Income Tax on Companies

TAXPAYERS CONCERNED

The tax law which applies to Business Entities and individuals who are not employees also applies to companies. But companies and similar organisations as described in Article 38 DTI are subject to additional regulations.:

According to  article 38, the following entities shall be subject to corporate income tax:

  • Companies established in accordance with Rwandan or foreign law;
  • Cooperative societies and their branches;
  • Public business enterprises;
  • Partnerships;
  • Entities established by Districts and the City of Kigali, to the extent that these entities are involved in business activities;
  • De facto companies or associations and any other entities that perform business activities, and are established for the purpose of making profits.

But much of what applies to companies is also defined in Articles 1 to 36 which apply to companies as well as individuals who are tradesmen or members of the professions. Articles 37 et seq apply to businesses registered as companies or who are covered by Article 38 – referred above

Tax residence

Unless specifically stated otherwise (see above), a commercial company is taxable in Rwanda only if it has a tax residence here. Such an entity is regarded as resident in Rwanda if, during a fiscal year (Article 3 para. 3 DTI):

  • If it is established in accordance with Rwandan legislation even if the company does not have its effective management in Rwanda;
  • The entity is effectively directed from Rwanda at any time during the fiscal year even if it is established in accordance with foreign legislation;
  • The entity is a state-owned Rwandan company.

However, commercial companies which do not meet these conditions will be liable to tax only on their profits arising from a permanent establishment in Rwanda (Article 40 para. 2 DTI). A double taxation situation is avoided by a system of tax credits and double taxation relief agreements (see above). It is important to remember that even where an official Double Taxation Agreement does not exist, tax paid in another country should be taken into account when assessing tax due in Rwanda. Where tax paid in the other country is higher than paid in Rwanda does not mean that an allowance will be given iN Rwanda.  The same would happen to a Rwandan business operating in the UK.

TAX BASE

Principles

All income less deductible expenses is subject to Corporate Income Tax.

Article 37 establishes the Corporate income tax and Article 41 of DTI establishes the rate to be 30%.

Exemptions   Dividends paid between companies

Art.  45 DTI exempts taxable profits, any dividends or participations in the received profits of a resident company. The reason for this measure is that, as far as the company making the distribution is concerned, dividends have already been taxed in the form of income tax collected from the entity as they are not deductible expenses.

Gains arising on the reorganizations of companies

As far as a reorganization is concerned, the law aims to address several situations (Article 46 DTI):

  • The amalgamation of at least two resident companies;
  • The acquisition of at least fifty percent (50%) of the shares or voting rights, by number or value, of a resident company, in exchange for shares in the acquiring company;
  • The division (“scission”) of a resident company into at least two resident companies.

In case of reorganization of companies, the transferring company is exempt from tax in respect of capital gains or losses realized on reorganization. The receiving company values the assets and liabilities involved at their book value as stated by the transferring company at the time of reorganization. The receiving company depreciates the business assets according to the rules that would have applied to the transferring company as if the reorganization had not taken place.

In case of reorganization, the receiving company is entitled to carry over the reserves and provisions in the books of the transferring company, subject to the conditions that would have applied to the transferring company as if the reorganization had not taken place. The receiving company assumes the rights and obligations of the transferring company in respect of such reserves and provisions.        

ASSESSMENT AND ALLOWANCES

 Principle

Once the taxable profit is established by the taxpayer, it must be rounded down to the nearest thousand Rwf (Article 41 DTI).

The rate of the tax is fixed at thirty percent (30%) of taxable profit.

Reduction of the rate of the tax through investment promotion and incentives.

      Companies with large numbers of employees

In order to promote investment and to encourage the companies to engage employees, the tax law has outlined tax incentives but only for approved investors. In practice, this takes the form of a discount of the rate of tax applied as the number of employees increases (Article 41 para. 3 DTI).

  • If the company employs between one hundred (100) and two hundred (200) Rwandans, the rate of tax will be reduced by two percent (2%);
  • If the company employs between two hundred and one (201) and four hundred (400) Rwandans, the rate of tax will be reduced by five percent (5%);
  • If the company employs between four hundred and one (401) and nine hundred (900) Rwandans, the rate of tax will be reduced by six percent (6%);
  • If the company employs beyond nine hundred (900) Rwandans, the rate of tax will be reduced by seven percent (7%).

However, the employees to be taken into account are those where:

  • the business is their prime employer – i.e. the tax deducted is not simply 30% withholding tax which would happen where the person works for several employers (see Articles 48 and 50 DTI)
  • the employees are paying income tax – their pay is greater than Rwf 30,000 per month
  • the employees are employed for at least 6 months during the fiscal year (art. 41 in fine DTI).

This provision obviously aims at encouraging companies to hire better-paid Rwandan employees.

    Exporting companies

A discount in the rate of the tax is also in place for companies which operate in export fields in order to encourage them to continue to play a positive role for the growth and development of the Rwandan economy. This exemption is based on sales turnover generated by export activities (art.42 para. 1 and 2 DTI):

  • If export activities generate between three million US dollars ($3,000,000) and five million dollars ($5,000,000) for Rwanda, the rate of the tax will be discounted by three percent (3%);
  • If export activities generate more than five million dollars (5 000 000 $) for Rwanda, the rate of tax discount will be five percent (5%).

At an exchange rate of Rwf 600 to 1 USD, 3 million USD are the same as Rwf1.8 billion

It should be noted that the reductions in the rate of tax for exports cumulate with the reductions of the rate of tax for occupation of workers.

   Declaration and payment of the tax  

Art. 43 DTI which regulates the tax declaration and the modes of payment of the tax on the profits of companies are almost identical to article 12DTI, its counterpart for income tax.  Therefore, the applicable rules for the declaration and the payment of the income tax apply mutatis-mutandis for the declaration and the payment of the income tax of companies.

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