On 28 October 2022, Rwanda’s new income tax law (came into effect, repealing its predecessor, law no. 016 / 2018 of 13/04/2018, which has been in force since 2018. The new law seems to overhaul the Rwandan income tax system as it introduces various significant changes.
One of the key changes introduced by the new law relates to tax treatment of partnerships. These will be treated as tax transparent with their income being taxable at a partners’ level. The new law also deals with the taxation of business structures that are new in Rwanda such as:
- investment special purpose vehicles (SPVs); and
- protected cells companies and/or their cells.
The new law also extends the application of thin capitalisation restrictions to realised foreign exchange losses which will (in the same way as interest on related-party funding transactions) be subject to a 4:1 debt to equity ratio limitation. Unrealised foreign exchange losses have been, in the new law, included under the list of non-deductible expenses.
Another change introduced relates to the taxation of gambling companies which was previously governed by a separate law. Gambling companies will now be subject to corporate income tax as well as payment of advance taxes at the rate of 13% of the difference between wagers received and winnings paid out.
It also revisited the concept of residence for individual where the 183-day rule has been supplemented with a special-anti avoidance provision warranting consideration of the days spent in Rwanda during the previous two tax periods. It equally expanded the concept of permanent establishment (“PE”), particularly the agency PE by capturing instances where the agent plays significant role leading to the conclusion of contracts by a non-resident enterprise. A new form of PE for insurance companies collecting premiums in Rwanda or insuring risks in Rwanda has also been introduced.
There is also an extension of the list of payments subject to withholding tax, and the new items on the list include:
- repatriated profits;
- reinsurance premiums; and
- capitalisation of retained earnings.
Low-income earners have also been considered where the amount exempted from personal or employment income tax has been increased from FRW30 000 to FRW60 000 a month or its equivalent per annum, and a new a basket (FRW100 001 to FRW200 000 a month or its equivalent per annum) will be taxed at a rate of 20% effective from the second year of the new law.
The last change, which is probably the most striking, is the general anti-avoidance tax provision (“GAAR”), which is introduced for the first time in Rwanda. The new GAAR permits the tax administration to disregard or recharacterise transactions/arrangements lacking commercial substance/rationality, those whose principal purpose is to obtain tax benefits, etc.