• UNIT 1: TAXATION OF CORPORATE 1 BUSINESS PROFITS

    Key unit competence: Compute corporate income tax (CIT)

    Introductory activity 

    John is tax consultant who works with different companies in providing
    advisory services regarding to taxes matters and do the declaration of their
    taxes as well. For the year ended 30 June 2022, John had many clients and

    among matters that dealt with are shared below:

    1. One of his clients called KIGALI CITY, a government entity, has made
    a surplus of FRW 500,000 and wants John to advice on tax that is
    required to comply

    2. Rweru Ltd another client, has prepared its financial statements for
    the year ended 30th June 2022 and approved, wants John to assess
    and file its annual return to Revenue Authority.

    3. Rubengera company Ltd, a parent company, during the year ended
    30th June 2022, acquired 65% of share in Rutsiro Investment Ltd
    and wants John also to advice on the implication of taxes on the
    investment made in Rutsiro Investment Ltd.

    4. XYZ company Ltd has made a huge investment in construction of
    factory, and during the year ended 30 June 2022, it made a loss of
    FRW 2billion and as the new company has approached also John as
    tax expert to advise them on the implication of taxes on this issue.

    Suppose you are John, advice your clients on these matters noted

    above. What do you think John would base on to advice and drawn

    conclusion to the above matters?

    1.1: Relevant legislation, Chargeable and exempt entities


    1.1.1: Relevant legislation

    The legislation on income tax is established by law no
     027/2022 of 20/10/2022.
    The legislation covers both personal income tax and corporate income tax (CIT)
    besides withholding tax, capital gain tax and tax on gaming activities. In this
    unit we will focus on the calculation of corporate income tax, which is covered

    in Chapter III of the legislation.

    The processes related to calculating both personal income tax and corporate
    income tax, including filing and paying taxes, are very similar and you will have

    seen certain aspects of this unit in Units 4 and 6 in Senior Four.

    Corporate income tax is levied on business profits received by taxpayers other

    than individuals.

    Therefore, in this unit we will consider how we calculate the profits on which

    companies are charged to tax.

    1.1.2: Chargeable and exempt entities

     Any company that receives taxable income must register and pay corporate 

    income tax unless the company is exempt.

    1. Taxpayers

    The following entities will be liable to corporate income tax:
    a) A Ccompany established in accordance with Rwandan law and a
    foreign company registered in Rwanda;
    b) A cooperative society;
    c) A State-owned company;
    d) Trustee, enforcer or protector of a trust;
    e) A foundation;
    f) A protected cell company or a cell of a protected cell company depending
    on the choice of the investor at the time of company registration;
    g) A non-resident in Rwanda person with a permanent establishment;
    h) An entity established by a District or the City of Kigali if that entity
    performs an income generating activity;
    i) An association or entity that is established to realize profits regardless

    of its nature. 

    2. Entities exempted from corporate income tax

    The following entities are exempted from corporate income tax:

    a) The Government of Rwanda;
    b) The City of Kigali;
    c) The district;
    d) The National Bank of Rwanda;
    e) Organisations that carry out only faith-oriented activities,
    humanitarian, charitable, scientific or educational character unless
    the revenue received exceeds the corresponding expenses or if those
    entities conduct a business;
    f) International organisations or agencies of technical cooperation
    if such exemption is provided for by international agreements or
    an agreement concluded between these organisations and the
    Government of Rwanda;
    g) Qualified pension funds;
    h) Public institutions in charge of social security;
    i) Development Bank of Rwanda « BRD »;
    j) Agaciro Development Fund Corporate Trust;
    k) Business Development Fund limited “BDF Ltd”.
    l) Special purpose vehicle, unless the revenue received exceeds the
    corresponding expenses; 
    m) Common benefit foundations;
    n) Resident trustee for income earned by a foreign trust.
    However, entities exempted from corporate income tax are required to submit
    to the tax administration their financial statements not later than 31st March
    following the tax period or three (3) months following specific tax period
    granted to taxpayers who have made an application in accordance with
    provisions of Article 9 of the law No

     027/2022 of 20/10/2022. 

