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The Ministry of Finance recently presented proposed amendments to various tax laws including the Income Tax Act and the Stamp Duty Act among others. In particular, the Income Tax (Amendment) Bill 2024 (the “Bill”) proposes to introduce a tax on the gains from the disposal of non-business assets at a rate of 5% on the gains computed. Clause 5A (3)(c) of the Bill however provides that this tax would not apply to gains from the disposal of non-business assets arising from the disposal of investment interest of a registered venture capital fund or private equity (sic). Further, Clause 21 (1) (ta) proposes to exempt income derived from or by private equity or venture capital fund regulated under the Capital Markets Authority Act, Cap 84 from tax. `
These developments – including related ones contained in the Stamp Duty (Amendment) Bill 2024 – are a welcome development, as they are intended to grant incentives to venture capital and private equity funds providing patient capital to start-ups and other high-growth businesses.
While the proposed tax exemptions are well-intentioned and may indeed spur inward investment, they are couched in ambiguous language and this might lead to a failure to achieve the desired objective.
Ambiguities in the proposed amendment
From a reading of the provisions, the entities that would enjoy the tax incentives under the Bills would be private equity (sic) and venture capital funds approved by the Capital Markets Authority of Uganda. There are a few lingering questions, however, as highlighted below:
1. The Capital Markets Authority Act (the “Act”) requires venture capital funds to obtain approval from the Capital Markets Authority (the “Authority”) prior to commencing operations in Uganda.
It may be argued that this requirement is typically disadvantageous, as several venture capital funds are foreign-domiciled, and the requirement to go through the rigorous regulatory processes prior to providing capital to start-ups in Uganda may be unwelcome to the extent that it introduces several ongoing regulatory compliance obligations. A further implication in the Bill therefore is that these foreign domiciled venture capital funds would be further excluded from benefitting from the proposed incentives, on account of not being licensed by the Authority.
If this interpretation holds true, the benefits intended to be realized through the incentives would be limited to a small pool of venture capital funds approved by the Authority – contrary to the wider objective of attracting more capital. A broader solution, other than amending this proposal in the Bill, will require an amendment to the Act, to remove the requirement for venture capital funds to obtain licenses from the Authority prior to doing business in Uganda.
2. The Act does not provide for regulation of private equity funds and as such, they do not require approval to commence operations in Uganda. As opposed to the venture capital funds, therefore, both local and foreign private equity funds would benefit from the incentives, it appears.
If that be the case, the applicability of the incentives would be uneven and impede the full realization of the intended objective. There is also a risk of misinterpretation of the provisions to the extent that there will be an expectation on the part of private equity funds to obtain approval from the Authority, as is the case with venture capital funds – prior to benefitting from the tax incentive, whereas there is no requirement in the Act for that approval.
To the extent of the ambiguities highlighted above, and to ensure the full realization of the intended objective, there is a need for clarification of the proposed amendments. The applicability of the incentives should also be expanded to include angel investors, accelerators, and incubators. Lessons may be drawn from the position adopted in the Nigeria Start-Up Act to this effect, as is highlighted below.
Viewpoints from the Nigeria Start-Up Act
As previously highlighted in this article, the Nigeria Start-Up Act provides for tax incentives for angel investors, venture capitalists, private equity funds, accelerators and incubators (collectively, – “investors”) that invest in start-ups – including an investment tax credit equivalent to 30%, applicable to any gains on the investments subject to tax, and a tax exemption on capital gains tax that accrues from the disposal of assets by investors, provides the assets have been held in Nigeria for a minimum of 24 months.
It is notable that the Nigeria Start-Up Act does not distinguish between foreign or locally domiciled investors, which makes the incentives applicable to all investors and ensures that the objectives of the incentives are realized.
The incentives proposed under the Bill are more attractive – but limited to the extent that they are conditioned to being licensed in Uganda for venture capital funds, and limited by the ambiguity regarding the private equity funds.
Conclusion
The proposed tax incentives are a welcome development, especially for the start-up ecosystem in Uganda. However, without the clarifications in the Bill, the objectives of the incentives may be long in coming on account of the structural challenges with the language of the law.
Disclaimer: “The views and opinions expressed on the site are personal and do not represent the official position of Stanbic Uganda and Khulani Capital.”
