1. Introduction

1.1 The Tax Amendment Acts, 2026 introduce a number of significant changes to Uganda’s tax regime, most of which are expected to take effect on 1st July 2026. The amendments affect key tax legislation, including the Income Tax Act, Cap. 338, the Value Added Tax Act, Cap. 344, the Stamp Duty Act, Cap. 339, the Lotteries and Gaming Act, Cap. 334, the Excise Duty Act, Cap. 336 and the Tax Procedure Code Act, Cap 343.

1.2. This commentary provides a section-by-section summary of the key amendments and their likely practical implications for taxpayers, businesses, investors, and sector participants. We highlight the previous legal position, the change introduced by the amendment, and the likely effect of the amendment on tax compliance and commercial planning going forward.

2. Disclaimer

2.1. This legal update is intended for general information purposes only. It is not intended to constitute, and should not be relied upon as, conclusive tax advice in relation to any specific transaction, dispute, tax position, or compliance issue. Tax consequences may vary depending on the facts of each case, the taxpayer’s structure, applicable exemptions, and future guidance from the Uganda Revenue Authority. Readers who require advice on any tax issue should seek comprehensive advice from a qualified tax professional.

3. The amendments to Tax Acts

Part A: The Income Tax Amendment Act

[Please note that as at the date of Publication, the Income Tax Amendment Act has not yet been assented to by the President]

Amendment to Section 2: Definition of “Royalty”: Inclusion of software

3.1. Section 2 paragraph (a)(i) of the Amendment Act inserts the word “software” immediately after the word “model” in paragraph (a)(i) of the definition of “royalty” in section 2 of the principal Act.

3.2. Prior to this amendment, payments for the use of software occupied an uncertain position in the definition of “royalty.” Whilst the URA had, in practice, treated software licence payments as royalties subject to withholding tax under section 82 of the ITA, the definitional basis for this position was contestable, as “software” was not expressly enumerated in the definition.

3.3. Taxpayers could plausibly argue that a payment for the use of software was a payment for a service rather than a royalty, thereby escaping withholding tax. The insertion of “software” into the definition now places this position beyond argument: payments made as consideration for the use of, or the right to use, software are expressly royalties for all purposes of the ITA.

3.4. The consequences are significant. Withholding tax under section 82(1) of the ITA is now unambiguously applicable to payments for the use of software made by resident persons to non-resident software owners, at the rate of 15% under Part V of Schedule 4.

Amendment to Section 21: Exempt Income: Two Substantive Changes

Substitution of Paragraph (ab), Bujagali Hydro Power Project Income.

3.5. Section 21(1) of the ITA lists categories of income that are exempt from income tax. Paragraph (ab) previously provided an exemption for the income of the Bujagali hydro power project up to 30th June, 2026. Section 3(a)(i) of the Amendment Act substitutes paragraph (ab) with a new provision exempting the income of the Bujagali hydro power project up to 30th June 2032.

3.6. This amendment extends the income tax exemption for the Bujagali hydro power project for a further defined period. The Bujagali Hydroelectric Power Station is a critical component of Uganda’s national electricity grid, and the continued exemption of its income from tax is a deliberate fiscal policy decision to support the financial sustainability of the project.

3.7. It should be noted that this exemption applies to the income of the project entity itself and does not, of its own force, exempt payments made by the project to third parties such as contractors, lenders, or service providers, which remain subject to the applicable tax provisions of the ITA.

Insertion of Paragraph (ah), Income of a Developer of a Hotel or Tourism Facility

3.8. Section 21(1) of the ITA did not previously contain any express income tax exemption directed specifically at developers of hotels or tourism facilities of the scale contemplated in the new provision. Section 3(a)(iii) of the Amendment Act inserts a new paragraph (ah) into section 21(1) of the ITA, exempting the income of a developer of a hotel or tourism facility whose investment capital is at least ten million United States Dollars in the case of a foreigner, or five million United States Dollars in the case of a citizen, provided that the developer, subject to availability, uses at least seventy percent of locally sourced raw materials and employs at least seventy percent of its employees who are citizens earning an aggregate wage of at least seventy percent of the total wage bill.

Amendment to Section 21(7): Definition of “Infrastructure Bond”.

3.9. Section 3(b) of the Amendment Act substitutes the definition of “infrastructure bond” in section 21(7) with a new definition providing that an infrastructure bond means all bonds, notes or other similar securities used to raise funds for public infrastructure and other social services, if those bonds have a maturity period of at least ten years.