    Entities resident in Rwanda will be liable to corporate income tax on their
    worldwide business profits. However, dividends paid between resident
    companies that have not been subject to withholding tax (as the recipient
    company, being registered with the tax administration, will be exempt from

    WHT) are not included in corporate taxable income. 

    This is because the paying company would have already paid the relevant
    amount of Rwandan CIT on the profits out of which the dividend is paid. Note
    that dividends from overseas companies (for example a foreign subsidiary of
    a Rwandan parent company) are liable to CIT in Rwanda; the amount gross of
    overseas taxes should be included in taxable profit and then the overseas tax

    suffered can be deducted from the CIT liability (as double taxation relief). 

    Application activity 1.1

    1. The Government of Rwanda, the City of Kigali, the Districts, the
    National Bank of Rwanda are exempted from corporate income tax,
    however if they perform an income generating activity are liable to
    corporate income tax.

    On that context, with convincing reasons explain which of the
    following entities are not subject to Corporate Income tax?
    A. Keza Co Limited that imports sugar, cooking Oil and salt and sell
    them to the retail and wholesalers.
    B. Navigation Co that provides Human resource services to the
    different clients in Rwanda
    C. Gasabo District’s conference hall with its unique TIN that is rented
    to the staff of the district and other people in the country.
    D. None of the above
    2. Tick to show whether the following are taxable or exempt for the

    purposes of corporate income tax:

    1.2: Income tax

    1.2: Income tax

    Learning Activity 1.2

    Muhire is a business man who used to sell the home appliances. He started
    his business in 2018, after 1 year, 2 years and 3 years in business. He made
    a total revenue of FRW 5,000,000, FRW 10,000,000 and FRW 15,000,000
    respectively. As the business was growing, Muhire recruited an accountant
    to facilitate him in preparing the financial statements and declaration of
    taxes. During the year ended 31st December 2022, Muhire’s profit or loss
    account shown a total revenue of FRW 50,000,000 and expenses of FRW
    30,000,000 but included in the expenses were personal expenses of FRW

    20,000,000.

    Question:
    As student of taxation, advice Muhire on the income tax to pay

    1.2.1: The income tax regimes

    Different income tax regimes apply to calculate corporate income tax for
    companies’ dependent on their level of turnover. For companies with turnover
    exceeding FRW 20,000,000 the real regime applies which means that companies
    will need to calculate their taxable trading profits. This is done by adjusting the

    accounting profits in exactly the same way as we saw for a sole trader.

    As you saw in Unit 6 in Senior Four, income tax has three rules (regimes) for
    taxpayers based on their annual sales. These rules apply equally to corporate
    taxpayers. The calculation of corporation tax under flat rate taxation and sales
    tax/lump sums has been summarized in Senior Four’s Unit 6. Businesses with
    annual sales (annual turnover) of more than FRW20,000,000 must apply the
    real regime and pay corporation tax at 30% on their taxable income. The
    calculation of taxable income is covered in this unit.

    1.2.2: Taxable income

    The taxable income is the amount on which a company will be liable to corporate
    income tax.

    Taxable income for companies is calculated as


    In this topic we look at the calculation of taxable trading profits. The other
    income to be included is covered in sub-heading 1.3 and losses are covered in

    sub-heading 1.6

    1.2.3: Taxable trading profits

    In exactly the same way as for a sole trader business, the accounting profit of the

    company must be adjusted for tax purposes to give the taxable trading profits.

    The adjustments made for companies are identical to those for a sole trader

    and are covered in Unit 6 of senior four. 

    Companies are entitled to the same tax depreciation as we saw in Unit 4 in
    senior four and the same adjustment is made for the difference between
    the amount charged as depreciation in the accounts and the amount of tax

    depreciation which is deductible. 

