The Income Tax (Amendment) Act, 2026: Key Reforms and Their Impact
The Income Tax (Amendment) Act, 2026: Key Reforms and Their Impact
1. Commencement
The Act came into force on 1 July 2026 and therefore all provisions introduced by the Amendment Act took effect on that date.
2. Redefinition of Royalty [Section 2]
The amendment expands the definition of a royalty to expressly include payments for software, software licenses and related digital rights. Under the previous position, software payments were often treated as ordinary service payments, particularly where no intellectual property rights were transferred. The amendment significantly broadens URA's scope of taxation by ensuring that software payments made to non-residents are captured within the royalty definition and may therefore be subject to withholding tax.
While the amendment provides much-needed clarity and aligns Uganda's tax framework with international practice, it is likely to increase the tax cost and compliance burden for businesses using foreign software vendors, Software as a Service “SaaS” platforms and cloud-based solutions. Businesses should review software agreements, assess withholding tax exposure, and update procurement and accounting processes to ensure compliance.
3. Amendment of Section 21: Exempt Income
a) Hotel and Tourism Facility Developer Exemption [Section 21(1) (ah)]
The amendment maintains tax incentives for qualifying hotel and tourism facility developers that meet specified investment and employment thresholds. Income of a hotel or tourism facility developer is exempt from income tax where the developer:
- Invests at least USD 10 million (foreign investor) or at least USD 5 million (Ugandan citizen investor).
- Uses at least 70% locally sourced raw materials where available.
- Employs at least 70% Ugandan citizens and ensures they account for at least 70% of the total wage bill.
The amendment is intended to stimulate investment in the tourism and hospitality sectors by reducing the tax burden on large-scale tourism projects. The measure is expected to encourage foreign direct investment, support sector growth, and contribute to job creation especially with the upcoming AFCON games scheduled for 2027 with Uganda as one of the host countries.
However, investors must continue to satisfy strict qualification criteria relating to capital investment, employment levels, and tourism-specific conditions. Hotel operators, resort developers, and tourism investors should review project eligibility, monitor compliance with the prescribed thresholds and ensure that qualifying conditions are maintained throughout the incentive period.
b) Revised Definition of Infrastructure Bond [Section 21 (7)]
The amendment revises the definition of an infrastructure bond to now include all bonds, notes and similar securities used to raise funds for public infrastructure and social services with maturity periods of at least ten years. Under the previous regime, only listed infrastructure bonds benefited from favorable tax treatment provided certain conditions were met. The revised definition seeks to tighten eligibility criteria and provide greater clarity regarding the types of bonds that qualify for the exemption.
Investors, infrastructure companies, financial institutions, and insurance companies should review their bond portfolios and confirm compliance with the new requirements to avoid unexpected tax consequences.
4. Inclusion of Microfinance Deposit-Taking Institutions or Tier 4 Microfinance Institutions [Section 24]
An allowable bad debt written off expense claim in relation to money lent by Microfinance Deposit-Taking Institutions or Tier 4 Microfinance Institutions besides financial institutions.
5. Amendment of Section 25 (5): Interest Deductibility Rules
a) Introduction of Dormant Entity Definition
A dormant entity is now specifically defined as a non-individual entity that is not conducting business and has no accounting transactions during the year.
b) Revision of Group Definition
A group now means persons other than individuals with at least 51% interest of the common underlying ownership and excludes any member of the group that is dormant.
c) Revision of Tax earnings before interest, tax, depreciation and amortization “Tax EBITDA” Definition
The Act clarifies on the definition of Tax EBITDA to mean the sum of gross income less allowable deductions other than brought forward losses and excludes interest, depreciation and amortization.
6. Amendment of Section 82 (5): Withholding Tax on Debenture Interest
The amendment revises the withholding tax treatment applicable to interest payments on debentures made to non-residents, the applicable rate is 5%. Previously, Section 82(5) of the Income Tax Act exempted WHT on interest paid in respect of debentures provided the conditions of widely issued, paying interest outside Uganda, and if the lender was a bank or financial institution of a public character were met.
The proposal broadens Uganda's taxing rights over offshore financing arrangements and seeks to capture additional revenue from cross-border transactions. While the measure strengthens domestic revenue mobilization, it may increase borrowing costs for companies relying on foreign loans and could reduce the attractiveness of Uganda as a destination for foreign-funded projects.
Businesses with international financing arrangements should review loan agreements, evaluate double taxation treaty relief, and assess the overall effect on financing costs.
7. Digital Services Tax “DST” – Royalties Excluded [Section 86 (7)]
The amendment clarifies that payments characterized as royalties will not simultaneously be subject to Digital Services Tax of 5%. The clarification provides certainty by ensuring that royalty payments are taxed under the royalty withholding tax rules at 15% while remaining outside the scope of DST.
This is a positive development for technology companies, software providers and multinational enterprises engaged in digital transactions. Taxpayers should nevertheless review payment classifications carefully to ensure that transactions are appropriately characterized and taxed under the correct regime.
