Court of Appeal Upholds URA’s sh2.4b Withholding Tax Assessment Against ATC Uganda
Capitalised interest constitutes payment for tax purposes, rules three-judge panel
The Court of Appeal has upheld a withholding tax assessment of sh2.4 billion issued by the Uganda Revenue Authority (URA) against ATC Uganda Limited, delivering a landmark ruling that withholding tax becomes applicable when interest is capitalised rather than only when paid in cash.
In a judgment delivered on March 27, a panel of three Court of Appeal Justices led by Justice Stella Alibatese dismissed ATC’s appeal, affirming earlier decisions by the Tax Appeals Tribunal and the High Court.
“The appeal is hereby dismissed with costs to URA,” Justice Alibatese ruled. Justices Eva Luswata and Jesse Bayurahanga Rugyema concurred with the judgment.
Background of the Case
The dispute traces back to June 2012, when ATC Uganda secured a seven-year shareholder loan of $124.5 million (approximately sh462 billion) from its Netherlands-based parent company, UTI. The loan was intended to finance the acquisition of MTN Uganda’s tower business.
The loan carried an interest rate of 6.56 per cent per annum, with a provision that accrued interest would be added to the principal during the initial period of the loan.
Following an audit, URA assessed withholding tax of sh24.2 billion on interest that had accrued between 2012 and 2017. ATC objected to the assessment, arguing that withholding tax becomes payable only when interest is actually paid, not when it accrues or is capitalised.
Court’s Rationale
In her judgment, Justice Alibatese ruled that capitalising accrued interest amounts to conferring value to the lender and is therefore deemed payment for tax purposes.
“Even without actual cash flow, a taxpayer is deemed to have paid interest at the point of capitalisation,” she ruled, adding that this triggers withholding tax regardless of whether money physically changes hands.
On the interpretation of the phrase “when paid” under the Income Tax Act, the court found no error in the earlier decisions, holding that “converting accrued interest into a principal increases the lender’s benefit and constitutes payment.”
The justices observed that capitalisation benefits the lender by increasing the recoverable principal base, as accrued interest is added to the original principal.
“The borrower becomes liable for interest on the enlarged principal amount. This results in a higher total debt obligation, with future interest accruing on the increased balance if payment is not made,” Justice Alibatese noted.
The court further noted that the lender earns compound interest on both the original principal and the capitalised interest, thereby enhancing the overall return over time. Capitalisation also prevents the loss of accrued interest and allows for the postponement of payment without extinguishing or waiving the debt.
“Where a borrower is unable to pay interest immediately, capitalisation ensures that the lender’s entitlements are preserved,” the judge observed.
Conversely, the justices noted that the borrower also derives a benefit from capitalisation, as it defers immediate payment obligations, helping the borrower avoid default or enforcement proceedings.
URA Welcomes Decision
URA’s Commissioner for Legal Services and Board Affairs, Catherine Donovan Kyokunda, welcomed the decision, saying it affirms the authority’s assessments and legal work.
She said the ruling reinforces URA’s commitment to ensuring all due taxes are identified and collected, noting that exchange of information with foreign jurisdictions was key in establishing the tax liability.
Other Grounds Dismissed
The court also dismissed ATC’s argument that URA improperly relied on the financial statements of its foreign parent company. It ruled that Uganda has the authority to tax such interest and other income and expenses under the Netherlands-Uganda double taxation agreement, and that using the lender’s records for verification was lawful.
The justices explained that capitalisation of accrued interest occurs where interest that has accrued but has not been paid is added to the principal sum of the loan, so that it becomes part of the outstanding principal.
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