Rwanda Wakanda : Unpacking the huge new tax changes in Rwanda

Unfortunately, Wakanda is still fictional, but could Rwanda really become the Singapore of Africa?  It certainly wants to be, and it has made immense progress in recent years.  So, we all know how Rwanda has been building itself as a financial hub for Africa over the last few years, and what a great news story for Africa it has been in many ways.  Today, we unpack some recent tax changes and discuss how these interact with Rwanda’s great ambitions.

On 28 October 2022, various tax changes came into force to clarify and overhaul the tax system to make it more fit-for-purpose as a global financial centre.  Specifically, and ambitiously, there are changes to clarify the taxation of various new or unusual entity types, including partnerships, protected cell companies, special purposes vehicles, as well as (unusually for Africa), taxation rules for trusts and foundations.  Of course, being in Africa, there are even more rules on withholding taxes (sigh) as well as more tinkering with the residence definitions.  So very big changes and if you have operations in Rwanda, or are considering a move there, it’s definitely worth checking how the new rules will impact you.

Changes in brief – business structures

Lots of change here, partnerships will now be classified as tax-transparent entities, so the partnership will now be taxed on a partners’ level as opposed to the partnership as a whole. Other business ownerships that have been identified include cell companies, trusts, foundations, and investment special purpose vehicles, all with their own tax rules to consider. Additionally, gambling companies will now be taxed at a flat rate of 13% calculated as the difference between the winnings that have been paid out and the respective wagers received.

The dreaded thin cap

With regard to funding of related parties in Rwanda, there have been some changes to the thin capitalisation rules, i.e. the rules which restrict how much interest can be deducted on loan from a connected person. The thin cap rules have now been expanded to include realised foreign exchange losses, which are bound by the 4:1 debt-to-equity ratio limit, and unrealised foreign exchange losses are now classified as non-deductible. This needs to be carefully considered and with the increased interest rates and volatile currencies recently, this will likely have a significant impact on taxpayers.

And now, the GAAR

One of the key changes, drum roll please, is the introduction of Rwanda’s first-ever General Anti-Avoidance Rule (GAAR).   So, what is a GAAR again?  It’s basically the tax equivalent of “because I said so”, and provides that if you do something clever or convoluted that gives you a tax benefit and even if it is totally legal in terms of tax legislation, IF you did it solely or mainly to achieve the tax benefit, then you’re a very naughty boy and the tax benefit will be disallowed.

This is a big deal, and not usual across Africa compared to the developed world.  African countries that already have some sort of GAAR provisions include South Africa (no surprises there), Kenya, Zambia, Nigeria, Ghana, and Uganda.   The South African GAAR is of course the toothiest, see here for our previous article All you need to know about general anti-avoidance rules – focus on SA  and other countries’ GAARs vary quite a lot in terms of practical application.

So although the application and thus power of the GAARs varies a lot, where there is a GAAR there’s a worry.  So ignore it at your peril, as it is a very powerful tool if invoked carefully, and many careful plans have come a cropper in court through the GAAR, as discussed in another article Best laid plans of mice and men – how tax structures can come tumbling down in court – Regan van Rooy

So, a lot to think about if you are in Wakanda or planning to go, contact us to discuss how these broad-reaching changes could impact you.