8. Insertion of Section 115A: Arm's Length Principle
The amendment introduces a new provision formally incorporating the arm's length principle into Uganda's tax law. Although transfer pricing rules already existed, the arm's length standard was not expressly included in the Income Tax Act. The amendment strengthens URA's ability to challenge transactions between related parties that do not reflect market conditions and enhances alignment with international transfer pricing standards.
The measure is expected to improve consistency and strengthen anti-avoidance enforcement. However, multinational groups will face increased scrutiny and compliance obligations, particularly regarding transfer pricing documentation and benchmarking studies. Taxpayers should review intercompany agreements, management fees, royalty arrangements, and service charges to ensure they can demonstrate arm's length pricing.
9. Monthly Rental Income Provisional Return [Section 124]
The amendment introduces an option for individuals earning rental income to file monthly provisional rental income tax returns. The objective is to improve tax collection and encourage continuous compliance in the rental sector by spreading tax payments throughout the year.
While this may improve government cash flow and reduce year-end compliance risks, it imposes additional administrative requirements on landlords, property owners, and real estate companies. Individuals will need systems capable of tracking monthly rental income and calculating provisional liabilities accurately.
10. Withholding Tax on Gaming or Betting Winnings [Section 131]
The amendment imposes withholding tax on gaming at a rate of 15%. This amendment aligns the tax treatment for both gaming and betting activities. The proposal broadens the tax base by bringing gaming income within the withholding tax framework and aims to improve tax compliance within the rapidly growing gaming sector.
Winnings are defined as payout less the staked amount and therefore, tax applies only to actual gains. National Lottery winnings are excluded.
The amendment will primarily affect betting companies, casino operators, gaming agents, and their customers.
11. Expanded Withholding Tax on Telecommunication Commissions [Section 133]
The amendment expands withholding tax at 10% to cover commissions earned from telecommunication retail services, mobile network services or provision of mobile money services. Previously, Section 133 imposed WHT on telecom commissions but the scope of services covered was narrower, focusing primarily on airtime distribution and provision of mobile money services.
The amendment broadens the tax base and may improve compliance within the telecommunications sector. However, telecom agents and mobile money operators are likely to experience reduced net commissions. Businesses should review commission structures, identify affected services, communicate changes to agents, and ensure that systems correctly account for withholding tax obligations on qualifying payments.
12. Insertion of Section 135B: Withholding Tax on Public Entertainers
The amendment Act introduces withholding tax on payments made to public entertainers at 6%. Previously, there was no specific WHT provision for payments to public entertainers under the Income Tax Act. The objective is to formalize taxation within the entertainment industry and improve tax collection from both resident and non-resident performers. The measure creates a clear mechanism for collecting tax at source and aligns the entertainment sector with other industries subject to withholding tax.
Furthermore, public entertainers have been defined to mean persons who perform in public, or in front of the camera, or microphone, on stage, radio, television, or digital performers.
Businesses should consider this withholding tax obligation as they hire influencers for marketing activities or MCs at events. This amendment affects both designated and non-designated WHT agents. The entertainers may have further compliance obligations such as filing final income tax returns as this WHT is not a final tax.
13. Amendment of Section 139: Final Withholding Tax
a) Insurance Agent Commissions
The 10% WHT on commissions payments to insurance agents is now recognized under the final withholding tax provisions. This is introduced to simplify compliance for individual insurance agents. The insurance agents will not have further tax obligations such as filing a final income tax return regarding the insurance commission income.
b) Telecommunication retail services and Mobile Money Commissions
Commissions paid to resident individuals for telecommunication retail services, mobile network services and mobile money services are treated as final withholding tax income.
14. Revised PAYE Tax Bands [Schedule 4 Part I]
The amendment revises individual income tax bands and PAYE thresholds. The new structure is intended to provide relief to lower-income earners while increasing progressiveness within the tax system. The amendment is expected to reduce the effective tax burden for employees in lower income brackets and increase disposable income for many workers. All gross salary payments below UGX 335,000 are now exempt from PAYE.
Conversely, some higher-income earners may experience greater tax liabilities. Employers will be required to update payroll systems, revise tax deduction calculations, and communicate the changes to employees before implementation to avoid underpayments, overpayments and compliance penalties.
NOTE:
The PAYE rates for non-resident individuals have not been amended.
This Act was signed by the President on 20 August 2026, after its commencement date of 1 July 2026. At the moment, the PAYE return template from the portal still reflects the old rates. We anticipate that by the 15th of September 2026, the template would then be reflecting the new rates. Therefore, for August and future salaries, the new rates should be used to prepare the payroll and proceed to make payments to employees accordingly.
For the period of July 2026 where filing had already been done, we will have to wait for the URA's advise on this, whether returns have to be amended and the excess money refunded to the employees or not.
How we can help
To understand how these amendments may affect your organization and the steps you should take, speak with our tax professionals for tailored advice. Contact us at tax.ug@forvismazars.com or +256 414 660 071.