Major Win for Businesses: Tribunal Limits Uganda’s 30% Interest Deduction Rule

The Ruling

The Tax Appeals Tribunal in Techno Three Uganda Limited v Uganda Revenue Authority (TAT App. No. 009 of 2025) ruled that Techno Three Uganda Limited is not restricted by 30% of the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) — the interest deduction cap for companies that are part of a group. The Tribunal’s ruling was based on the substance-over-form interpretation of the law, finding that the company was not part of an active economic group since its affiliates were dormant, despite having common underlying ownership.

The Law

Section 25(3) of the Income Tax Act Cap 338 provides that the amount of deductible interest in respect of all debts owed by a taxpayer who is a member of a group, other than a financial institution, micro-finance deposit-taking institution, tier 4 micro-finance institution or person carrying on insurance business, shall not exceed thirty percent of the tax earnings before interest, tax, depreciation, and amortisation (30% of EBITDA). A "group" means persons (companies, partnerships, etc.) with common underlying ownership.

The Rationale

Where a group comprises economically dormant entities with common underlying ownership, a strict literal interpretation of section 25(3) may produce an absurd outcome and impose an unjustified tax burden on the economically active entity.

Why the Tribunal Arrived at Its Ruling

• Substance over Form Principle. Taxation should reflect the true economic reality of a transaction. While the company appeared to be part of a group due to common underlying ownership, the other companies were non-trading and economically dormant, with no meaningful commercial relationship with Techno Three Uganda Limited.
• No Base Erosion or Profit Shifting. The legislative intent behind section 25(3) is to prevent base erosion and profit shifting, particularly where multinational entities lend within the group to reduce taxable income. Techno Three is based in Uganda and borrowed from third-party local banks.
• Tax Cohesion Principle. Where interest is paid to local taxpayers who declare and account for tax on that income, the risk of erosion of the Ugandan tax base is effectively neutralised. The lenders, Bank of Baroda and Bank of Africa, are subject to tax on the interest income.
• Economic Impact. A literal application of the cap would have produced an absurd result that was never contemplated by the legislature and would have created an unjust tax burden.

Tribunal’s Commentary on Policy

The Tribunal observed that section 25(3) is contrary to broader national policies such as Vision 2040, NDP IV, and the Tenfold Growth Strategy, all of which aim to increase access to credit for the private sector. The unintended consequences are restrictions on the cost of doing business for local enterprises and discouragement of investors from setting up multiple companies.

Conclusion

The decision joins the ranks of other progressive Tribunal rulings highlighting the absurdity that a literal interpretation of the Income Tax Act would cause, and adopting a purposive approach instead.

Companies that are part of a dormant group with common underlying ownership can now substantially unload the 30% EBITDA interest deduction limitation. Those that are part of an active group should assess their tax filings and economic activity accordingly. The Tribunal recommended that the Ministry of Finance consider restricting section 25(3) to multinational enterprises, in line with its anti-BEPS purpose.