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Starting a foreign owned business in Uganda is not as easy as it seems, if you want to do it formally (i.e. legally).

All the statistics and rhetoric referring to Uganda as an environment for entrepreneurial startups focuses on the positive side of unemployment and the limited number of formal sector jobs.   See here, here, and here.  Unemployment should not be twisted to allow a government to abdicate its responsibility of creating the right enabling environment for jobs to be generated.  These statistics instead point to the necessity of Ugandan’s to chart their own paths so they can survive, literally.  It is an interesting way to encourage entrepreneurship for those unskilled and then link this to small and medium enterprise (SME) [1] development while the enabling environment and incentives to grow a business remain unaddressed.

It is true that starting a business – the actual legal registration of an enterprise in Uganda – is not that complicated or time consuming [2]; what comes after is.  Interestingly, my experience differs from many.  It has taken well over 1 year to formally register my business, the causes unfortunately are legion – everything from an incompetent lawyer, to a Registrar’s office bent on preventing a business from forming due to the way it sounds in relation to other businesses (even though the names are spelled differently), to the use of a poorly constructed corporate governance constitution (or articles) for operating businesses in Uganda.  These factors all contributed to an extended period of uncertainty in terms of legal status for my business and they prevented us from securing contracts.

There are basic filing fees to register a company at the Uganda Registration Services Bureau (or the Registrar of Companies) and these ultimately depend on the type of company you want to start.  See here for a comprehensive list of fees.

Registration Fees - Uganda v3

In the case of a limited by share private firm, the entire registration fees can range from 1.5M/= to 2.5M/= or approximately $500 to $800, and depend on the initial share capital allocated by owners that limits their liability [3].  See here for a table of registration fees based on share capital.

Registration Fees - Share Capital v2

In addition, the time it takes to be fully registered can be anywhere from 5 days to 5 months, depending the efficacy of your lawyer, the clarity of the business owners, and the available resources.   These costs do not include coordination, travel, and communication expenses.

What is not stated are the ongoing hoops you must jump through to obtain legal status after you register.  After the company is registered, directors of a company must apply for a tax identification number (TIN) for both themselves and then for the company, this is normal.  This process is not painstaking or long, however what surprised us was the 450,000/= (or $136) provisional tax levied by the Uganda Revenue Authority (URA).  This amount was not based on any relevant historical data nor on any submitted projection of sales, since it was levied the day after we registered for a TIN and the TIN application makes no request for such information.  A more detailed look at taxes within Uganda can be found here.  The annual corporate tax rate is 30% on earnings, capital gains is 30%, dividends are taxed 15%, payroll (withholding) taxes are 6% on income earned by employees, National Social Security Fund (NSSF) taxes are 10% of income earned to be paid by the employer, and value added tax (VAT) of 18% for the supply of goods and services is levied on most purchases (although this can be partially recouped at year end).  Typically, a tax system is not post haste but ex ante in nature, taxing the firm based on the estimated earnings on a quarterly basis.  That our municipality tax license (via Kampala Capital City Authority or KCCA) was being held up for a provisional URA tax payment [4], was simply ludicrous if not illegal.

A trading license is required to operate in Uganda, this is normal.  If you are located in Kampala, which we are, the municipality or KCCA will issue a license at around 437,500/= (or $132) for our line of work.  These costs do not include coordination, travel, and communication expenses.  However to get this license, you must obtain a letter of recommendation from the Ministry of Trade, Industry, & Cooperatives (Ministry of Trade).  To get this letter there is a bit of a chicken and egg situation.  You are required to show a valid work permit and proof of investment valued at over $100,000.  These requirements make sense if you are already working in the country and elect to start a business, but not if you are a foreigner entering the country looking to start a business.  To demonstrate proof of investment also speaks to a donor mentality or a large multi-national corporation (MNC) approach to dealing with legal and regulatory requirements, leave alone those appropriate for an SME.  In addition to the initial KCCA licensing fee, an annual KCCA tax is levied based on earnings; leave it to say this will be an additional 2M/= (or $600) per year for us.

In order to transact financially, it is easiest to use a local financial institution however this is a challenge for foreigners opening a business and originating from the US.  The State Department’s Foreign Commercial Service department offers a comprehensive macro view of Doing Business in Uganda, however the finer details of culture, on the ground standards of doing business, and financial regulatory matters are left out.  For example, to open a bank account for a US citizen requires the local bank to open up a separate file that reports back to the US any and all transactions as required by Anti-Money Laundering laws in the US and the Anti-Money Laundering Act 2013 in Uganda.  These additional requirements make it more difficult for US originating foreign business owners to operate.  Furthermore, the minimum requirements to open a business bank account are set abnormally high:  $3,000 for a USD account, and 10M/= for a UGX account [5].

