23 May 2019
RWANDA: New Residency Rule May Impact Tax for Foreign Companies
The Rwandan government has issued four ministerial orders on taxation. The four orders address requirements for loss carry-forward beyond the normal period, simplified accounting for small businesses, the annual turnover required for certification of a taxpayer's financial statements, and criteria for determining a taxpayer's permanent residence and the location of place of effective management. The new rules became effective on 7 May 2019, supplementing the country’s Income Tax Act, adopted in April 2018.
The key terms of the order regarding loss carry-forward for more than five-year tax period, require a written application to the Commissioner General of the Rwanda Revenue Authority, together with the tax declaration for the relevant fifth-year tax period. Sound reasons for the ongoing loss, proof on how the loss was derived, along with audited financial statements for the periods in question will also be needed. Applicants must be credible taxpayers with no history of tax evasion or late payments, and cannot have distributed any profits in the relevant five-year period.
Two other orders require small businesses to only maintain simple accounting records of daily cash and credit sales, daily cash and credit purchases, and all cash income and expenditure. The annual turnover threshold for companies that are obliged to provide financial statements certified by qualified professionals has also been increased to RWF400 million (US$440,000) to RWF600 million (US$660,000), and the sectors exempted from this requirement have been expanded to include distributors of soda, juice, petrol and petroleum products and audit firms, except when they cumulate activities.
While these changes may have some impact of foreign businesses, in the case of the order relating to criteria for identifying tax residency (Ministerial Order 003/19/10/TC of 29/04/2019), there could be significant implications for foreign companies operating in the country, and multinationals using Rwanda as a hub for regional operations.
Under this order, a company is deemed to have its place of effective management, and consequently, 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. According to Dieudonné Nzafashwanayo, a Senior Associate at ENSafrica, one of Africa’s largest law firms, this order may be of major significance, as 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 Rwanda’s corporate income tax on their worldwide income in terms of article 48 of the Income Tax Act.
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 for those established offshore for genuine commercial reasons.