UGANDA, Kampala | Real Muloodi News | Alex Matovu, Managing Partner at the law firm Signum Advocates, recently authored an article about the property tax regime in Uganda. The real estate sector significantly contributes to the nation’s tax pocket. Mr Matovu notes how important it is to understand the current and proposed property tax regime when considering property development.
Current Tax Rates
When a person buys land, they are required to pay stamp duty at the rate of 1.5 per cent of the purchase price. This tax needs to be paid before the property is transferred into their name.
If the person constructs a building on that land, the government requires them to pay 18 per cent Value Added Tax (VAT) of the cost of the construction materials they purchase.
If the constructed building is a rental, the rental income earned is subject to rental income tax. For individuals, rental income is taxed at 20 per cent of income earned above Shs 2,820,000 (the threshold). For companies, the tax rate is 30 per cent.
But unlike individuals, corporations are allowed to deduct all of their expenses as losses against the rental income they earn, whereas individuals deduct 20 per cent. An example of an allowable deduction is the interest paid on a mortgage that was secured to fund the property. Another allowable deduction is the VAT paid on the construction materials purchased to build the property.
Owners of commercial property are also required to pay Property Rates to their local municipality. Property Rates are an annual tax on the value of the property.
The property value is a percentage of the property’s estimated rental value (whether it is rented or not). The rate is between 2 and 12 per cent, depending on the municipality. It applies to any commercially managed property or building, like rented houses, rented shops, factories, or any part used for business, even if it is owner-occupied. In return, local government is mandated to provide services like garbage collection, street lights, road maintenance and so on.
Proposed Amendments to the Property Tax Law
Sarah Muzungyo Chelanga, Associate Director, Tax at Ernst & Young Uganda, recently wrote an OpEd for about amendments proposed under the Income Tax (Amendment) Bill 2021.
Government has proposed to increase the rental income tax rate for individuals from 20 per cent to 30 per cent to match that of companies.
Secondly, there was a proposal to fix the deductible/allowable expenses and losses at 60 per cent.
However, following debate and approval by Parliament, the Bill now proposes allowing 75 per cent as deductible/allowable expenses and losses. This will apply to individuals and companies equally. Ms Chelanga referenced a Parliament Hansard as the source of this information.
Government is also dropping the Shs 2,820,000 annual fixed of tax-free rental income threshold.
Further, rental income taxpayers will be required to file a separate return for each rental property owned. Under the current rental tax law, corporations can aggregate all rental income and expenses from all of their buildings into one tax return, thereby declaring losses on one building against income earned on another. This practice will come to an end in July 1st 2021, when the new Income Tax (Amendment) Bill 2021 is set to take effect.
Tax Incentives for Real Estate
Tax incentives that apply to this sector are limited to construction equipment and building materials. For example; earth moving machinery, construction cranes and specialised vehicles are free of import duty by tariff. Also, the VAT on such equipment is deferrable for companies that are VAT registered.
The supply of construction materials for development of industrial parks or free zones whose investments are at least $50 million is exempt from VAT. Further, such materials are not subject to excise duty either.
Whilst these may not be direct incentives to a real estate investor, the expectation is that they reduce the cost of construction, says Mr Matovu.
Why Tax Compliance will be Important
While no one enjoys paying taxes, the most successful property developers and landlords in Uganda understand that paying property and rental income tax affords them legitimacy. Legitimacy is one consideration by investors when awarding big contracts.
To attract financing for existing or expansion projects, loan underwriters consider the tax perspective of real estate financial models. Banks and other reputable capital investors will be reluctant to finance investments that don’t plan for, declare or under-declare their tax obligations.
This is particularly relevant now that the Uganda Revenue Authority is starting to employ the use of technology to enforce compliance. Investors will be more cautious about the financial risk involved with real estate investments that are non-compliant with their legal tax obligations.
Therefore, before entering into property development ventures, it is important to first understand and weigh all of your tax obligations.
Covid-19 Impact on Real Estate
Real estate is among the key sectors of the economy devastated by the COVID-19 induced lockdown measures instituted by the government.
Despite some landlords adhering to the government’s calls for leniency upon tenants as a way of shielding the economy from the pandemic facilitated hostilities, there has since not been a guaranteed recovery plan put in place to their benefit.
In light of this, it is prudent that property developers seek the help of tax experts in the coming tax year for professional advice on how to take full advantage of the 75 per cent deductible/allowable expenses and losses against rental income earned.
As rental income tax only applies to rental income earned, taxes are reduced in equal measure to COVID-19-related income losses. A bitter sweet silver lining.
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