Distilled
A Ugandan tower company borrowed US$124.5 million from its Dutch parent at 6.56 per cent, with interest automatically capitalised rather than paid. No withholding tax was remitted for five years. The Court of Appeal held that capitalising accrued interest confers value on the lender and is therefore payment: withholding tax fell due at each capitalisation date, without any cash moving. The rate itself was never in issue.
The facts
In June 2012 ATC Uganda Limited borrowed to facilitate the purchase of a communication towers business from MTN Uganda. The shareholder loan agreement, dated 29 June 2012, was with Uganda Tower Interco B.V., its Netherlands parent. The two companies had the same directors. The principal was US$124,536,227.35, the rate 6.56 per cent, the term seven years.
The interest mechanics matter. For an initial period of thirty months, accrued interest automatically capitalised and was added to outstanding principal at the end of each interest period. Thereafter interest was payable in arrears — unless there was insufficient cash flow to pay the whole of the accrued amount, in which case the entire amount for that period automatically capitalised instead. Principal, together with all interest accrued and other amounts owing, fell to be repaid in full on the payment date.
In practice interest was capitalised from 2012 to 2017 and no withholding tax was remitted on it. Cash interest began to flow in February 2018, and withholding tax was paid on those remittances. The authority assessed the earlier capitalised amounts to withholding tax and penalty. The company paid 30 per cent of the assessed tax as a condition of challenging it.
What the case is not about is worth stating plainly. There is no benchmarking, no credit rating analysis, no comparables, no thin capitalisation argument and no challenge to the 6.56 per cent rate anywhere in the judgment. Transfer pricing appears only in the authority's submissions, in passing, and neither reasoned judgment engages with it. This is a pure question of statutory construction about when interest is paid.
The litigation
Tax Appeals Tribunal · Application No. 17 of 2019 · authority prevails
Dismissed with costs. The Tribunal held that by converting interest and adding it to principal, the company had fully discharged its interest obligation.
High Court, Commercial Division · Civil Appeal No. 32 of 2020 · authority prevails
Dismissed with costs, upholding the Tribunal.
Court of Appeal · 2026 · appeal dismissed on all three grounds
Three grounds were pleaded: that the judge below had wrongly construed the provision as an accrual provision and so wrongly treated capitalisation as payment; that he had relied on English case law in disregard of the statute's own context; and that the lender's Netherlands books could not found a Ugandan assessment. A preliminary objection by the authority was overruled. All three grounds then failed.
ajiho commentary
The whole case turns on one definition
The statute defines payment as including any amount paid or payable in cash or in kind, and any other means of conferring value or benefit on a person. That last limb is what decides the case. The Court held the phrase cannot be narrowed to the movement of real cash, and that capitalisation confers value: it increases the amount owed and causes future interest to accrue on a higher balance. Notably it added that once capitalised, the amount ceases to be interest and becomes principal. The exposure therefore travels precisely as far as that statutory wording does — and no further.
The English authority went the taxpayer's way and did not help
An unusual feature. The Court agreed with the company that the leading English authority holds capitalisation is not payment, and agreed that the judge below had misapplied it. It made no difference. Foreign authority is persuasive only, and applies where domestic law is silent or unclear; here the domestic definition was neither. The concurring judgment went further, holding the Ugandan provision is not in pari materia with the old United Kingdom wording. Groups reasoning from familiar common law positions should note how little that reasoning was worth against an inclusive statutory definition.
The PIK toggle offered no protection
This is the point with the widest practical reach. The clause was not hard-wired PIK throughout — after the initial period, interest was payable in cash unless cash flow was insufficient, in which case it capitalised. That construction is standard in private equity and real estate documentation, and it is often understood as preserving the character of a cash-pay instrument. The Court treated it identically to a contractual PIK. The toggle changed nothing.