    Application activity 1.2

    Which of the following correctly states the adjustments to be made to a
    company’s trading profits for tax purposes? (Tick one column for each

    item)


    1.3: Other income for companies

    Learning Activity 1.3

    Muhanga Enterprise Ltd, is company located in Muhanga district that
    do farming activities. During the board members’ meeting, the chair
    suggested to expand the investment as the accumulated profit presented
    by the management showed that the company has so far generated more
    reserves. From the suggestion of chair, the meeting resolved the following:
    1. To buy 10% of share in Shyongwe Ltd one company specialized in
    bookkeeping.
    2. To deposit some money in one commercial bank under the fixed
    term deposit at the annual interest rate of 12%.
    3. To construct residential houses near Muhanga city and start renting

    them to the visitors. 

    Question

    Apart from the income Muhanga Enterprise Ltd generating from its main
    business of doing farming activities, what else do you think as other
    incomes that are going to be generated if the resolutions of Board meeting

    are implemented by Muhanga Enterprise Ltd’s management.

    1.3.1: Taxable income

    In addition to the taxable trading profits, companies will also be taxed on their

    investment income and rental income receivable during the year. 

    After the taxable trading profits are calculated, other income must be brought

    in to calculate the company’s taxable income. 

    1.3.2: Investment income

    Dividends received by Rwandan companies from another Rwandan entity will
    be non-taxable and should be excluded from the taxable income calculation.

    Only overseas dividends would be included in the calculation of taxable profits. 

    From the investment income any investment expenses can be deducted. This

    will include any carrying charges and interest expense.

    The net investment income is then included in the taxable income calculation

    although when submitting a corporate income tax declaration, the investment 

    income and investment expenses will actually be entered in different rows of

    the declaration.

    Be reminded that, all investment income in the form of interest, dividends
    and royalties must be included unless these are non-taxable. These may have
    been received net of withholding tax but the gross amount must be declared as
    taxable income and then the tax withheld will be included in the calculation of

    the tax due.

    1.3.3: Rental income

    Rental income from buildings is included in taxable income. Related expenses
    are allowable, including tax depreciation on the building and any related

    interest on loans to acquire/improve the building. 

    A deduction can be made for rental income from machinery, equipment, land

    and livestock.

    The deduction can include:
    10% of the rental income as wear-and-tear expense
    Interest paid on loans to purchase the rented items

    Tax depreciation according to the usual rules (as per Unit 4 of senior four)

    Note that rental income for personal income tax purposes of taxpayers (i.e.
    individuals) is declared separately from corporate profits, while rental income
    for a corporation is included in the calculation of taxable income. This includes
    rental income from the rental or leasing of machinery, equipment, land,
    buildings and livestock. The special regulations for calculating the amounts

    subject to rental income tax for buildings do not apply to companies.

    Application activity 1.3

    1. Mwiza Ltd prepares its accounts to the year ended 31st December.
    In the year its financial statements show the following:
    – Interest income of FRW 680,000, which is received net of 15%
    withholding tax
    – Royalty income of FRW 595,000, also received net of 15%
    withholding tax
    – Expenses of managing the investments at FRW 50,000.
    Calculate the investment income which will be included in Mwiza Ltd’s

    taxable income.

    2. Mugonero Ltd bought a tractor for FRW 1,000,000 in the year ended
    31 December 2021 which it rents out. During the year ended 31
    December 2022 it received monthly rental income of FRW 20,000.
    When it bought the tractot Mugonero Ltd took out a loan of FRW
    800,000 to help purchase the tractor and it pays interest on this
    loan at a rate of 4% per annum.

    Required: What is Mugonero Ltd’s rental income to be included in its
    taxable income calculation?
    A. FRW 134,000
    B. FRW 240,000
    C. FRW 184,000

    D. FRW 158,000

    1.4: Total taxable income for companies

    Learning Activity 1.4

    Muhire is Managing Director and founder of Urumuri Ltd and he is looking
    for an expert in tax to help his company to prepare the taxable income. The
    following is the extract of the profit or loss account of Urumuri Ltd for the

    year ended 31st December 2022.


    Suppose Muhire has approached you as an expert, help Urumuri Ltd to

    prepare the total taxable income for the year ended 31st December 2022.

