An Expert Report from Continental Tax Trade

Effective 1st July 2025, the Government of Uganda has significantly altered the taxation of digital services provided by non-resident companies to their related entities in Uganda. Through the Income Tax (Amendment) Act, 2025, these specific transactions are now exempt from the 5% Digital Services Tax (DST). However, this "exemption" is not a tax relief; instead, these payments are now subject to a 15% Withholding Tax (WHT), effectively tripling the tax rate on such intra-group services. This change requires immediate attention from all businesses in Uganda that procure digital services from foreign-related parties, as it fundamentally reshapes tax liability and compliance procedures for a wide range of common cross-border transactions.

A critical implication of this new policy is the transfer of the tax compliance obligation. Previously, under the DST regime introduced in 2023, the non-resident service provider was responsible for registering with the Uganda Revenue Authority (URA), filing returns, and remitting the 5% tax on their gross Ugandan-sourced revenue. Under the new WHT regime, the Ugandan company making the payment is now legally designated as a withholding agent and is responsible for deducting the 15% tax at source before remitting the net payment to the provider. The applicability of this rule hinges on the broad legal definition of an "associate," which, under Uganda's Income Tax Act, extends beyond simple ownership to include any relationship where one party acts on the suggestions or wishes of another, encompassing parent-subsidiary relationships, companies under common control, and even entities with significant director-level influence.

Continental Tax Trade strongly advises all clients to undertake an immediate and thorough review of their service agreements with all non-resident digital providers to determine if an "associate" relationship exists under Ugandan law. This assessment is crucial to identify transactions now liable for the 15% WHT and to avoid significant penalties for non-compliance. Businesses must update their payment and accounting systems to ensure the correct deduction and timely remittance of the WHT to the URA. Furthermore, we recommend a comprehensive review of inter-company service agreements and transfer pricing documentation to ensure they can withstand the heightened scrutiny from the URA on related-party transactions that this new legislation inevitably brings.