3.10. The revised definition broadens the category of instruments that qualify as infrastructure bonds by expanding the range of qualifying securities to include bonds, notes, and “other similar securities,” and by expressly extending coverage to bonds issued for “social services” in addition to public infrastructure.

3.11. The retention of the ten-year maturity requirement as a qualifying condition ensures that only genuinely long-term financing instruments attract the exemption, consistent with the policy rationale of incentivising patient capital for Uganda’s infrastructure development needs. The practical significance is that interest income derived by investors from a wider class of qualifying instruments will be exempt from income tax, making infrastructure bonds a more attractive investment class for both resident and non-resident investors.

Amendment to Section 24: Bad debts: Extension to Microfinance Institutions

3.12. Section 4 of the Amendment Act amends section 24(2)(b), (2)(c), (3)(b), and the definition of “debt claim” in section 24(3), by inserting immediately after the words “financial institution” in each instance the words “microfinance deposit-taking institution or tier 4 microfinance institution.”

3.13. This amendment broadens the scope of the bad debt deduction provisions under section 24 of the Income Tax Act to expressly include microfinance deposit-taking institutions and tier 4 microfinance institutions. Prior to the amendment, the provisions governing deductions for bad debts and loan losses primarily applied to financial institutions, creating uncertainty as to whether microfinance institutions could similarly claim deductions in respect of irrecoverable loans and related loss reserves.

3.14. By expressly incorporating microfinance deposit-taking institutions and tier 4 microfinance institutions within section 24, the amendment aligns their tax treatment with that applicable to other regulated financial institutions. Consequently, these institutions may now claim deductions for qualifying bad debts written off in their accounts and for loss reserves held against identified or potential losses, subject to the conditions prescribed under the Act.

3.15. The amendment is particularly significant in the Ugandan financial sector context, where microfinance institutions play an increasingly important role in extending credit to small and medium enterprises, farmers, and low-income borrowers who may not ordinarily access conventional banking services. The clarification therefore promotes consistency, certainty, and neutrality in the taxation of credit institutions operating within Uganda’s broader financial services sector.

Amendment to Section 25: Interest Deductibility Cap: New Definitions

3.16. Section 25 of the Income Tax Act governs the deductibility of interest expense, including the limitation on deductible interest by reference to a percentage of tax earnings before interest, tax, depreciation and amortisation (tax-EBITDA).

3.17. Section 5 of the Amendment Act substitutes section 25(5) by introducing new statutory definitions for “dormant,” “group,” and “tax earnings before interest, tax, depreciation and amortisation.” A “dormant” person is defined as a non-individual entity that is not conducting business and has no accounting transaction in a year of income. A “group” is defined as persons other than individuals with at least fifty-one percent common underlying ownership, excluding dormant members. “Tax earnings before interest, tax, depreciation and amortisation” is defined as gross income less allowable deductions other than brought-forward losses and excluding a deduction under section 25(1), plus depreciation and amortisation.

3.18. These amendments provide greater certainty in the application of the interest limitation rules. In particular, the fifty-one percent ownership threshold establishes a clear test for determining group membership, while the exclusion of dormant entities prevents inactive companies from affecting the interest limitation calculations. Further, excluding brought-forward losses from the tax-EBITDA computation prevents taxpayers from artificially increasing deductible interest through accumulated losses, thereby strengthening the effectiveness of the interest deductibility restrictions.

3.19. This amendment follows the recent Ruling of the Tax Appeals Tribunal in Techno Three Uganda Limited v Uganda Revenue Authority TAT Application No. 009 of 2025 in which URA had restricted the taxpayer’s interest deduction on the basis that the taxpayer was part of a “group” by reason of common underlying ownership with other companies. The Tribunal accepted that, on paper, the taxpayer shared common ownership with the other companies.

However, it found that the other companies were non-trading or dormant entities, had filed nil returns, and did not have any real economic relationship with the taxpayer. The Tribunal therefore held that a purely literal application of section 25 would produce an absurd result where inactive companies existing only on the register would cause a taxpayer to lose part of its interest deduction.

The Tribunal adopted a purposive and substance-over-form approach, holding that the interest limitation rule was intended to prevent abuse through excessive interest deductions and profit shifting, not to punish a taxpayer merely because its shareholders had incorporated dormant companies. The assessment was accordingly set aside. The 2026 amendment responds to this reasoning by expressly defining “dormant,” “group, and “tax-EBITDA,” thereby clarifying how the interest limitation rule should apply going forward.

Authored by:
Ronald Kalema (Partner) & Fortunate Okello, Candidate Attorney