    1.4.1: Calculation of total taxable income for companies

    The taxable income is calculated by bringing together all the sources of taxable

    income as below:


    Application activity 1.4

    Turakize Plc is a Rwandan company registered with the tax administration 
    and trading in furniture manufacturing. Its audited profit or loss account

     for the tax period is shown below:


    Notes

    1. Rental income was earned by letting out spare items of machinery
    that cost FRW 150,000,000. These items are included in the other
    plant and machinery pool (see Note 3).
    2. This interest did not suffer withholding tax as it was derived from a
    long-term bank deposit.
    3. There were no acquisitions or disposals of assets in the period.
    4. Tax written down values of fixed assets at 1st January are as follows:
    5. Buildings: FRW 300,000,000 (original cost FRW 500,000,000)
    6. Other plant and machinery pool: FRW 60,000,000
    7. This bad debt was written off in the period after the customer was
    declared insolvent by a court. The income was taxed in the previous
    accounting period.
    8. This represents a proportion of the value of all goods sold.
    9. The company has paid the correct PAYE on all amounts included as
    wages and salaries.
    10. Legal and professional fees include a fine for breaching safety
    regulations of FRW 1,500,000. The remaining FRW 2,500,000
    relates to accountancy and debt collection services.
    11. Interest payable is on a business loan used to invest in working
    capital.
    Required: Compute the total income chargeable to corporate tax on

    Turakize Plc for the tax period.

    1.5: Corporate restructuring and tax on liquidation

    Learning Activity 1.5

    Karangazi Ltd is a company specialized in producing and selling Maize flour,
    during the year ended 31st December 2022, the shareholders of Karangazi
    Ltd decided to transfer their 70% of assets and liabilities to Kiramuruzi Ltd

    after assessing the performance of the company.

    Question

    1. On your understanding, what do you think was happened in
    Karangazi Ltd?
    2. Assuming, you have been appointed to assess the implication of
    taxes on the above decision made by Karangazi Ltd’s shareholders,

    what is your recommendation?

    1.5.1: Definition of restructuring

    A corporate reorganization occurs when one of the following events occurs:
    • A merger of two or more Rwandan resident companies
    • The acquisition of 50% or more of a company in exchange for shares in
    the purchasing company
    • The acquisition of 50% or more of the assets and liabilities of a company
    in exchange for shares in the purchasing company.
    • The purchase of all of a company’s assets so that it is replaced by
    another company
    • The splitting up of a Rwandan resident company into two or more

    separate companies

    1.5.2: Implications of restructuring

    The transfer of assets by a company during restructuring is exempt from

    corporate income tax.

    In case of restructuring of companies, the transferring company is exempt from
    tax in respect of capital gains and losses realized on restructuring. The receiving
    company values the assets and liabilities involved at their book value in the
    hands of the transferring company at the time of restructuring. The receiving
    company depreciates the business assets according to the rules that would have
    applied to the transferring company as if the restructuring did not take place.
    In case of restructuring, the receiving company is entitled to carry over the
    reserves and provisions created by the transferring company, subject to the
    conditions that would have applied to the transferring company as if the
    restructuring did not take place. The receiving company assumes the rights
    and obligations of the transferring company in respect of such reserves and

    provisions. 

    1.5.3: Implications of liquidation

    When a company goes into liquidation, its assets are sold and the money is
    used to pay off all of the company’s debts. The remaining money is then paid
    out to the shareholders and treated as a dividend (for personal income tax and

    withholding purposes) in the last taxable period of the company’s existence.

    1.5.4: Impact on losses

    A restructuring is likely to lead to a transfer of over 25% of a company’s share
    capital; in this case losses being carried forward may no longer be permitted to

    be offset against profits

    Application activity 1.5

    Mibabaro Plc, a Rwandan company, transfers its trade and all of its assets
    to Gakire Plc, an unconnected Rwandan company, in exchange for shares

    in Gakire Plc on 30th November 2022.

    One of the assets transferred was a factory used in the trade that originally
    cost FRW 40,000,000 six years ago and had a written down value of FRW
    28,000,000 for tax purposes. Its market value was FRW 50,000,000 at 30th

    November 2022. 

