High Court of Uganda Affirms Net Interest Approach Under EBITDA Interest Limitation Rules

Introduction

The High Court of Uganda on 28 June 2026 delivered a significant judgment in Ambitious Construction Company Limited v Uganda Revenue Authority (Civil Appeal No. HCT-00-CC-CA-0082-2025), fundamentally clarifying the application of Uganda's interest limitation rules under Section 25(3) of the Income Tax Act Cap 338. The case resolved a question that has generated significant uncertainty since Uganda introduced its EBITDA-based interest limitation rules in 2018:

Should the 30% EBITDA cap under Section 25(3) apply to gross interest expense or net interest expense?

Background

The taxpayer, Ambitious Construction Company Limited, obtained commercial financing for its construction business. Due to cash flow timing differences, part of the borrowed funds was temporarily advanced to third parties, generating taxable interest income.

When preparing its income tax returns for the 2019 to 2021 financial years, the taxpayer calculated deductible interest by offsetting taxable interest income against interest expense before applying the 30% EBITDA limitation.

Uganda Revenue Authority (URA) rejected this methodology and instead applied the limitation to gross interest expense, resulting in additional tax assessments. The Tax Appeals Tribunal agreed with URA, prompting an appeal to the High Court.

Key Takeaways

The Court held that, in appropriate circumstances involving borrow-to-on-lend arrangements, the 30% EBITDA limitation applies to net interest expense — i.e. interest expense less taxable interest income — rather than gross interest expense. The Court overturned the Tax Appeals Tribunal's earlier decision and quashed the additional tax assessments.

1. OECD BEPS Action 4 is a Legitimate Interpretive Aid

Although Uganda is not an OECD member and OECD guidance does not have the force of law, the Court observed that Uganda's 2018 amendment introducing the EBITDA-based interest limitation rule was clearly modelled on the OECD's fixed ratio rule. Such guidance therefore remains highly persuasive where domestic legislation has clearly been modelled on internationally recognised tax standards.

Parliament's adoption of the EBITDA approach, the repeal of the former thin capitalisation rules, and subsequent amendments excluding financial institutions all demonstrated an intention to align Uganda's law with the OECD framework.

2. Section 25(3) Must Be Read Purposively — Avoiding Double Taxation

A major concern identified by the Court was the risk of economic double taxation. Interest income earned by the taxpayer forms part of taxable income and is already included in the EBITDA calculation. If the related interest expense is limited on a gross basis without recognising the corresponding interest income, the taxpayer effectively suffers tax on income generated from funds whose financing costs are only partially deductible.

The Court found this outcome inconsistent with the objective of the OECD fixed ratio rule and contrary to tax neutrality, rejecting the Tribunal's exclusively literal interpretation in favour of a purposive approach that promotes commercial reality over artificial tax outcomes.

3. The Act Does Not Refer to "Gross Interest"

Neither Section 25(1) nor Section 25(3) uses the words "gross interest." The Court rejected URA's argument that only gross interest qualified for limitation, noting that adopting it would effectively insert words into the statute that Parliament deliberately omitted. Courts cannot add words to taxing legislation.

4. Ambiguity Must Be Resolved in Favour of the Taxpayer

Applying the contra fiscum rule and the Supreme Court authority in URA v Uganda Tax Operators and Drivers Association, the Court held that because the Act uses neither "gross interest" nor "net interest," the provision is ambiguous — and any ambiguity in tax legislation must be interpreted in favour of the taxpayer.

Practical Implications for Taxpayers

Taxpayers should carefully assess whether this decision affects their current or historical tax positions. In particular, businesses should review:

• Interest limitation calculations under Section 25(3);
• Intra-group financing arrangements;
• On-lending transactions;
• Existing or pending URA audits involving interest deductibility.

Conclusion

This decision is an important judicial pronouncement on Uganda's interest limitation regime since the 2018 tax amendments. By recognising net interest as the appropriate measure for the 30% EBITDA cap, the High Court has aligned Uganda's interpretation of Section 25 with international practice and commercial reality.

Unless overturned on appeal, the judgment stands as persuasive authority on Uganda's interest limitation rules and will influence both tax planning and tax dispute resolution for years to come.

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Prepared by TASLAF Advocates — Tax Practice.