The lender's accounting became the assessment evidence
The authority relied on the Netherlands lender's financial statements, which recognised the interest income and on which Netherlands tax had been paid, as showing that the lender's claim to interest had been extinguished. The Court saw no bar: the treaty permits source taxation of interest capped at ten per cent of the gross amount and provides for exchange of information, and the treaty has domestic effect. It added, more bluntly, that it would be preposterous to expect the authority to ignore what sits in the books of related companies with common directors. Consistency between borrower-country and lender-country recognition of PIK is now an assessment risk, and exchange of information is the delivery mechanism.
Foreign authority was discarded, then adopted
The most awkward feature of the judgment, and the one most likely to be argued on any further appeal. Having found the domestic definition express and clear, and having said there was no need to dwell on the old English cases, the Court then decided the meaning of "when paid" by block-quoting a Kenyan Court of Appeal decision — twice — for the propositions that payment is deemed made even where no money passes and that withholding need not be done physically but as a book entry. Persuasive authority was refused where it favoured the taxpayer and relied on where it favoured the authority. The reasoning is also thin in places: the benefit analysis rests on an enlarged principal base and compounding, which describe the economics of deferral rather than receipt, and the concurring judgment notes that the borrower benefits too — awkward for a test asking what value was conferred on the lender.
The characterisation holding may prove too much
Worth sitting with. The Court held that once capitalised the amount ceases to be interest and becomes principal. But withholding bites on a payment of interest to a non-resident. On the Court's own reasoning, at the instant the obligation crystallises the thing charged has already become principal — and repayment of principal is not a withholding event at all. The judgment uses the change of character to show the interest obligation was discharged, without addressing that the same step removes the subject-matter of the charge. The charging provisions themselves appear nowhere in the lead judgment; they surface only in the concurring judgment's summary of the Tribunal below.
And a problem the Court left open
If withholding fell due at capitalisation between 2012 and 2017, and the capitalised amounts thereby became principal, what was the status of the cash remitted from February 2018 — on which withholding was also paid? On the Court's own reasoning much of that was repayment of principal rather than interest. Neither judgment addresses the point, and it leaves an unresolved double charge on the same economic return.
What this means for your business
On PIK structures in inclusive-definition jurisdictions. The commercial point of PIK is that no cash leaves the borrower, and that remains true — what changes is that the withholding obligation no longer waits for the cash. Where the statute defines payment to include conferring value or benefit, roll-up creates a cash tax cost with no corresponding cash yield. Model the withholding at each capitalisation date, funded from the borrower's own resources, rather than at eventual payment.
On toggle drafting. A cash-pay instrument with a shortfall toggle was treated as PIK. If the distinction matters for withholding in a given jurisdiction, it needs to be established by local analysis rather than assumed from the drafting.
On group accounting consistency. The lender's recognition of income was used against the borrower. Where PIK is recognised as income in the lender's jurisdiction, expect that treatment to surface in the borrower's jurisdiction and to be treated as an admission.
On what this case does not decide. It says nothing about the arm's length rate, the borrower's capacity to service the debt, or deductibility. A group facing a Ugandan withholding assessment on capitalised interest is fighting on timing and characterisation, and transfer pricing arguments will not be the answer.
ajiho will continue to monitor East African decisions on the timing and characterisation of intra-group interest, and cover further decisions in future FT Cases.
Case reference
ATC Uganda Limited v Uganda Revenue Authority, Court of Appeal of Uganda at Kampala, Civil Appeal No. 220 of 2022, 2026. Lead judgment: Alibateese JA, with Byaruhanga Rugyema JA concurring with separate reasons and Luswata JA concurring. On appeal from the High Court, Commercial Division, Civil Appeal No. 32 of 2020 (Wejuli Wabwire J); at first instance the Tax Appeals Tribunal, Application No. 17 of 2019. Primary source: official judgment.
This judgment must be checked against the official record before anything in it is cited. The neutral citation and date appear only in the file name, and the High Court date, the assessment figure and the interest-recognition period are each recorded inconsistently across the lead judgment and its concurrences — the assessment figure differs by three orders of magnitude and one digit is illegible, which is why no figure is quoted above. The copy used was processed by optical character recognition and contains pervasive character corruption, including in party and judicial names and in the statutory provision as quoted.