One of the questions frequently asked by foreigners who want to do business in Rwanda is whether Rwanda imposes withholding taxes on payments made to non-residents.
The answer is yes. Cross border business is on the rise in Rwanda and as a result more payments are flowing from Rwanda to non-residents.
The requirement to withhold tax on payments made to non-residents can seem complicated and burdensome, but compliance is essential if the payer is to avoid liability for the tax, penalties and interest charges. It’s important to seek good advice to understand and comply with Rwanda’s withholding requirements accurately. At the same time, a basic understanding of withholding requirements can save time and money and make tax advice even more valuable.
First, to ensure that the appropriate amount of Rwandan income tax is being paid, Rwanda tax law requires the Rwandan resident person or company which is making the payment to the non-resident person to withhold tax on certain types of payments made to the non- resident person.
Withholding tax on payments made to non-resident persons provides the Rwanda Revenue
Authority (RRA) with a very sure and efficient tax collection mechanism, saving the RRA the
trouble of chasing after foreigners who are not based in Rwanda to pay Rwandan taxes.
Second, the tax law provides that a non-resident person is subject to Rwandan tax if the non-resident person was employed in Rwanda, carried on a business in Rwanda, rendered services in Rwanda or disposed of certain types of property that are situated in Rwanda.
A non-resident is required to pay Rwandan tax on income derived from Rwanda, but his lack of a presence in Rwanda may make it impossible for the RRA to enforce the legislation.
The withholding tax requirements are therefore in place to ensure that the tax payable to the Rwandan Government is deducted before the funds are paid to the non-resident foreigner.
Third, any resident person who pays a dividend, interest, rent, royalty, a management or technical services fee or other amount in respect of services rendered in Rwanda to a non-resident person is required to withhold 15% of the payment and remit that amount to the RRA.
Generally, consultancy and technical fees include amounts paid to foreign consultants in respect of technical services provided to the Rwandan resident person or business, as long as the services are rendered in Rwanda. Management fees normally include payments for
management functions such as planning, direction and control.
Management fees are subject to withholding tax regardless of where the functions of management are provided from. On the other hand, services rendered outside of Rwanda should not be subject to the withholding tax requirement.
This is because, according to the Rwanda tax law, income is derived from sources in Rwanda only in instances where the income is derived from services rendered in Rwanda.
Therefore, for administrative ease, it is advisable for non-resident persons who are providing services to Rwandan resident persons to distinguish between what services are being provided from outside Rwanda and what services are being provided from within, or rendered in, Rwanda. Administratively, it is also advisable for these two kinds of services to be invoiced separately.
The fourth thing to remember is that the amount withheld from the payment made to the non resident person must be remitted to the RRA by the 15th day of the month following the month in which the payment was made to the non-resident.
Failure to withhold the tax will leave the Rwanda resident who made the payment to the non-resident liable for the withholding tax, as well as for applicable interest and penalty charges. This means that the service provided by the non-resident could end up costing the resident person substantially more than originally anticipated. The taxing provisions relating to withholding tax in Rwanda are quite complicated, so much so that there even instances where entities have applied a narrow interpretation to this provision and have withheld tax on payment for goods supplied by non-residents.
I look forward to explaining the circumstances when and how this arises in this column next week.
Paul Frobisher is a Tax Manager at PwC Rwanda Limited. Email