Inside rental tax

The Real Estate sector is one of the pivotal sectors of Uganda’s growing economy as it contributes significantly to the nation’s tax pocket. It is therefore important to understand the current tax regime pertaining to the industry and how it aids the development of the industry.

Current tax rates

At inception stage, a person who acquires an interest in land is required to pay stamp duty at a rate of 1.5 per cent of the value of the land, which is payable before such land can be transferred into that person’s name. Once land is acquired and one proceeds to procure construction materials, Value Added Tax (VAT) at the rate of 18 per cent will be charged on such material. Such VAT if properly recorded by a VAT registered person forms part of their input VAT in the computation of their VAT payable by the fifteenth day of each month.

Once the rental properties are completed, a person investing in real estate should know that the rental tax rates for individuals differ from those levied on companies. For individuals, rental income is taxed at the rate of 20 per cent of the chargeable income, in excess of Shs2.82m (the threshold). The allowable deductions (expenditures and losses incurred by the individual in the production of such income) are capped at 20 per cent. These allowable deductions include interest paid on a mortgage that was secured to fund the building which is the subject of the rental tax. On the contrary, the tax rate is 30 per cent for companies which own rental properties. But unlike individuals, corporations are allowed deductions on all the expenses and losses incurred in the production of their gross rental income.

Tax incentives for real estate

With regard to tax incentives for the sector, not many exist. The available incentives are only on building materials. For example; construction equipment such as specialised vehicles are free of import duty by tariff and the VAT on such equipment is deferrable for companies that are VAT registered. The same goes for earth moving machinery and construction cranes. The supply of construction materials for development of industrial parks or free zones whose investments are at least $50 million is also exempt from VAT and is not subject to excise duty. Whilst these may not be direct incentives to a real estate investor, the expectation is that they should at least reduce the cost of construction.

Proposed amendments

Within the Income Tax (Amendment) Bill 2021, there are a raft of amendments that directly affect the landscape of the real estate industry.

It is proposed that the same rate of tax (25 per cent) be levied both on individuals and corporations. This proposal does not only eliminate the perception of unfairness on the part of those doing business as companies.

It is also proposed that the allowable deductions for both individuals and companies be capped at 60 per cent. Whereas this is a welcome gesture to individual real estate owners, corporations will be dealt a heavy blow. Corporations whose expenses and losses are over and above the allowable deduction, will have to pay more tax on their rental income than they would under the current tax regime.

Filing separate tax returns for each building

In the proposed amendments, a rental income tax payer will also be required to file a separate return for each building that they own. Currently, one can aggregate all the rental income from all their buildings and apply the tax rate. This approach is supportive of more developments as subsequent buildings are considered to be a re-investment. This proposed amendment is not only expected to discourage investment in the sector but will also increase the cost of compliance, which runs contrary to government’s drive to increase the level of compliance amongst the citizens.

In a nutshell, while the proposed amendments are expected to streamline the rental income tax regime, they have largely been opposed by policy analysts and players in the sector who view them as a ploy to disincentivise investment. To many, the timing of these proposals is also concerning.

Covid-19 impact on real estate

The real estate sector is among the key sectors of the economy that were most affected by the lockdown measures imposed by government. Government called for compromises to be made by landlords to ensure that the economy can withstand the pandemic hostility, to which, some of the landlords adhered, despite not being guaranteed a recovery plan from government.

These same real estate players are now being dealt the short end of the stick with regards to taxation.

By Alex Matovu the managing partner at Signum Advocates.