The email from the Uganda Revenue Authority landed like a thunderclap: “Notice of assessment for
undeclared rental income.” For the management of Lake Victoria Hotel Limited, those words carried a
weight no hospitality executive wants to hear. They had just leased out their hotel to another operator,
confident it was a legitimate business arrangement. Yet to the taxman, that lease was not a business
move; it was rent. URA issued an assessment based on this position that the lease meant something
entirely different: undeclared rental income that had escaped taxation under Section 5 of the Income
Tax Act (Cap 340). The hotel objected, insisting that what was transferred was an entire business
operation, not just physical premises.
And so began one of 2025’s most instructive tax battles: Lake Victoria Hotel Limited v URA, decided by
the Tax Appeals Tribunal (TAT) on 3rd October 2025. The case has since stirred intense discussion in
accounting circles, not for its glamour, but for its quiet precision in redefining what qualifies as rental
income in Uganda.
Lake Victoria Hotel, a long-established player in Uganda’s hospitality industry, had leased its entire hotel
facility to Granada Hotels for USD 850,000 per year. To the hotel’s directors, this was a temporary
business handover, allowing Granada to run the operations while they focused on other ventures.
At the core of this dispute lay a single but profound legal question: “Was the lease of the hotel a transfer
of a business or merely a letting of property?”
Lake Victoria Hotel argued that the transaction represented a business transfer, emphasizing that the
agreement gave Granada Hotels the right to continue the hotel’s operations, complete with goodwill,
existing clients, and operational assets. They claimed that the physical premises were incidental to the
transfer of the ongoing business.
URA disagreed. The Authority maintained that the hotel’s core business was hospitality, not property
leasing. Therefore, any income earned from granting rights to use immovable property fell squarely
under rental income, ring-fenced under Section 5(3) of the Income Tax Act.
URA cited the principle that rental income from immovable property is taxed separately and is only
treated as business income where the taxpayer’s primary business is real estate or property letting.
The Tribunal, in its meticulous examination of the lease agreement, unearthed several critical clauses
that shaped the outcome.
First, it found that Granada Hotels was under no legal obligation to continue operating the business
under the “Lake Victoria Hotel” brand name. The lessee was permitted to operate under its own
trademarks, logo, and even change the name, a key indicator that the deal was not a business transfer.
Second, the Tribunal noted that the mode of remuneration was telling: a fixed annual lease payment of
USD 850,000, rather than a profit-sharing or performance-based structure typically seen in business
transfers.
Moreover, the lessee’s obligation to collect and remit receivables from existing customers was
interpreted not as continuity of business, but as part of the process of managing the transition of assets
under a lease arrangement.
In its ruling, the Tribunal drew a firm line between business income and rental income, emphasizing the
substance-over-form approach in tax interpretation. “The main purpose of the transaction involving the
lease of the hotel was to grant the lessee rights to use the buildings,” the Tribunal held.
While the applicant’s legal team attempted to show that operational obligations in the lease indicated a
transfer of business, the Tribunal viewed those as incidental conditions commonly found in lease
agreements, such as restrictions on how a tenant may use property. Accordingly, the Tribunal concluded
that the consideration received, being for the right to use and occupy property, fell squarely within the
definition of rental income.
Uganda’s Income Tax Act draws a sharp distinction between business income (Section 18) and rental
income (Section 5). Specifically, Section 5(3) ring-fences rental income, excluding it from being taxed as
business income under Section 4. The Tribunal relied on this statutory separation to assert that
payments made in consideration for occupation or right to use land or buildings shall be taxed as rental income, irrespective of the title or style of agreement. This interpretation underscores a key message for taxpayers: the substance of a transaction overrides its form or label.
This decision holds far-reaching consequences for corporate taxpayers, especially in industries like
hospitality, manufacturing, and energy, where property and operational assets often overlap.
Substance Over Form: The ruling reaffirms that tax authorities and tribunals will look beyond contractual
language to the actual economic reality of transactions.
Lease vs Business Transfer: If an entity’s primary business is not property letting, income derived from
leasing premises is likely to be treated as rental income.
Contract Drafting Matters: Agreements must clearly spell out the nature of the transaction, whether it’s
a lease, management contract, or business transfer, to avoid costly recharacterization.
URA’s Expanding Powers: The decision also reinforces URA’s authority to recharacterize transactions,
aligning with global tax trends under OECD’s BEPS Action Plan that promote transparency and
discourage tax avoidance through artificial structuring.
The World Bank’s 2025 Uganda Economic Update recently noted that Uganda’s non-compliance gap in
rental income taxation remains high, with an estimated UGX 1.2 trillion in unreported rent annually. This
case, therefore, comes at a pivotal time, signaling URA’s intensified scrutiny of the property and
hospitality sectors. Tax professionals and practitioners now caution that companies seeking to “lease
out operations” must review their documentation through a tax lens, or risk falling into the same trap.
The Tribunal has reaffirmed that taxation today is not a matter of mechanical compliance. It is a matter
of transactional intelligence. The days of form over substance are gone; what now matters is how a deal behaves economically. Every clause, every definition, and every payment structure carries a tax identity
that can be reinterpreted under Section 5(3) of the Income Tax Act.
As a business, structure your agreements with tax foresight, not as an afterthought. For my fellow
practitioners, it calls for a deeper synthesis of commercial law, contract interpretation, and fiscal policy.
The tax landscape is evolving, precision in language, intent, and execution has become the new
compliance currency.
In the end, Lake Victoria Hotel v URA is not just about rent or business income. It is a timeless reminder that in taxation, strategy begins where semantics end.
The writer is a chartered Accountant and a chartered Tax Advisor
