On 7 May 2019, the Rwandan Government issued four ministerial orders implementing the Income Tax Act, which was adopted in April 2018. The ministerial orders became effective on the same day and provide for various practical details not dealt with under the Income Tax Act, including requirements for loss carry-forward beyond the normal period, simplified accounting for small businesses and the annual turnover required for certification of a taxpayer's financial statements.
However, Ministerial Order nº 003/19/10/TC of 29/04/2019, providing criteria for determining a taxpayer's permanent residence and the location of place of effective management, introduces changes that are likely to significantly affect doing business in Rwanda, especially by Rwandan residents investing abroad and multinationals using Rwanda as a hub for operations in the region.
In terms of the ministerial order, a company is deemed to have its place of effective management, and therefore, tax residency, in Rwanda, if:
- its day-to-day control and management are performed in Rwanda;
- its shareholders' meetings are held in Rwanda;
- its books of accounts are prepared in Rwanda; or
- its main shareholders or directors are resident in Rwanda.
Each of the criteria under the ministerial order may have its own implications for foreign companies, but the fourth criterion seems to be most concerning. It implies that all foreign companies whose majority shareholders or the majority of its members of the board of directors are Rwandan residents, will be liable for Rwandan corporate income tax on their worldwide income in terms of article 48 of the Rwandan Income Tax Act.
The provisions on the place of effective management seem to defeat the spirit of the Rwandan investment promotion law, which provides for special incentives to international companies having their headquarters or regional offices in Rwanda. In addition, the ministerial order does not make any distinction between companies set up by Rwandan residents in low tax jurisdictions exclusively for tax purposes and those established offshore for genuine commercial reasons.
Reviewed by Celia Becker, an executive in ENSafrica's Africa regulatory and business intelligence team.
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