Heavy Taxes, Thin Margins: Why Uganda’s Rental Tax Policy is Testing Real Estate Growth Potential Uganda’s real estate sector is growing, but its tax framework may be slowing it down. High borrowing costs, capped deductions, and multiple levies are squeezing corporate landlords, pushing up rents and discouraging investment. Experts warn that without reform, the sector’s long-term contribution to jobs, housing, and revenue could suffer significantly.

On the surface, Uganda’s real estate sector appears to be thriving. Cranes dot Kampala’s skyline, mortgage uptake is rising, and Government revenue from corporate and rental income taxes continues to grow.

But beneath this apparent progress lies a quieter strain—one that tax experts warn could slow the sector’s momentum if left unaddressed.

Patricia Kiggundu, a Tax Manager at PwC Uganda, likens the situation to the old parable of the goose that laid golden eggs.

Real estate, she argues, is steadily contributing to the economy, but excessive or poorly structured taxation risks killing off its long-term potential.

Recent figures show why the sector attracts attention. Mortgage lending rose by 33% from UGX 526 billion in 2022 to UGX 702 billion in 2023, reflecting strong investor confidence.

During the 2023/24 financial year, corporate income tax collections stood at UGX 434.5 billion, while rental income tax contributed UGX 41.26 billion.

These numbers underscore real estate’s growing role in Uganda’s revenue base. Yet, they also raise an important question: at what cost is this revenue being raised?

The answer, Kiggundu explains, lies in the design of Uganda’s rental tax system, particularly for corporate landlords.

For individual property owners, she says, recent reforms have brought relief. Those earning below UGX 2.82 million annually are exempt from rental tax, while those above that threshold pay 12% only on the excess.

The system is simple and progressive, easing compliance and reducing pressure on small landlords.

Companies, however, operate under a very different framework. Regardless of their actual costs, corporate landlords can only deduct expenses up to 50% of their gross rental income.

The remaining income is taxed at 30%, even if much of it has already been consumed by legitimate business costs such as loan interest, maintenance, or commissions.

Any expenses above the 50% cap are permanently lost for tax purposes.

In theory, the cap was meant to prevent aggressive tax planning. In practice, Kiggundu notes, it often results in companies paying tax on income they never truly earned.

She illustrates this with a common scenario. A company invests UGX 2 billion to construct a commercial building, largely financed through bank loans.

In a year, it earns UGX 200 million in rent but spends UGX 140 million servicing mortgage interest, maintaining the property, paying agents, and accounting for depreciation.

Despite these real costs, only UGX 100 million is deductible. The company is then taxed on the remaining UGX 100 million, resulting in a UGX 30 million tax bill, effectively taxing a loss-making operation as though it were profitable.

This challenge is magnified by Uganda’s high cost of borrowing. Commercial lending rates often range between 18 and 20%, making interest the single largest expense for property developers.

Yet interest costs are still caught within the same deduction cap. Add local service tax and ground rent payable to local governments, and property owners find themselves facing multiple layers of taxation on the same asset.

The consequences extend beyond landlords. To remain viable, many pass these costs on to tenants through higher rents, particularly in urban centres where demand is strongest.

Over time, this risks making formal commercial and residential space less affordable, while discouraging new investment.

Kiggundu argues that reform does not mean sacrificing revenue. Allowing full deduction of mortgage interest, or excluding it from the 50% cap, could ease pressure on developers while still preserving government’s tax base.

Such a move would align rental taxation more closely with the economic realities of property development.

There is also a policy contradiction at play. Recent amendments to the Income Tax Act now exempt individuals from capital gains tax when transferring assets into companies they control, encouraging structured ownership and better succession planning.

Yet the restrictive rental tax rules make company ownership less attractive once the property starts generating income.

Uganda’s real estate sector remains a valuable economic asset. It supports jobs, anchors urban development, and provides a steady stream of public revenue.

But as Kiggundu cautions, taxing it too heavily, especially at the early stages of investment, could undermine the ability of real estate to grow.

If carefully nurtured, real estate will continue to deliver sustainable returns for both investors and the state. If squeezed too hard, the golden goose may stop laying eggs altogether.