Access to finance is crucial for business expansion and the economic growth of any nation. In Uganda, limited access to finance has been a significant challenge, with statistics revealing that 70% of businesses struggle to secure credit. Traditional banks, microfinance institutions, and government development programs have been the primary sources of capital. However, high interest rates and stringent loan requirements, coupled with external shocks, have constrained business growth potential.

To address these challenges, the Government of Uganda set a goal in its Third National Development Plan (NDP III) to increase market-based financing of Ugandan business enterprises from 1.5% of GDP in 2018/19 to 3% by 2026/2027. This growth is to be realized through alternative financing avenues such as private equity (PE) and venture capital (VC) funds licensed by the Capital Markets Authority (CMA), crowdfunding portals approved by the CMA, and new stock market listings.

Despite a steady increase in Foreign Direct Investment (FDI) in Uganda—from $0.8 billion in 2017 to $2.9 billion in 2022, according to the Bank of Uganda’s private sector investment survey—most of these investments have been made remotely, particularly from countries like Kenya.

To foster the establishment of private equity funds in Uganda, the government introduced regulatory reforms at the beginning of the 2024/2025 financial year, including tax incentives aimed at easing business operations, as detailed below.

Tax Incentives

Income Tax (Amendment) Act 2024

This Act exempts income earned by PE and VC funds regulated by the CMA. Additionally, income derived from the disposal of government securities on the secondary market is tax-exempt. The Act also provides a 10-year income tax exemption to companies involved in the manufacture of electric vehicles, electric batteries, electric vehicle charging equipment, or the fabrication of the frame and body of an electric vehicle. This exemption extends to companies operating specialized hospital facilities.

Stamp Duty (Amendment) Act 2024

This Act exempts capital duty on the share capital of a limited liability company incorporated in Uganda when acquired, or its shares acquired, by a PE or VC fund regulated by the CMA. It introduces a nil duty rate for capital duty on nominal share capital or any increase in shares acquired by an investor in a PE or VC fund. Additionally, it establishes a nil duty rate for the transfer of shares or other securities to or by an investor in a PE or VC fund regulated under the CMA Act.

These tax incentives are designed to attract private equity financing and establishment in Uganda. The regulatory reforms have the potential to not only boost FDI but also to increase the establishment of PE and VC funds within the country.

The Importance of Private Equity Financing

Private equity financing is vital for business growth as it provides long-term funding, enabling businesses to achieve both short and long-term goals. Additionally, PE funds offer expertise and networking opportunities. Uganda’s financial system is predominantly bank-based, with financial institutions playing a crucial role in providing capital in the form of debt. However, this needs to be supplemented by a growing market-based system to diversify capital sources available for business growth and economic transformation.