the government. We expect a gradual depreciation of the shilling against the US dollar over the coming years. Potential for sharper depreciations remains elevated, with dry weather posing risks of greater-than-projected inflation and weaker exports.
Capital Controls: Uganda keeps open capital accounts, and Ugandan law imposes no restrictions on capital transfers in and out of Uganda, unless the investor benefited from tax incentives on the original investment, in which case the investor will need to seek a 'certificate of approval to externalise funds' from the UIA. Investors can obtain foreign exchange and make transfers at commercial banks without approval from the Bank of Uganda in order to repatriate profits and dividends, and make payments for imports and services.
Remittances: While Ugandan law does not restrict foreign investors from repatriating their funds, a foreign investor who benefits from incentives granted under the Investment Code Act still needs authorisation from the UIA before he or she can repatriate any funds. Even when the UIA grants authorisation, it only applies to repatriation for particular purposes as specified under the 'certificate of approval to externalise funds'. Foreign investors may also remit through a legal parallel market including convertible negotiable instruments.
Credit: Though Uganda has a large number of banking institutions, interest rates remain high as the substantial costs of doing business incurred by banks are passed on to borrowers in the form of high borrowing rates.