Withholding tax on the sale of mortgaged properties

Introduction

The application of withholding tax on the sale of mortgaged properties in Uganda has sparked significant judicial debate, as evidenced by two contrasting High Court decisions: Luwaluwa Investments Limited v. Uganda Revenue Authority ([2023] UGCommC 160), decided by Hon. Justice Thomas Ocaya, and Bernard Byamukama v. Paul Muwanga t/a Polo Boutique ([2025] UGCommC 261), decided by Hon. Justice Stephen Mubiru. Both cases grapple with the interpretation of Section 118B(2) (now Section 130(2)) of the Income Tax Act (ITA), Cap 340, which mandates a 6% withholding tax on the purchase of business assets, and its interaction with Section 117(2)(b) (or Section 127(2)), which exempts interest paid to financial institutions from withholding tax. While Justice Ocaya’s ruling in Luwaluwa prioritizes taxpayer fairness by limiting tax liability to surplus proceeds after loan repayments, Justice Mubiru’s decision in Byamukama emphasizes robust revenue collection by requiring tax withholding on the gross purchase price, with exemptions adjusted later. This Article examines the legal provisions, the judges’ divergent positions, the reasons for Justice Mubiru’s departure from Luwaluwa, and the implications for Uganda’s financial and real estate sectors, arguing that the split necessitates higher court clarification to balance revenue protection with equitable taxation.

Justice Ocaya’s Position in Luwaluwa Investments v. URA

In Luwaluwa Investments Limited v. Uganda Revenue Authority (High Court Civil Appeal No. 43 of 2022), decided on May 22, 2023, Justice Ocaya addressed a URA assessment of UGX 965,700,000 against Luwaluwa Investments for purchasing Afrique Suites, properties sold by Equity Bank Uganda Limited to recover a defaulted USD 10 million loan. The Tax Appeals Tribunal upheld the assessment, arguing the properties were business assets under Section 118B(2) and no conflict existed with Section 117(2)(b). Luwaluwa appealed, challenging the asset classification, the provision’s clarity, and its compatibility with the interest exemption.

Justice Ocaya ruled that mortgaged properties become business assets upon foreclosure, as ownership is irrelevant under Section 118B(2): “It reasoned that there is no requirement that the asset must be owned or put into use by the entity selling under section 118B(2)… for it to qualify as a business asset”. He found the provision unambiguous, clearly imposing tax on business asset purchases. However, he identified a critical conflict between Section 118B(2) and Section 117(2)(b), reasoning that withholding tax is a collection mechanism for income tax, and no tax applies if no chargeable income exists.

Analyzing the proceeds under Section 36 of the Mortgage Act, Ocaya J held:

• Principal is a return of capital, not chargeable under Sections 15 and 17 noting that “The principal recovered does not form part of the chargeable income of the bank”.
• Interest is business income under Section 18(1) but exempt under Section 117(2)(b) as he pointed out that “The interest recovered by disposal of a foreclosed mortgage is business income of the bank. However, the same interest income is exempt from withholding tax under section 117(2)”.
• Surplus “Only the surplus of the consideration for the sale of mortgaged property after deduction of the principal sum and interest is properly amenable to withholding tax”.

Since the sale proceeds (USD 4.35 million) covered only part of the principal, with no interest or surplus, no tax was due, “The amount paid by the appellant only partly covered the principal which does not form part of the chargeable income of the bank thus not amenable to withholding tax”. Ocaya J set aside the TAT’s decision, emphasizing equitable taxation that “Tax is the life blood of government… There should be a balancing act. In each case, the court should consider all the circumstances together and give a decision that best achieves the justice of the case”. His ruling limits tax liability to surplus proceeds, protecting taxpayers in foreclosure sales where no profit is realized.

Justice Mubiru’s Position in Bernard Byamukama v. Paul Muwanga

In Bernard Byamukama v. Paul Muwanga t/a Polo Boutique (High Court Civil Suit No. 134 of 2022), decided in August 2025, Justice Mubiru addressed a dispute where the defendant (buyer) sought to offset Shs. 120,000,000 (6% withholding tax) from an outstanding Shs. 200,000,000 owed for a land sale with a commercial building, the proceeds of which (Shs. 1,800,000,000) cleared a loan with Equity Bank. The plaintiff (seller) argued no tax applied, citing Luwaluwa, as the proceeds covered principal/interest. Mubiru J rejected this, affirming the tax obligation.

Mubiru J agreed that the property, with a commercial building used for rental income and a restaurant (“Afrika Hotpot Restaurant”), was a business asset under Section 2(h): “In the instant case, there is a commercial building on the land… He himself used part of the building to run his own restaurant business… It fits the description of an asset ‘used for the purposes of the business’”. He clarified that withholding tax under Section 118B(2) is a capital gains tax collection mechanism, applied to the gross payment at realization thus “Withholding tax upon the purchase of a business or business asset is essentially a mechanism for the collection of capital gains tax at source… It is computed on the gross amount paid without deduction of expenses, losses or allowances”.

Crucially, Mubiru J found no conflict between Sections 118B(2) and 127(2), rejecting Luwaluwa’s expansive exemption: “It is possible to give effect to the purpose and language of both provisions while maintaining their unity; hence they are not in conflict”. He argued that tax is withheld on the gross price, with exemptions (e.g., interest) adjusted later under Section 146. The defendant was obligated to withhold Shs. 120,000,000, which could be offset.  Mubiru J prioritized revenue protection, noting that capital gains tax targets “unearned increments” from societal development.

Implications

The judicial split creates uncertainty. Luwaluwa offers relief to buyers and financial institutions by limiting tax to surplus proceeds, aligning with fairness where no profit is made. Byamukama imposes a stricter burden, requiring upfront withholding to safeguard revenue, with adjustments later. Mubiru’s approach aligns with the ITA’s intent to tax business asset disposals broadly but risks overtaxing non-income proceeds, while Ocaya’s ruling protects taxpayers but may enable evasion if surplus calculations are unclear.

For financial institutions, Byamukama necessitates clear sale agreements delineating principal, interest, and surplus to facilitate URA adjustments. Buyers must comply with filing deadlines and issue tax credit certificates to avoid penalties under Section 142. The conflict warrants Court of Appeal or Supreme Court clarification to harmonize the provisions and balance revenue goals with equitable taxation.

Conclusion

Justice Ocaya’s Luwaluwa ruling exempts principal and interest in mortgaged property sales from withholding tax, taxing only surpluses to ensure fairness. Justice Mubiru’s Byamukama ruling mandates withholding on the gross price, with exemptions adjusted post-collection, prioritizing revenue protection. Mubiru’s departure from Luwaluwa stems from its overly broad exemption, which he believes undermines the tax’s purpose, and his preference for harmonizing Sections 118B(2) and 127(2). Until resolved by a higher court, stakeholders must navigate Byamukama’s stricter compliance demands, underscoring the need for clear statutory guidance in Uganda’s tax regime.