When Can Domestic Laws Override Tax Treaties?

In the case of White Sapphire Ltd/Crane Bank Ltd vs the Commissioner General of the Uganda Revenue Authority ("URA"), the Ugandan High Court considered the notoriously controversial anti-avoidance provisions, in terms of which the benefits of a double tax agreement ("DTA") concluded by Uganda would not be available where at least 50% of the underlying ownership of the resident of the other contracting state is not held by individuals resident in such other contracting state.

The judgment, delivered on 6 December 2017, held that although the provisions of the DTA between Uganda and Mauritius would apply to dividends declared from Uganda, the anti-avoidance provisions of the Uganda Income Tax Act ("UITA") are also applicable and the matter was to be resolved by mutual agreement between the URA and Mauritius Revenue Authority ("MRA").

In the case at hand, dividends were declared by Crane Bank, a Ugandan commercial bank, to its Mauritius-incorporated shareholder, White Sapphire Ltd, which in turn is 100% held by a Kenyan resident individual. Crane Bank withheld 10% withholding tax on the dividends, as provided for by the DTA, while the URA insisted on levying 15% withholding tax as per the UITA.

Although the judge agreed that the provisions of the DTA may be applied to the dividends declared, the anti-avoidance provisions of section 88(5) of the UITA can also be legally applied. In terms of these provisions, treaty benefits would not be available where at least 50% of the underlying ownership of the resident of the other contracting state is not held by individuals resident in such other contracting state (with effect from 2016, these provisions have been amended to a beneficial ownership and economic substance test).

It was held that this is a scenario catered for...