A trading company is generally permitted to deduct expenses that are incurred wholly and exclusively for purposes of the company's trade, provided these costs are not capital in nature and are charged to the profit and loss account.
The Rwandan tax law stipulates that deductible expenses should fulfil the following conditions:
- Are incurred for the direct purpose of the business and are directly chargeable to the income.
- Correspond to a real expenses and can be substantiated with proper purchase receipts.
- Lead to a decrease in the net assets of the business.
- Are used for activities related to the tax period in which they are incurred.
Depreciation and amortisation
Accounting depreciation of fixed assets is not allowable as a deduction for tax purposes. The same applies in the case of amortisation of assets. However, businesses are allowed specified deductions, referred to as tax depreciation in respect of specified classes of assets. This is deducted in arriving at taxable income.
Tax depreciation allowance is granted to persons who own depreciable assets at the end of the tax period and use such assets in the production of income.
Land, fine arts, antiquities, jewellery, and any other assets that are not subject to wear and tear or obsolescence are not depreciated. Buildings, heavy industrial equipment, and machineries are depreciated annually, each on its own, at a depreciation rate of 5% of the cost of acquisition, construction, refining, rehabilitation, or reconstruction.
Intangible assets, including goodwill that is purchased from a third party, are depreciated annually, each on its own, at a depreciation rate of 10%, while information and communication systems whose life is over 10 years are depreciated annually at the rate of 10% of the cost of acquisition.
Computers and accessories and information and communication systems whose life is under 10 years are granted tax depreciation at 50%.
Tax depreciation allowance is available on any other business asset at the rate of 25%.
As mentioned above, purchased goodwill will attract tax depreciation at the rate of 10%, which is an allowable deduction. However, amortisation of goodwill is not tax deductible.
There is no clear guidance on the tax treatment of start-up expenses. However, in practice, start-up expenses of a capital nature are not deductible for tax purposes. Where they relate to purchase of assets, respective tax depreciation is claimed. Start-up expenses of a revenue nature are tax deductible.
Interest on borrowed money used for earning business profit or interest in respect of an amount payable for property acquired to earn income is deductible, provided the interest paid is pursuant to a legal obligation and is reasonable under the circumstances.
Thin capitalisation rules can limit interest deductions when debt owed to related entities exceeds four times the amount of the corporation's equity (see Thin capitalisation in the Group taxation section).
A bad debt provision will be deductible for tax purposes if it fulfils the following conditions:
- The amount was previously included in the income of the taxpayer.
- Debt is written off in the books of accounts.
- Taxpayer has taken all possible steps in pursuing payment and has shown a court decision declaring the insolvency of one’s debtor.
However, for an individual whose debt is less than RWF 3 million, in addition to the conditions referred to in (a) and (b), the taxpayer must provide proof that one has taken all reasonable steps over a period of three years to recover the debt.
Further, licensed commercial banks and leasing entities duly licensed as such are allowed to deduct, in determining business profit, any increase of the mandatory reserve for non-performing loans as required by the directives related to management of bank loans and similar institutions of the National Bank of Rwanda. Similarly, the business profit is increased by the entire amount recovered from bad debts deducted from such reserves.
Donations and gifts to charitable organisations and other non-profit making organisations are tax deductible to the extent of 1% of turnover. Consequently, donations to profit making organisations, irrespective of the amount, and any donations above 1% of turnover to non-profit making organisations are not allowed as deductions for CIT purposes.
Fines and penalties
Fines and similar penalties imposed for breaking the law or for statutory offences, such as late payment of taxes, are not tax deductible.
The law does not specify which type of non-statutory fines or penalties are not allowed for tax. For example, there is no guidance on whether fines or penalties paid for breach of contract are deductible or not.
Income tax paid on business profit and recoverable VAT are not deductible for tax purposes. This includes any back taxes paid by the business.
Net operating losses
Tax losses can only be carried forward for five tax periods, earlier losses being deducted before later losses. However, on application, the tax administration may authorise the taxpayer to carry forward the tax loss for more than five tax periods. This is subject to fulfilment of certain conditions.
If the direct or indirect ownership of the share capital or the voting rights of an unlisted company changes more than 25% by value or by number during a tax period, such a company is restricted from carrying forward losses incurred during the tax period and previous tax periods.
There are no provisions for carrying back tax losses.
Payments to foreign affiliates
Royalties, management fees, and similar payments to non-residents are deductible expenses to the extent that:
- they do not exceed 2% of the turnover of the taxpayer, and
- they are incurred to earn income of the Rwandan company, adhere to the arm's-length principle, and comply with transfer pricing requirements.