Immigration also becomes a further hindrance on foreign entrepreneurs adding to their regulatory and tax burden.  Although a standard work permit for an NGO (Class G1) or a company can run 2.6M/= (or $800) for a single year for a foreigner, foreign business owners require a directors permit (Class D – Business and Trade) costing 8.25M/= (or $2,500) per year.  See here for the official Ministry of Internal Affairs Directorate of Citizenship and Immigration Control fee schedule updated July 2015.  The rationale for increasing this permit cost had nothing to do with the enabling environment for new business in Uganda, even though it seems it should; it had to do with parity in relation to other nations.  So instead of using the old rates which were favorable for attracting business owners, the decision was to increase these costs for business owners, creating another barrier to entry.

Not surprising is that firm size matters when dealing with bureaucracy.   However, that firm size should be a dis-incentive for SME’s to expand and grow is troubling.  We know that growing an SME can get you in trouble in Uganda, if not from government, then from its own employees sabotaging growth prospects.  As firms grow, the levels of trust grow distant and stronger checks and balances are required.  Yet in an SME, these checks and balances typically do not grow at the same pace as the firm growth with varying other priorities taking precedent.  In addition, the larger the firm, the easier it becomes to maneuver the regulatory environment due to concessions, tax breaks, political links, and other favors.  If firm size is smaller, then the regulatory burdens are much greater in relation to their revenues.  Based on the above, there seems to be a general enabling environment geared to support large enterprise, but not SME’s in Uganda.  Policy is therefore discriminating against the SME.

Among all this, a consistent suspicious attitude was portrayed at every corner when dealing with officials.  Many government representatives treated us as if we were guilty of an uncommitted crime, as if we should not be there in the first place.  There is no doubt that standards of customer service have not reached their full potential in Uganda.  However, if entrepreneurship is advocated by both the donor community and the local government as much as it is, then it would seem to me that there would be a correlation with the nature in which officials treat entrepreneurs and new SME’s.

How does all this attract foreign investment?

I believe that in general foreigners are attracted by the unknown, or by what they do not know, and they want to explore how things work in Sub-Saharan Africa.  For the investor, it is just the opposite.  With inadequate information, limited local contacts, extremely low levels of social capital due to many things including the general enabling environment, past negative experiences, and the regulatory hurdles listed above, investors have little choice but to look at conservative investments [6] – those that SME’s are unable to access.

As for attracting foreign investors, even if there is a marketing program to attract foreign investment, without the enabling environment and social capital to support it, little incentive exists.  Of course if you are large then the landscape changes, however this circles back to our point.  If SME’s are the backbone to a thriving economy, why are they taxed so heavily, treated so poorly, and given such little incentive to operate in favor of larger firms?  For foreign investors, repatriation of US dollar investments are taxed at 15%, on top of all other taxes noted above to operate locally [7].  Even with a special purpose vehicle in a double tax treaty state, savings only extend another 5%, leaving a tax burden of 10% on repatriated income.  If investments are in dollars, there remains foreign exchange risk (we will not address political risk here).  The Ugandan shilling is currently depreciating against the dollar due to commercial bank purchases of US currency upon any Bank of Uganda expanding monetary policy and with a stronger US dollar due to expectations of the Fed raising interest rates.  There is a historic spike near election season with excess Ugandan shilling pouring into the economy for the campaign season.

Of course, there are many arguments in favor of a limited enabling environment like the one we see in Uganda; one of those arguments being protectionism.  From all the reading I’ve done on protectionism, and using the US Farm Bill as an example since agriculture is a mainstay of the Ugandan economy, it is clear that protecting certain industries diminishes the value of that industry, it prevents it from truly growing due to the inherent lack of innovation when competition is not fierce, and it de-incentivizes SME’s from expansion and growth by ultimately limiting the market in which they can operate.  The more mainstream argument relates to the cultural backlash given to South Asians (Indians) and East Asians (Chinese) who have abused their positions and skirted the system, giving locals a view that these foreigners are only here to exploit and take positions of influence at the expense of locals.

I speak as a pro-Ugandan interested in building the SME enabling environment.  We often call for foreign investment however we do not allow the proper incentives locally to align with this call.  How to address these issues is a longer term advocacy issue and requires a greater understanding about SME’s in Uganda to generate policy in favor of SME’s.  Yet if we rely on the donor community to drive this conversation, then the business community will lose out in the end.  Clearly, more needs to be done here to alleviate the challenges of the regulatory environment in favor of foreign owned SME’s.

