With the ever-growing globalisation of economic activity characterised by free movement of goods, capital and labour, Rwandan residents can now do business with or in foreign countries, hold shares in non-resident companies, extend loans to non-resident borrowers and work outside Rwanda.

Rwandan residents doing business in or with foreign countries, working and holding investments in such countries respectively derive income from other countries in the form of business profits, dividends, interests, royalties and wages, etc.

However, the taxation of income derived by Rwandan residents from abroad (which, in international taxation parlance, may be referred to as "outbound income”) can give rise to a number of issues particularly with respect to double taxation relief—which is the focus of this article.

The global tax system and double taxation relief

Rwanda operates a worldwide income tax system in that Rwandan residents (whether nationals or not—NB: Rwanda’s corporate and individual residence rules are beyond the scope of this article because that is another delicate aspect of the Rwandan international taxation rules) are taxable in Rwanda on their worldwide income.

The worldwide nature of the Rwandan income tax system is entrenched in Articles 5, 10 and 48 of the Rwandan Income Tax Act (Law nº 016/2018 of 13/04/2018), which respectively give Rwanda the taxing right over income earned by resident individuals and entities irrespective of whether such income is derived from sources on the Rwandan territory or abroad.

This suggests that a Rwandan resident (whether an individual or a corporate body) receiving dividends from a non-resident company or interest or other types of income from a non-resident must file a tax declaration and pay applicable taxes on such income.

Similarly Rwandan enterprises with permanent establishments in foreign countries must include, in their taxable income business, profits of their permanent establishments in foreign countries.

However, as Rwanda indeed taxes income derived by non-residents from Rwanda, foreign countries from which Rwandan residents derive their income will, in most cases, tax such income on the basis that it is sourced from their territories.

This would give raise to juridical double taxation as the same income would be taxed in both the country of source and the country of residence.

The Rwandan Income Tax Act recognises this potential double taxation of Rwandan residents on income derived from abroad and provides for relief by way of tax credit method which is different from the exemption method used in some countries, whereby income taxed in the source country, is exempted from taxation in the country of residence.

The foreign tax credit method is dealt with under Article 7 of the Income Tax Act which provides that if during a tax period, a Rwandan resident derives an income from taxable activities performed abroad, the income tax payable by that resident in respect of such income is reduced by the amount of foreign tax payable on such income.

Unrelievable foreign tax

The tax credit under Article 7 of the Income Tax Act may not fully relieve from double taxation a Rwandan resident taxed abroad especially when the applicable tax rate in the country of source is higher than the rate applicable in Rwanda (thereby ensuring that the global system does not impair Rwanda’s taxation of its own domestic source income).

Thus, Rwanda applies a limited tax credit method and the foreign tax credit allowed is limited to the amount of taxation that would have been imposed by Rwanda on foreign earnings (applying the rate applicable on such income under the Rwandan Income Tax Act).

It is not clear from the Rwandan Income Tax Act whether unrelieved foreign tax can be carried forward in order that if the foreign tax rate reduces below the rate that would be applicable in Rwanda the taxpayer be able to claim a credit. This should be allowed.

The issue of unreliavable foreign tax may also arise from differences in source rules applicable in Rwanda and other countries from which Rwandan residents derive their income.

For instance the Rwandan Income Tax Act seems to allow foreign tax credit only in case of income derived from the activities performed abroad, yet some countries may treat as derived from their territories income paid by their residents, and accordingly, tax such income.

It is also not clear from the Income Tax Act how the "performed abroad” test would apply to some types of income such as dividends, interest, royalties and service fees.

In the absence of clarity, one would however, tend to think that dividends, interest, royalties and service fees paid to Rwandan residents by non-residents would be foreign-sourced (and therefore foreign taxes paid on such income would be creditable within the meaning of Article 7 of the Income Tax Act) as the Rwandan Income Tax Act treats the same income as having its source in Rwanda and tax accordingly such income when paid by Rwandan residents to non-residents.

A different interpretation would lead to a disconnect (and possibly some distortion).

In all cases, the issue of unrelievable foreign tax (particularly arising from any disconnect in the applicable source rules) would be resolved where there is an anti-double taxation agreement (DTA) between Rwanda and the country from which foreign income is derived and accordingly taxed.

This is based on the fact that either Contracting State to the DTA would, in most cases, have the obligation to provide double taxation relief for income taxed by another Country State in accordance with the DTA.

The analysis of Rwandan law rules governing taxation of outbound income clearly indicates that Rwandan residents (whether national or not) are liable to payment of taxes on their income derived from abroad including employment and passive income, and therefore must file tax returns and pay applicable taxes on such income since the penalties associated with failure to do so are enormous.

Obviously, Rwandan residents are allowed a credit on foreign tax, but the applicable foreign tax credit regime is not that clear and Rwandan residents deriving income from foreign sources are advised to seek professional tax advice in that regard.

The writer is a corporate and tax lawyer, and senior associate at ENSafrica Rwanda.

Email: dnzafashwanayo@ensafrica.com

The views expressed in this  article are of the author.