Uganda-Netherlands Double Tax Agreement: A Highlight of the Key Provisions

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

Introduction

Significant foreign direct investment into Uganda is through the Kingdom of Netherlands via holding or
intermediate entities domiciled therein that set up companies in Uganda.

This can largely be attributed to the fact that Netherlands not only inked a Double Tax Agreement (“DTA”) but equally has concluded a Bilateral Investment Treaty (“BIT”) with Uganda. In this article, we write briefly about this BIT but largely highlight the key provisions in the Uganda-Netherlands DTA (“UG-NZ DTA).

Bilateral Investment Treaty

Uganda has a BIT with the Netherlands entered into in 2003. BITs are international agreements establishing
the terms and conditions for private investment by nationals and companies of one country in another country. BITs set out substantive principles for investment protection as well as the procedures for investor state arbitration.

Investors from countries that are party to BITs are able to bring claims against host countries for the contravention of investment terms. Umbrella, Fair and Equitable and Most Favoured Nation clauses that are all embedded in BITs ensure extra protection for foreign investments in addition to the other legislative and contractual buffer tools.

The International Centre for Settlement of Investment Disputes (“ICSID”) in Washington DC has already
handled at least two claims brought under BITs involving the government of Uganda and International Oil Companies though both were withdrawn prior to determination and involved tax disputes. These were Total E&P Uganda BV vs. Republic of Uganda ICSID Case No. ARB/15/11 and Tullow Uganda Operations PTY LTD vs. Republic of Uganda ICSID Case No. ARB/12/34.

Double Tax Agreements
DTAs are agreements or treaties between two or more countries principally setting out the terms under which
the respective countries seek to eliminate double taxation at the same time preventing fiscal evasion with respect to taxes on income and capital gains.

DTAs address double taxation in two main ways. Firstly, the respective countries to the DTA may allocate the taxing rights to ensure that either country but not both tax the underlying income. Where both countries have the right to tax this income, the DTA may set out the maximum tax rates each country can impose but also allow for a credit of the tax suffered in the other DTA contracting state.

Through the framework for exchange of information, the DTAs facilitate cooperation between the various national tax authorities as a means of combating tax evasion. Uganda entered into a DTA with the Kingdom of
Netherlands in 2004 that came into force in 2007. We understand this DTA is presently being renegotiated.
We headline further below the key provisions in this DTA.

Supremacy of DTA provisions
Tax treaties generally override the provisions of domestic legislation. Section 88(1) of Uganda’s Income
Tax Act (“ ITA”) provides that an international agreement entered into between the Government of Uganda and the government of a foreign country shall have effect as if the agreement were contained in the ITA.

To mitigate treaty abuse, Uganda introduced an anti-treaty shopping provision in section 88(5) of the ITA that precludes entitlement to the reduced rate or exemptions provided by DTAs unless the recipient of the income is a beneficial owner or is a publicly listed company.

Whether this provision can override the terms of the DTA unless the same limitation is included in the DTA is questionable.

Scope and application of the DTA
Like all other DTAs, the provisions of the UG-NZ DTA apply to taxes imposed on income and capital in either
of the Contracting States being Uganda and the Kingdom of Netherlands. Other tax types such as stamp duty, value added tax, excise duty and import duties are out of scope.

They are not covered by DTAs. To benefit from these DTA provisions, taxpayers must be resident in either of the Contracting States. Residence for tax purposes is determined in accordance with the respective domestic tax laws of Uganda and the Kingdom of Netherlands.

There are instances where a taxpayer is tax resident in two jurisdictions yet for purposes of applying some
provisions of the DTA, a taxpayer must be designated as tax resident in one State. This is resolved through
the inclusion of tie-breaker provisions in the DTAs.

Where by reason of the UG-NZ DTA any person other than an individual is a resident of both Uganda and the
Kingdom of Netherlands, that person is deemed to be resident for tax purposes only in that State in which the
place of effective management is situated. Effective management is usually determined by reference to
where the board meetings of a company are held being the place where the key decisions of a company are held being the place where the key decisions are taken.

