. GENERAL PRINCIPLES
In tax law, the taxation of incomes earned by companies is based on some general principles. These include the following:
- The company is a subject of tax law distinct from its shareholders;
- The company is taxable on the whole of its income, all of which are regarded as belonging to the company and therefore taxable. Indeed, the distinction between capital and labour incomes do not make any sense as regards company taxes. The same applies to expenses. All expenditure made by a company is always regarded as applying to business activities. However, for an expenditure to be deductible, it is necessary that it meets the conditions of deductibility (see above);
- Pre-tax profit does not necessarily correspond to taxable profit. Indeed, certain types of expenditure incurred by companies are not always regarded as deductible for tax purposes.
The tax law indicates entities which are taxable in the form of income tax on companies (Article 38 DTI):
According to this article, 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;
- 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.
Entities mentioned in 1, 2 and 3 are deemed to conduct business in all their activities. This means that all their revenues are deemed to be received from their business activities.
Although the law has, in a restrictive way, listed those taxable entities liable to income tax on companies, it also outlines entities which are exempted from such taxation. These include the following entities (Article 39. 3º DTI):
- The Government of Rwanda, Provinces, the City of Kigali, and Districts; o The National Bank of Rwanda;
- Entities which solely carry on activities of a religious nature, or for humanitarian, charitable, scientific or educational purposes, unless the revenue received during a tax period exceeds the corresponding expenses, or to the extent that those entities in reality conduct a business;
- International organizations and agencies of technical cooperation and their representatives if such exemption is provided for by international agreements;
- Qualifying pension funds ; o The Rwanda Social Security Fund ; o The Rwandan Development Bank.
In addition, any micro-finances institutions recognised by the authorities are also exempted from income tax on companies but only for one five (5) years period which runs starting from the date of their approval. This period may be renewed by order of the Minister of Finance (Article 42 in fine DTI).
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).
According to article 44 of the DTI, the principles of determination of the benefit of the individuals, including allowable and deductible expenditure, apply mutatis-mutandis (“those things having changed which need to be changed”) for the determination of the taxable profits of companies. The principle of permanent establishment also applies in these cases. However, interest payable on loans and advances are deductible only up to a limit where the total amount of these loans and/or advances does not exceed, during the fiscal year, four (4) times the amount of the company’s resources (net assets). To determine what is meant by “own resources”, the reserves and provisions according to the balance sheet are not included. The law wanted to aim not only at authorized capital. It should be noted that this last rule applies neither to physical persons nor to banks or insurance companies (Article 22 in fine DTI).
In addition, resident companies resident are taxable on all their profits, whether of Rwandan or foreign origin, while non-resident companies are taxable only on any profits arising from a permanent establishment in Rwanda (Article 40 DTI). Finally, any products of liquidation are regarded as a distribution of dividends of the latest fiscal year (Article 47 DTI). Therefore, they will be also taxable.
Exempted benefits 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 the event of the reorganization of companies, the company which is being acquired is exempted of capital gains tax that notionally arises at the time of this reorganization. However, it will not be able to deduct any expenditure relating to the depreciation that is theoretically chargeable following this operation.
From the opposite point of view, the acquiring company evaluates the book value of the assets in the books of the company as at the date of the reorganization. Moreover, the acquiring company depreciates the assets according to rules’ which would have been applied to the transferring company if the reorganization had not taken place.
PAYMENT OF TAX
Once that taxable profit is established by the taxpayer, it must be rounded down to the nearest thousand RwF (Article 11 DTI).
The rate of the tax is, as is the case with investment income, a proportional one. For commercial companies, this rate is fixed at thirty percent (30%) of taxable profit.
Reduction of the rate of the tax
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 reduction in 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%); o 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%); o 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 which are not in tax-free income brackets , currently the income bracket of lower than 360.000 RwF per annum. Also, they must be employed for a period of at least six (6) months during the fiscal year (art. 41 in fine DTI). This provision obviously aims at encouraging companies to hire better-paid Rwandan employees.
A reduction of 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 dollars (3 000 000 $) and five million dollars (5 000 000 $) for Rwanda, the rate of the tax will be at the rate of three percent (3%);
- If export activities generate more than five million dollars (5 000 000 $) for Rwanda, the rate of tax will be five percent (5%).
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.