” TAX ALERT “
In a bid to align with international best practices of limiting base erosion and profit shifting, Uganda adopted the interest limitation rule and enacted the same under Section 25 of the Income Tax Act, Cap. 338 (the “ITA”).
Several decisions from the Tax Appeals Tribunal (the “Tribunal”) have endeavored to lay out the scope of the interest limitation rule in Uganda’s tax regime; all with varying guidance. The latest of these cases is Techno Three Uganda Limited v Uganda Revenue Authority (TAT Application No. 009 of 2025).
In this March series, the tax team at SM & Co Advocates provides an overview of the interest limitation rule, the rationale behind the rule and delves into the varying application of the rule by the Tribunal.
Introduction to BEPS Action 4 – interest limitation rule
In 2013, the OECD and G20 launched the Base Erosion and Profit Shifting (BEPS) project to address gaps in the international tax system that allow multinational enterprises (MNEs) to erode tax bases and shift profits to low- or no-tax jurisdictions. These concerns intensified after the 2008–2009 financial crisis, which heightened fiscal pressures worldwide.
Fast forward to 2015, the BEPS project promulgated a package that included 15 action points to promote coherence, substance, transparency, and certainty in international taxation.
Action 4 specifically targets Limitation on Interest Deductions, aiming to curb excessive interest deductions that erode the tax base, particularly through debt financing.
The action focuses on three main risk areas:
• Groups placing higher third-party debt in high-tax jurisdictions.
• Groups using intragroup loans to create interest deductions exceeding the group’s actual third-party interest expense.
• Groups financing tax-exempt or deferred income with debt.
The OECD’s recommended fixed ratio rule
To minimize base erosion, the OECD recommended a fixed ratio rule as the best-practice approach. This limits an entity’s net interest deductions (and economically equivalent payments) to a percentage of its tax EBITDA (earnings before interest, taxes, depreciation, and amortization, based on tax-adjusted figures). The rule links deductions directly to the entity’s economic activity in the jurisdiction.
To balance effectiveness and prevent a race to the bottom, the OECD suggested a corridor of 10%–30% for the fixed ratio. Ideally, it should apply to all forms of interest to avoid circumvention through different legal structures.
The rule is poised as straightforward to administer for taxpayers and authorities, while remaining robust against avoidance. Ideally, the rule targets entities in multinational groups as a minimum, with encouragement to extend it to domestic groups where risks exist (intragroup financing or structured arrangements with third parties).
Under the BEPS project, the OECD cautioned that a fixed ratio is a blunt tool that may not account for sector-specific or legitimate non-tax reasons for higher leverage, so countries should consider supplementary rules (group ratio tests) or carve-outs for genuine commercial debt.
Uganda’s implementation: Section 25 of the Income Tax Act, Cap. 338 (the “ITA”)
In 2018, Uganda amended the ITA to replace thin-capitalization rules with a broader interest limitation rule under Section 25. Interest is deductible if incurred on debt used to produce income, but for taxpayers that are members of a “group” (non-individual persons with common underlying ownership), deductible interest is capped at 30% of tax EBITDA. Excess interest is carried forward for up to three years.
However, the above limitation does not extend to financial institutions, microfinance deposit-taking institutions, tier-4 microfinance institutions, and insurers. This position was confirmed in Rwenzori Bottling Company v URA, TAT Application 21 of 2021.
Up to this point, Uganda adopted the OECD’s fixed ratio at the upper end of the corridor (30%) and extended it to domestic groups, broader than the OECD’s minimum focus, principally on MNEs.
Application challenges in Uganda: Tribunal Cases
Implementation of the interest limitation rules in Uganda has raised questions about scope and intent, as seen in two Tax Appeals Tribunal (TAT) decisions.