Individuals resident in both Uganda and the Kingdom of Netherlands are deemed resident for tax purposes:

• In the State they have a permanent home;

• In case they have a permanent home in both countries, they are resident only in the State of vital interests((‘the State with which his personal and economic relations are closer’);

• In case they have a centre of vital interests in both countries, they are then resident in the country in which they have a habitual abode;

• In case they have a habitual abode in both countries, they are then resident in countries they are nationals;

• If they are nationals of both countries or neither of both, residence is determined in accordance with mutual agreement procedures under the DTA between authorities.

Permanent Establishment
It is important to understand what a Permanent Establishment (“PE”) is in accordance with the provisions of the UG-NZ DTA. This is because the business profits of any enterprise under this DTA are ordinarily taxed in the country where the taxpayer is resident unless that taxpayer has a PE or taxable presence in the other Contracting State.

PEs in Uganda are normally taxed in a similar way to companies. Income is computed based on generally accepted International Financial Reporting Standards financial statements with usual adjustments.

Under the UG-NZ DTA, a PE means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. It includes a place of management, branch, an office, factory; workshop, and
a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

A building site or construction or installation project in either Uganda or the Netherlands constitutes a PE if it
lasts more than 6 months. The UG-NZ DTA also provides for a service PE where there is the provision of services (including consulting services) by employees or other personnel of an enterprise for more than 4 months in any 12-month period in either of the Contracting States.

Capital gains
Under the UG-NZ DTA a resident for tax purposes of either Uganda or Netherlands may have their capital
gains arising on the disposal of immovable property taxed by the other Contracting State provided the immovable property is situated in that Country.

The term “immovable property” has the meaning it is given under the law of the Contracting State in which the
property is situated. Gains from the alienation of movable property forming part of the business property of a PE which an enterprise of a Contracting State has in the other Contracting State, including such gains from the
alienation of such a PE (alone or with the whole enterprise) may also be taxed in that other State.

Gains arising from the alienation of an enterprises’ aircraft or ships operated in international transport or
traffic are only taxable in the DTA Contracting State in which the place of effective management of the
enterprise is situated. As earlier mentioned, effective management is determined by reference to where the
board meetings of a company are held being the place where the key decisions of a company are taken.

For all other property disposals, the arising gains are only taxable in the Contracting State of which the
alienator is a resident.

International transportation
It is provided under the UG-NZ DTA that profits from the operation of aircraft and ships in international
traffic are only taxable in the Contracting State in which the place of effective management of the
enterprise is situated. The place of effective management is usually where the board meetings of a
company are held.

Technical fees
UG-NZ DTA does not contain any article covering technical, professional or management fees. This
accordingly means that payments to a recipient in the Kingdom of Netherlands would not be subject to tax in
Uganda unless the recipient has created a PE in Uganda in which case it would be taxable as business
income.

Passive income
Passive income includes dividends, interest and royalties amongst other. Such income is usually taxed
by way of withholding mechanism in the source country whenever the recipients are paid.

Under the UG-NZ DTA, dividends may be taxed in the jurisdictions where the payer and recipient are tax
resident subject to the exceptions. If the recipient of these dividends is a beneficial owner, the rate of taxation may not exceed 15%.

Though judicial precedents continue to give varied interpretations premised on contextual circumstances, a beneficial owner in general terms is that person who has the full right to use and enjoy the income received unconstrained by a contractual or legal obligation to pass the payment received to another person.

These dividends are eligible for exemption from taxation in the payer’s jurisdiction where the payee beneficially
owns at least 50% of the share capital of the payer (provided the investment was made after the treaty came into force).

In other cases where the payee beneficially owns less than 50% of the share capital of the payer, the rate of
withholding tax is 5%. Interest may also be taxed in the jurisdictions where the recipient is tax resident or where it arises or is sourced. If the recipient is a beneficial owner, the rate of taxation should not exceed 10%.

There is an exemption from taxation provided for interest on loans granted or guaranteed by government bodies or by the central bank of the borrower’s jurisdiction. This exemption is also extended to interest on loans from banks and ‘financial institutions of a public character’ with a duration of 3 years or more.

Royalties may also be taxed in the jurisdictions where the recipient is tax resident or where it arises or is sourced. If the recipient is a beneficial owner, the rate of taxation should not exceed 10%.

The writers are with Cristal Advocates