Is Uganda’s rental tax policy hurting real estate growth?

Is Uganda’s Rental Tax Policy Hurting Real Estate Growth? 

There’s an old story about a man who owned a goose that laid a golden egg every day. Hoping to get all the eggs at once, he killed the goose—only to find none inside. He had destroyed something valuable out of impatience.

Uganda’s real estate sector is much like that goose. It’s a growing contributor to the economy, but if overtaxed or poorly supported, it could be stifled. Recent data shows strong interest in real estate development, with mortgage uptake rising by 33%—from UGX 526 billion in 2022 to UGX 702 billion in 2023. In the 2023/24 financial year, corporate income tax brought in UGX 434.5 billion, with rental income tax contributing UGX 41.26 billion.

While these figures reflect growth, they also raise concerns about the burden placed on corporate landlords especially through Uganda’s rental tax system.

Understanding the Rental Tax Burden

Rental tax in Uganda is levied on income earned from leasing immovable property. For individual landlords, the system was simplified in FY22/23: those earning less than UGX 2.82 million annually pay no rental tax, while those earning more pay 12% on the excess.

However, for companies, the rules are stricter. A company can only deduct expenses up to 50% of its gross rental income, even if its actual costs are higher. The remaining income is taxed at 30%. Any expenses beyond the 50% cap cannot be carried forward to future years.

This policy was introduced to limit excessive deductions by companies, which the government believed were reducing their tax contributions. But in practice, it’s creating financial strain for corporate landlords.

A Real-World Example

Consider Company Z, which spent UGX 2 billion to build a commercial property. In one year, it earned UGX 200 million in rental income. However, it also incurred:

• UGX 90 million in mortgage interest (at rates of 16–18%),
• UGX 20 million in maintenance costs,
• UGX 20 million in broker commissions,
• UGX 10 million in depreciation (industrial building allowance).

Total expenses: UGX 140 million.

Under current law, only UGX 100 million (50% of rental income) is deductible. The remaining UGX 100 million is taxed at 30%, resulting in a tax bill of UGX 30 million. This means Company Z pays tax on income it didn’t actually earn, due to the cap on deductions.

The Bigger Picture

This example highlights a broader issue. Commercial bank lending rates in Uganda range from 18% to 20%, making borrowing expensive. For companies investing in real estate, interest payments often exceed other costs. Yet, the law limits how much of this interest can be deducted from taxable income.

On top of rental tax, property owners also pay Local Service Tax and Ground Rent to local governments—effectively taxing the same asset multiple times. These costs are often passed on to tenants, resulting in higher rents, especially in urban areas.

Time for Reform?

To support real estate growth, Uganda could consider allowing full deductions for mortgage interest, or at least excluding interest from the 50% cap. This would ease the financial pressure on corporate landlords and encourage more investment in housing and commercial property.

There’s also a need to revisit the broader rental tax provisions in the Income Tax Act. The current system may discourage formalization of property ownership under companies, which contradicts recent government efforts to promote structured succession and prevent land fragmentation.

In fact, a recent amendment to the Income Tax Act (FY25/26) exempts individuals from capital gains tax when transferring assets to a company they control. This is a welcome move, allowing families to consolidate property under one entity without tax penalties. But the rental tax cap still makes this setup less attractive financially.

A Call for Balance

Uganda’s real estate sector is a valuable asset. It supports jobs, provides housing, and contributes to Government revenue. But if corporate landlords are overburdened with taxes and limited in how they manage costs, the sector’s growth could slow down.

The Government has made positive steps, such as simplifying taxes for individuals and encouraging family asset consolidation. Now, it’s time to take the next step: reconsider the 50% cap on deductible expenses for companies, especially interest on loans used to build rental properties.

If nurtured wisely, the real estate sector can continue to lay golden eggs for Uganda’s economy. But if squeezed too hard, we risk losing the goose altogether.

By Patricia Kiggundu Tax Manager at PwC Uganda