We consider these below:
Aponye Uganda Limited v Uganda Revenue Authority (TAT Application No. 80 of 2021)
URA assessed additional tax of UGX 641,012,201, disallowing excess interest on grounds that Aponye was part of a group due to common shareholding with other companies (Quality Bags (U) Ltd, Aponye Transporters Ltd and Aponye House Ltd). Aponye argued it was not in a group, noting some entities (Aponye Transporters Ltd ceased in 2008; Aponye Hotel/House was a sold sole proprietorship).
In this case, the Tribunal applied a literal interpretation observing that: common underlying ownership (common shareholding) established a “group” under Section 25(5) hence the applicability of the interest limitation cap.
The Tribunal did not delve into whether the other entities were operational or seek to unpack the realities of the section (understandably so, because the duty of the Court is to enforce the law and not to make it as contended in Moil Uganda Limited v Uganda Revenue Authority TAT No.149 Of 2023).
The Tribunal favored strict wording, adopting the rule in Cape Brandy Syndicate over economic substance or the BEPS purpose.
The unanswered questions in the Aponye case such as the true intent of Section 25 were to be addressed later.
Techno Three Uganda Limited v Uganda Revenue Authority (TAT Application No. 009 of 2025)
URA assessed UGX 312,539,675 for 2018–2020, disallowing excess interest due to common shareholding with three other (non-operational) companies; Satech Industries Limited, Roma Granite and Marbles Limited, and Naguru Hill Holdings Limited. Techno Three argued no real group existed, as others lacked active operations, assets, or employees.
In resolving the dispute, the Tribunal adopted a purposive approach, ruling that a literal application of Section 25 would lead to an absurdity unintended by Parliament. It examined the economic reality and BEPS mischief (base erosion through excessive debt, especially intragroup or structured). The Tribunal established that the provision does not apply to “groups” of dormant entities with no risk of profit shifting.
The Tribunal referenced Parliamentary debates (Hansard): that clearly indicated that the rule targeted MNEs “lending amongst themselves” to reduce Ugandan taxable income, replacing thin-capitalization rules focused on foreign-controlled entities. In our view, this rule was not intended as a blanket cap on all groups, especially domestic ones without abuse risks.
This decision in Techno Three aligns more closely with OECD intent, emphasizing substance over form and noting the rule’s potential to choke local businesses’ access to finance (and stifling economic growth).
Regional comparison
Uganda’s broad application (including domestic groups without carve-outs) contrasts with peers in the region.
In Kenya, the 30% EBITDA cap mainly applies to interest paid to non-residents, preserving deductibility for domestic financing. Most importantly, micro and small enterprises (and other qualifying entities) are carved out of the interest limitation’s reach.
Tanzania and Rwanda adopted the BEPS-inspired fixed-ratio rules but emphasize MNE application and intra group loans with greater focus on genuine commercial debt.
Accordingly, the Techno Three ruling imports international best-practice nuance through the adoption of purposive interpretation.
Conclusion: Is Uganda doing it the proper way?
Uganda’s adoption of the 30% EDITDA interest limitation rule follows BEPS Action 4 in form, providing protection against base erosion.
However, its broad, literal application to all groups and all debt, including purely domestic ones without intragroup debt or structured debt arrangements with third parties exceeds OECD recommendations and risks unintended harm to local enterprises by restricting legitimate borrowing.
The Techno Three decision marks progress toward purposive, substance-based application aligned with BEPS goals: curbing MNE abuse, not hindering domestic growth or access to capital. While judicial fixes are welcome for certainty, legislative refinement is needed (as observed by the Tribunal). This could focus on:
• Explicit carve-outs for genuine third-party domestic debt; and
• Providing a clearer “group” definition requiring economic substance and MNE characteristics (or demonstrable abuse risk).
Such changes would align Uganda with international best practice, reduce uncertainty, support business growth, and help achieve revenue goals (20% tax-to-GDP ratio) without unnecessary economic drag. The current framework protects revenue but, without adjustment, may overreach its anti-avoidance purpose.
Disclaimer:
This publication is for general consumption and should not be taken and relied upon without seeking specific legal advice on any of the matters above.