Uganda’s Income tax Act broadly defines an associate as “…any person, not being an employee, that acts in accordance with the directions, requests, suggestions, or wishes of another person whether or not they are in a business relationship and whether those directions, requests, suggestions, or wishes are communicated to the first-mentioned person, both persons are treated as associates of each other”.

The above definition means that a director or Shareholder is treated as an associate of a limited liability company for tax purposes. 

Where companies have obtained loans from Directors or shareholders, Uganda Revenue Authority has on many occasions disallowed these loans and re-characterized them as Income under the anti-avoidance provisions.  Under Section 116 of the Income tax act, the Commissioner General has powers to “…. distribute, apportion, or allocate income, deductions, or credits between the associates…”

The above provision has been unfairly used by URA against Uganda’s taxpayers until the recent Tax Appeals Tribunal ruling in Explorer Limited Vs Uganda Revenue Authority. Two important issues to note from the above case.

1. Standard of proof; where a taxpayer provides reasonable information like; loan agreements, the loans were disclosed in the financial statements and there is statement by the lender (Director or Shareholder) confirming the existence of the loan, the tribunal ruled that on the balance of probability, it is reasonable to conclude that the loan is obtained. 

2. Re-characterization of the loan; whilst the Commissioner General has statutory powers to re-characterize a transaction, those powers must be exercised judiciously and rationally. To re-characterize a transaction, there must be some basis. In most re-characterization decisions by URA, they are always recharacterized the loans as revenue. In the ruling, the members of TAT wondered, “…. why has the respondent (URA) opted to re-characterize loans as income/revenue/sales and not as equity since the funds originated from shareholders?”.

The above ruling provides some relief to taxpayers who have been pushed to the wall by URA to provide unrealistic records to support transactions between associates and will go a long way to ease how businesses source funds internally.