    Which one of the following statements is true in relation to the tax

    treatment of the transfer of the building?

    A. The building will be transferred at its market value of FRW
    50,000,000 and Mibabaro Plc will pay corporate income tax on
    the gain of FRW 22,000,000.
    B. The building will be transferred at its original cost of FRW
    40,000,000 and Gakire Plc will claim 5% tax depreciation on the
    FRW 40,000,000.
    C. The building will be transferred at its written down value of FRW
    28,000,000 and Gakire Plc will claim 5% tax depreciation on the
    original cost of FRW 40,000,000.
    D. The building will be transferred at its written down value of FRW
    28,000,000 and Gakire Plc will claim 5% tax depreciation on the

    FRW 28,000,000

    1.6: Business loss reliefs


    Question

    The photo above showing the decline of profit and as far as taxation is
    concerned, what do you think the company should do in case the profit

    dropped down until resulting into loss?

    1.6.1: When does a business loss arise?

    Not all companies are profitable. In this lesson, we look at how a company can
    use a loss to reduce the income tax it owes. In addition, there is a loss on a longterm
    contract, we see that there are special rules on how this loss can be used

    to save income tax.

    A company makes a loss when its accounting profit or loss is adjusted for tax
    purposes, the tax depreciation is deducted and the resulting figure is a loss.
    The corporation’s taxable profits for the period of the loss are nil and the loss is
    carried forward to be used against future corporate taxable profits in the next

    five tax periods.

    Where a business makes a loss, Article 31 of Law No
     027/2022 sets out the rules
    as to how that loss can be utilised to save income tax. The rules are the same

    whether the business in question is a sole trader, partnership or company.

    A loss arises when the taxable business profits show as a negative figure after
    the adjustment to profit and after the deduction of tax depreciation. It does
    not matter whether there is a profit or loss in the accounts at the start of the
    adjustment. What matters is that once the profit or loss has been fully adjusted

    for tax purposes, it is a negative number.

    1.6.2: What can be done with a business loss?

    If a company makes a loss, this negative amount is included in the calculation
    of taxable income (because the taxable income is less than the deductible

    expenses).

    The legislation provides that business loss is carried forward and offset against
    business profits within the next five tax periods. But on request, you can be

    granted more than five years if you fulfill the requirements.

     Remember that, if there are losses incurred in more than one period, the

    legislation states that the losses of earlier periods must be deducted first.

    Note that while the law requires the loss to be offset against business income,
    the offset is actually against all taxable income received by the individual or
    by the company receives, as all income is reported on their income tax return
    (personal or corporate). A business loss is the loss arising from all of the taxable

    activities of the individual or company, not just their trading.

    However, if the loss is from a foreign source, this loss cannot be used to offset

    against Rwandan sourced business profits.

    1.6.3: Losses on long-term contracts

    A loss incurred on a long-term contract can be offset against previous profit
    recognised on that same contract, if it cannot be used against other business

    profits of the period.

    Carry back of losses on long-term contracts

    As seen in Unit 6 (Senior four taxation book), the income and expenses relating
    to a long-term contract are charged to the accounts on the basis of the percentage

    of costs actually incurred relative to the total expected costs of the project.

    When a project is expected to be profitable it means that a percentage of profit
    is recognized in each period in relation to the percent completion of the project.
    It is possible that the contract could then incur some unexpected costs. This
    could result in the contract becoming loss-making despite taxation of profits

    taxed in previous periods.

    The loss incurred will reduce the company’s taxable profit of the business in the
    relevant year. If the loss incurred is large enough that it cannot be absorbed by
    other profits of the period in which the contract is completed, the excess loss
    may be “carried back” and used against profits previously recognised for that
    contract. While the legislation does not specify settlement order, it is assumed

    that losses are offset against the most recent contract profits first. 

    Any remaining losses are then carried forward in the normal way.

