Ratio Magazine :: The Inside Track to East Africa’s Economies - Rwanda: How Supportive is Rwanda’s Tax Code of New Investors?

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Friday, 18 April 2008

Page 1 of 2

As part of his investment analysis of Rwanda, Ritesh Doshi also took a closer look at the country’s tax regime and its recent amendments. As part of his investment analysis of Rwanda, Ritesh Doshi also took a closer look at the country’s tax regime and its recent amendments.

Rwanda: How Supportive is Rwanda’s Tax Code of New Investors?
The tax code was most recently amended in 2006, and included some more modern articles such as provisions against thin capitalisation of companies. Tax reform is once again being driven by recent membership of the East African Community (EAC), with the tax code likely to be amended before the end of the year in anticipation of full compliance with the EAC tax code in June 2009. The key areas of importance to foreign investors are the following:

Corporate Taxes
Corporate taxes are currently at 30%, having been reduced from 35% in 2006, which puts it at parity with the rest of the EAC. In addition to the corporate tax rate of 30%, a withholding tax of 15% is imposed on any declared dividends, implying an effective tax rate of 40.5%. Companies operating as sole proprietors are exempt from the withholding on dividends, although this opens them up to unlimited liability. A comparison yields the following:

	Limited Company	Sole Proprietor
Profit Before Tax	USD100,000	USD100,000
Corporate Tax (30%)	(USD30,000)	(USD30,000)
Profit After Corporate Tax	USD70,000	USD70,000
Dividend Tax (15%)	(USD10,500)	None
Profit After All Tax	USD59,500	USD70,000

All companies are required to make a contribution of 5% of an employee’s gross salary as a social security payment.

The value-added tax (VAT) rate is 18%, and payable for most manufactured and imported goods, certain services and accommodation contracts of less than 90 day. This includes hotels and short-stay apartments.

Some provisions in the tax code, especially those relating to borrowing, may cause concern for investors in certain capital intensive industries. A company is only allowed to expense interest payable on loans that are equal to or less than four times the company’s equity capital. If this loan is foreign-currency denominated, a company can only claim interest expense relief of LIBOR + 1%, regardless of the cost of capital, while interest paid on any loans in excess of four times the equity capital cannot be claimed as an expense. There is some ambiguity about the treatment of foreign loan interest payments, with a number of parties stating that there is also a 15% withholding on them, which effectively treats them like dividends.

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