Uganda- Netherlands Double Tax Agreement: Do Professional Fees Attract Withholding Tax?

By Denis Yekoyasi Kakembo, Bill Page, John Teira, Dickens Asiimwe Katta, Francis Tumwesige Ateenyi

Introduction

Uganda has entered into several international treaties (“DTAs”), including one with the Netherlands. DTAs are aimed at preventing double taxation and evasion and cover various income streams, including dividends, interest, royalties, capital gains, and professional or technical fees for services like consulting, engineering, or legal work. They clearly outline which state party to the DTA is allocated the right of taxation of the respective income.

Compared to its other tax treaties, the DTA with the Netherlands lacks an article on professional or technical fees. This omission raises questions as to whether Uganda can demand for withholding tax (“WHT”) on payments for such services to non-resident persons covered by the DTA. This article examines this issue.

The contention

The treatment of professional or technical fees in cases where a tax treaty does not explicitly address them has been a topic of dispute in various jurisdictions. In such situations, tax authorities and courts have often turned to the DTA articles or provisions covering business income and other income to determine the appropriate taxation of professional or technical fees. These articles are examined to establish whether the services provided fall within the scope of a business activity or if they qualify as other income not specifically covered by the treaty.

Business income article

Under the Uganda-Netherlands DTA, article 7 specifically addresses the taxation of business profits. This article establishes the guidelines and principles for determining taxable business income and the allocation of taxing rights between the two countries. This article provides that the profits of an enterprise of a Contracting State are only taxable in that State unless the enterprise carries on business in the other Contracting State through a Permanent Establishment (“PE”) situated therein. To determine whether a non-resident person has a PE in Uganda, a careful examination of their activities is required. Mere presence of an agent or dependent agent in Uganda may not create a PE for the non-resident person.

However, if the agent has the authority to enter into contracts on behalf of the non-resident person or routinely plays a significant role in concluding contracts that are regularly finalized without substantial modifications by the non-resident person, then the agent's activities may give rise to a PE for the non-resident person. With regard to matters involving professional or technical fees, different courts have adopted various interpretations of Article 7.

Some courts have taken a narrower approach, considering the provision applicable only to income directly connected to the business activities of the enterprise. On the other hand, certain courts have taken a broader perspective, treating income from professional or technical services as business income if those services form an integral part of the enterprise's overall business activities. It is crucial to consider the specific provisions of the Uganda-Netherlands DTA and any applicable case law to determine the precise application and interpretation of Article 7 in relation to professional or technical fees in a given context.

Other income article

Article 21 of the Uganda-Netherlands DTA serves as a catch-all provision applicable to income not specifically addressed in the other articles of the treaty. This provision allows a contracting state to levy taxes on income that would otherwise remain untaxed under the treaty. The interpretation of Article 21 in other DTAs enumerated as Article 22 has been a contentious matter in numerous tax cases. Tax authorities often argue that professional or technical fees, not explicitly covered by other articles of the DTA, should fall within the scope of Article 22. Conversely, taxpayers assert that such fees are excluded from Article 22 because they are specifically addressed under Article 7 covering business income.

The applicable tax position

Based on our examination of the Uganda-Netherlands (“DTA”) and relevant case law, it is our opinion that Uganda does not have basis under the law to impose WHT on professional or technical fees disbursed to a non-resident enterprise in the Netherlands. Before its modification in 2000, the Organization for Economic Co-operation and Development ("OECD") Model Tax Convention included a specific provision, Article 14, addressing the taxation of management or professional services.

The deletion of this article 14 from the convention meant that professional services would only be subject to taxation under Article 7. The decision of the High Court of India in Bangkok Glass Industry Co. Ltd v Assistant Commissioner of Income Tax [2013] 215 Taxman 116 (Mad) supports the view that professional services and similar services are taxable under Article 7 of the OECD Model Tax Convention as business profits.

As expressed in this article, it our view that professional or technical fees fall within the scope of Article 7 of the Uganda-Netherlands DTA and should not be classified as income under Article 21, which is a residual provision intended for incomes not specifically addressed in other articles of the DTA. Based on this interpretation, we contend that professional fees paid to non-resident entities based in the Netherlands should not be subject to WHT in Uganda.

Conclusion

Although this matter has not yet been disputed in Uganda, it has been a subject of contention in neighboring states, particularly Kenya. In those jurisdictions, it has been established that domestic WHT does not apply in cases where a DTA does not explicitly address the taxation of technical or professional fees. Based on this precedent, it can be concluded that in the absence of specific provisions within the Uganda-Netherlands DTA regarding the taxation of professional or technical fees, domestic WHT should not apply in Uganda to payments made to non-resident entities based in the Netherlands.

The writers are with Cristal Advocates