    Application activity 1.6

    Bibaho Ltd incurred a FRW 80,000,000 business loss in the year ended 31st
    December 2020. In the year ended 31st December 2021 it makes taxable
    trading profits of FRW 120,000.000 and has investment income (gross) of
    FRW 2,500,000 and taxable rEntal income of FRW 5,000,000.

    Calculate Bibaho Ltd’s taxable income for the year ended 31st December

    2021.
    Skills Lab 1

    In group discussions, invite students to make research in library or on
    internet about the calculation of taxable income for companies and
    compute corporate income tax related to the income tax at home / in club

    then present their findings

    End of unit assessment 1

    1. Shakisha Plc is a small Rwandan company which sells scrap metal.

    The company prepares its accounts annually to 31st December.

    For the year ended 31st December 2022, the company’s net profit in
    the profit or loss account was FRW 74,500,000. This was arrived at

    after accounting the following items:

    a) FRW 6,000,000 incurred on repairs to their warehouse was
    charged as an expense. The warehouse was purchased in March
    2022 after it had been damaged in a flood and could not have been
    used in the state it was in at the time of purchase.
    b) Depreciation on fixed assets of FRW 13,000,000.

    c) Entertainment expenditure charged to the accounts was as follows:

    The bad debt relates to a sale which had been taxed in the year
    ended 31 December 2021 and was written off during the year. This
    was due to the debtor being declared insolvent and Shakisha Plc

    has taken all reasonable steps to recover the debt.

    e) The amount of dividend received from Haza Ltd, a fellow Rwandan
    company, recorded in the profit and loss account was FRW
    5,200,000. Shakisha Plc paid dividends of FRW 2,000,000 which

    had been deducted in arriving at the net profit of FRW 74,500,000.

    f) Shakisha Plc received royalty income of FW 4,250,000 during the
    year. This was the amount received during the year. It also received
    FRW 1,200,000 during the year from renting out spare warehouse

    space.

    Tax depreciation for the year end has been correctly calculated at

    FRW 7,000,000.

    Required: Calculate Shakisha Plc’s taxable income for the year

    ended 31st December 2022.

    2. UB Ltd had initially agreed a contract for FRW 20,000,000 and had
    estimated the costs to fulfill the contract at FRW 15,000,000. At the
    end of Year 1, the contract was still in progress and costs incurred to
    date were FRW 10,500,000. Accordingly, the contract was deemed
    70% complete and FRW 3,500,000 of profit was recognized and
    taxed during that year. The company generated FRW 3,000,000 of

    taxable profit on its other business activities in Year 1.

    In Year 2 the contract was completed, and UB Ltd incurred some
    unexpected costs it had not initially anticipated. The total costs
    actually incurred were FRW 22,000,000. This gave an overall loss

    of FRW 2,000,000.

    The project was accounted for correctly, and a loss of FRW 5,500,000

    on this contract was recognized in Year 2.

    UB Ltd has other business profits for Year 2 of FRW 2,750,000 plus

    investment income of FRW 250,000.

    Assuming that UB Ltd wants to claim relief for the contract loss as

    early as possible, how will the loss of FRW 5,500,000 be used?

    A. It will be offset in full against total business profits of FRW
    6,500,000 in Year 1.
    B. It will be offset against total income in Year 2 of FRW 3,000,000,
    and then the remaining FRW 2,500,000 will be offset against the
    contract profit in Year 1.
    C. It will be carried forward and used against future business profits
    D. It will be offset against business profit in Year 2 of FRW 2,750,000,
    and then the remaining FRW 2,750,000 will be offset against the

    contract profit in Year 1.

    3. Nakoze Ltd has incurred the following business profits and losses
    over the last four tax periods:
    Year ended 31st December 2016; Loss FRW (500,000,000)
    Year ended 31st December 2017; Loss FRW (200,000,000)
    Year ended 31st December 2018; Profit FRW 150,000,000
    Year ended 31st December 2019; Profit FRW 400,000,000
    No shares in Nakoze Ltd have been bought or sold over this period.
    Show how the losses are used against profits, compute the
    remaining losses to carry forward at 1st January 2020, and state to

    which year they may be carried forward.

    UNIT 2: WITHHOLDING TAXES