The new law establishing taxes on income is expected to reduce the tax burden on low-income formal workers, ease doing business, and at the same time, help the country to collect revenue to fuel economic growth, according to the Ministry of Finance and Economic Planning.

It was passed by the Chamber of Deputies on September 15, 2022, and awaits publication in the official gazette. It is a result of the review of the tax income law of 2018.

During the implementation of the existing law, some gaps were identified, calling for action to address them, the Government said in an explanatory note of the bill.

These include the need to review existing law in order to align it with the new developments regarding Kigali International Financial Centre (KIFC) initiative, to review taxable annual profit and monthly income amount to reduce the tax burden on low-income formal workers and promote employment; as well as to review some provisions to ease doing business.

Key changes in this draft law include the following:

Incentives to investors into KIFC

In order to attract experts and investors within the framework of activities related to KIFC, the draft law provides that an expert who works as a professional directly for an entity carrying out KIFC activities, who was not resident at any point in the five years immediately prior to becoming resident in Rwanda, will be exempted from personal income tax on foreign sourced earnings.

This incentive will be granted during the first five years following the date of becoming resident [of Rwanda].

Also, with a view to support the KIFC initiative, the list of entities exempt from the Corporate Income Tax has been extended to special purpose vehicles [unless the revenue received exceeds the corresponding expenses]; common benefit foundations; and resident trustee for income earned by a foreign trust.

The corporate income tax is levied on business profits received by taxpayers other than individuals.

A special purpose vehicle is a corporate entity including asset backed security, a real estate investment trust or any other entities used only and for the reason of being a pass through vehicle to facilitate investments in accordance with laws regulating the capital market products and business.

Extension of the list of entities subject to corporate income tax

The list of entities subject to corporate income tax has been extended to trustee, an enforcer or protector of a trust, a cell of a protected cell company [with a cell being a business unit (within a company) that has its own assets], foundations and a nonresident person with a permanent establishment, to avoid tax evasion.

Increasing tax-free income to Rwf60, 000 a month

The law provides for the increase of the taxable income threshold to Rwf60,000 per month (or Rwf720,000 per year) from the previous Rwf30,000 (or Rwf360,000 per year) that was set in 2005.

According to the Government, the move is intended to reduce the tax burden on low-income formal workers and promote employment.

Information from the Ministry of Finance and Economic Planning indicates that this development will benefit at least 165,500 formal workers, or 30 per cent of around 541,241 formal workers in Rwanda as of June 2022.

Tax cut for workers earning Rwf60,000 up to Rwf200,000

In the first year following the date of commencement of this law, workers earning up to Rwf60,000 per month will not be taxed, while those who earn from Rwf60,001 to Rwf100,000 will be charged 20 per cent tax rate. Those who get above Rwf100,000 will have to pay 30 per cent tax.

However, from the second year after the commencement of this law, those who earn from Rwf60,001 to 100,000 will pay 10 per cent income tax – implying a tax reduction of 50 per cent, while those receiving Rwf100,001 to Rwf200,000 will be charged 20% per cent instead of 30 per cent.

But, employees getting more than Rwf200,000 in monthly income will pay a 30 per cent income rate as usual.

Notwithstanding the above two provisions on employment income, income of a casual labourer is subject to tax on the special rate of 15 per cent. However, in calculating casual labourer’s tax, an income not exceeding Rwf60,000 per month is rated at zero per cent (in order words, tax-free).

Extension of payments subject to the 15 per cent withholding tax

With the new law, the number of Payments subject to the withholding tax of 15 per cent has been extended to cater for gaming activities, profit after tax or retained earnings that have been converted into shares, and repatriated profits.

Others are payments made in cash or in-kind by a resident person on behalf of a non-resident contracted person besides the contractual remuneration, and reinsurance premiums paid to nonresident insurers (except premiums paid to insurers that have signed agreements with the Government of Rwanda).

Withholding tax is a mandatory fee collected at a source of income, such as wages or dividends, as advance payment on income tax.

According to Rwanda Revenue Authority (RRA), a withholding tax of 15 per cent is levied on, among others, payments made by resident individuals or resident entities, on dividends, interests; royalties; service fees including management and technical ones; and performance payments made to an artist, a musician or an athlete.

Startups exempted from withholding tax

In line with support startups, the law provides that taxpayers who are newly registered during the concerned annual tax period, are exempted from withholding tax on sitting allowance, on payments (money they are paid for their works, services or products) or other methods of carrying out an obligation, and on public tenders.

Meanwhile, the new law included earnings from digital services and social media as a source of taxable income.