About Capitol Food Ventures Uganda, LTD

Capitol Food Ventures Uganda is a private sector strategic business and investment advisory firm focused on the efficiency of SME’s within various industries and sectors in East Africa.  We have a growing advisory practice that is unique to the local marketplace for SME’s in East Africa.  These firms often have high quality marketable products, however, many of the business functions, including management teams and market understanding, are lacking.  We believe that limited access to capital is not the most pressing challenge for SME’s in East Africa – in fact, just the opposite:  East Africa is flush with foreign, donor, government, and commercial capital.  Rather, identifying, preparing, and marketing quality firms are the greater challenges.  Therefore, our focus in service delivery is to evaluate our client’s firm or investment fund using business tools and metrics relevant to both our client and the market’s needs.  With our expertise and networks in the region, we help shape enterprises and investment funds to be more efficient, absorb capital, and to drive growth.  We believe that in order to deliver services in East Africa, a more intimate understanding of the market is needed. We understand this and aim to drive value and impact using what we refer to as “Relationship Advisory”: a longer term view of service delivery to our clients. This view helps us market our value to new clients – something we are proud to note has been word of mouth since our inception.

[1] Defining the scope of an SME depends on the market you are in but are typically based on three criteria:  i) total revenue, ii) total employees, and iii) total assets.  See here for review in another post.  As an example, in the US, SME’s are those firms with revenue below $50M, depending on industry, and below 1,500 employees, depending industry.  However an SME in Uganda is one with less than $10M in revenue and 50 employees, according to the Ministry of Finance, Planning, and Economic Development.  I have also seen figures in Uganda of $110k for revenue and 250 for employees; so the bag is mixed, still.

[2] See here for a list of steps required to register a business in Uganda.

[3] It should be noted that in Uganda there is a strange fixation on increasing the share capital amount to reflect that a firm has the ‘capacity’ to attract directors, investors, or the attention from government officials; or even simply to impress upon colleagues the significance of the newly registered enterprise.  However, this goes in direct contradiction to the very essence of a limited liability company.  The purpose here is to limit the liability of directors of a firm to as little as possible.  In my view, any number above 1 is too much.  The Company’s Act 2012, here, does not state a lower or upper bound on share capital limits. Yet there is another argument in the Uganda marketplace.  By increasing the share capital amount, you dis-incentivize director’s participation if they are unable to meet the level of initial contribution to the firm.

[4] There are additional tax burdens on monthly business filings, additional internal or external business costs on filings, and penalties levied for the smallest mistakes – all discriminating against the SME.  More flexibility is needed to promote SME development in Uganda.

[5] This data is taken from a leading financial institution in Uganda and minimum thresholds on account opening do vary across different banks.

[6] Conservative investments include fixed assets such as bonds and local certificate of deposits, on-lending financial resources to local financial institutions, or even co-investment into larger projects.  However all these investments require larger levels of investment to realize returns.

[7] There is a distinction between a ‘branch’ and a ‘subsidiary’ and the pros and cons of each in the Uganda market.  A branch is considered a legally connected operation to a parent office with reporting to the main office whereas a subsidiary is a more independent domestic operation with reporting locally.

3 thoughts on “Foreign Owned Business in Uganda

  1. http://www.theguardian.com/global-development-professionals-network/2016/feb/16/uganda-is-a-land-of-entrepreneurs-but-how-many-startups-survive

    Great piece on SME development in Uganda. A quote by KadAfrica’s Rebecca Kaduru, “This is a very high interest rate and a relatively low cap – neither is particularly sustainable for growing a business.”

    The article notes, “Entrepreneurs across Africa often cite access to capital as the biggest barrier to growth. But money alone is unlikely to produce significant results. It is financial discipline.”

    The Global Entrepreneurship Monitor (GEM) in Uganda is based out of Makarere and run by Rebecca Namatovu. “The country’s first ever national policy on SMEs was agreed last year (2015) – aiming to offer a more structured framework for support. But Namatovu, from GEM Uganda, worries it won’t go far enough: “Many training programmes highlight starting up, but ignore growth or crucial activities that can sustain firms.”

    I believe her point aligns with much of what I’m saying above.

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  2. Here are some more notes on the post:

    • The issue of reporting transactions on US citizens applies to the larger banks, not local institutions.
    • For work permit fees, if multiple years are sought, fee reductions apply, e.g. an application for two years is $4,000 and an application for three years is $5,000.
    • It should be noted that NSSF is not an official tax, it is a social security payment, however, since it is required by law for a business to contribute, it becomes a tax on the employer. Our definition of tax are those costs required by law/government and not operating expenses.
    • Refunds on VAT can be applied for an a monthly basis; it is not necessary to wait the entire year.
    • The withholding tax of 6% refers to payments made to suppliers; so in the case of a service firm like ours, when we conduct work, we are taxed an additional 6%.
    • Income taxes are paid based on pay bands under the PAYE (pay as you earn) system. See here for rate bands.
    • For the overall registration, a small distinction should be made whereby the government will push through paperwork rather expediently if it is correct; and then it becomes the promoters job to ensure the documents are in fact in order; however it should be noted that even if the documents are in order by the promoters, government can still put up barriers such as stating that ‘papers are not in order’ even though they are.

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