Uganda’s Proposed 5% Withholding Tax On Foreign Debt

Uganda is proposing significant changes to how it taxes cross-border debt. The Income Tax (Amendment) Bill, 2026 would introduce a new 5% withholding tax on certain interest payments that are currently exempt. Whether you are a borrower structuring foreign financing or a lender extending credit into Uganda, this could affect you.

The amendment targets interest payments on debentures issued to raise loans outside Uganda and paid to foreign banks and financial institutions of a public character which have historically been exempted to encourage foreign investment.

Where we are now

Under the current framework, section 82(5) of the Income Tax Act provides an exemption for interest paid to foreign financial institutions of a public character. The thinking behind this was straightforward: lower borrowing costs, attract foreign funding and encourage long-term debt financing through recognised institutions.

A recent test case: Kalangala Infrastructure Services v URA

The importance of this exemption was assessed in the 2025 decision of Kalangala Infrastructure Services Limited v Uganda Revenue Authority (TAT Application No. 265 of 2022). In that case, the taxpayer had partnered with the Government to develop infrastructure on Bugala Island, financing the project through loans from Nedbank Limited and the Emerging Africa Infrastructure Fund (EAIF). The Uganda Revenue Authority argued that interest paid to EAIF should attract withholding tax.

The Tribunal ruled in favour of the taxpayer, finding that EAIF qualified as a financial institution of a public character because it finances infrastructure projects benefiting the public. Importantly, the Tribunal noted that Uganda is a “net importer of capital” and that section 82(5) was designed to incentivise such foreign lenders to lend to Ugandan projects.

The proposed amendment would change this entirely. Interest payments like those in the Kalangala case would no longer be exempt instead, they would attract the 5% withholding tax.

Why is this happening?

We see three main reasons behind this change. First, the Government wants to broaden its tax base. With government borrowing and private debt growing substantially, a withholding tax on these interest payments creates a new revenue stream from transactions that previously fell outside the tax net.

Second, there is a fairness argument. The current exemption arguably favours offshore debt over locally sourced capital, and the 5% tax introduces a middle ground that reduces this imbalance.

Third, Uganda is aligning with regional practice. Several East African neighbours impose withholding taxes on cross-border interest, typically between 10% and 15%.

What this means for you

For borrowers, borrowing would cost more. Even at 5%, the new tax would increase the effective cost of debt. For lenders, the impact would depend on whether the tax can be credited against home country tax liabilities. Where no credit is available, the withholding tax would reduce lender returns.

Watch out for gross-up clauses. Many cross-border loan agreements require borrowers to “gross up” interest payments to preserve the lender’s net return. Where these clauses apply, the burden of any new withholding tax would fall on Ugandan borrowers. Lenders should review existing documentation to confirm whether gross-up protection is in place and whether it would cover this proposed withholding tax. For new transactions, lenders may wish to negotiate robust gross-up and tax indemnity provisions.

Double Taxation Agreements (DTAs) may help. If the amendment is enacted and lenders are resident in countries with which Uganda has a DTA, treaty provisions may cap or override the domestic rate. Both borrowers and lenders should assess whether treaty relief would be available and factor this into pricing and structuring discussions. Lenders should also consider whether their home jurisdiction would provide foreign tax credits for any Ugandan withholding tax suffered.

Do not forget compliance. If enacted, the amendment would place additional withholding and reporting obligations on borrowers. Getting it wrong would attract penalties, interest, and potential disallowance of interest deductions.

What should borrowers and lenders do now?

We would recommend getting ahead of this proposed change. Borrowers should review existing and proposed financing structures to identify instruments that would be caught if the amendment is enacted, check whether DTA relief would be available, examine loan documentation for tax gross-up clauses, and ensure withholding and reporting processes are robust.

Lenders should assess the potential impact on yield and pricing for existing and new Ugandan exposures if the amendment is enacted. Review whether existing loan documentation includes adequate gross-up, tax indemnity, and increased costs provisions. Consider whether restructuring through treaty-resident entities or alternative instruments might mitigate the tax cost and evaluate foreign tax credit availability in your home jurisdiction.

The Bottom line

This proposed amendment signals a clear shift in Uganda’s approach to taxing foreign debt. If enacted, borrowers would face higher financing costs, and lenders would need to pay careful attention to yield protection and structuring.

If you would be affected, whether as a borrower or a lender, now is the time to review your financing arrangements, assess treaty and tax credit relief, understand the potential financial impact, and ensure your documentation adequately addresses the proposed withholding tax before any changes come into force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.