S5: Taxation

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.