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Uganda

2007 Investment Climate Statement - Uganda

Openness to Foreign Investment

The Government of Uganda (GOU) seeks to attract foreign direct investment and markets itself to companies in Europe, Africa, Asia and the United States. Claiming nearly 21 years of security throughout much of the country, President Yoweri Museveni frequently encourages foreign businesses to set up operations in Uganda. President Museveni is hoping major events such as hosting the Commonwealth Heads of Government Meeting in November 2007 will increase investors' interest in Uganda. The President recognizes and often publicly warns of the negative consequences of red tape and other irritants to potential foreign investors. Despite this stance, the GOU has not demonstrated the political will to reduce corruption, which remains a significant challenge to potential investors.

Ugandan policies, laws, and regulations generally are investor-friendly. Foreign investors may form 100 percent foreign-owned companies and majority or minority joint ventures with local investors with no restrictions. The GOU permits foreign investors to acquire or take over domestic enterprises and encourages investments in new ventures. Ugandan courts generally uphold the sanctity of contracts, though the courts can be subject to political pressure. The courts are significantly backlogged and even when a judicial remedy is issued, businesses may encounter difficulty in having other GOU agencies enforce their judicial remedy.

Uganda needs to coordinate better its investment strategy and apply it evenly and transparently. The Uganda Investment Authority was created to help foreign ventures set up domestic operations. However, while the GOU remains committed to attracting foreign investment, it often relies upon ad hoc, venture-specific incentives, instead of promoting comprehensive, sector-wide investment strategies. While beneficial to individual investors, others contemplating operations in the same sector may not receive equal incentive packages.

The Uganda Revenue Authority (URA) historically has had a very low rate of tax collection because of inefficient collection and a lack of compliance by eligible payers. Due to the relative ease, the URA frequently targets large, often foreign-owned businesses. Businesses in the informal sector do not report revenue and therefore do not pay taxes. However, improvements emerged in 2005 and 2006 as the URA embarked on an impressive internal restructuring to increase efficiency and promote transparency. The URA set up offices throughout the country to provide local points of contact to address taxpayers concerns. Dozens of URA staff were fired and tax revenue collection increased significantly in 2005-06. This allowed 54 percent of the government budget to be funded by tax revenue, up from 52 percent the previous year. Uganda’s top income tax rate is 30 percent and the corporate tax rate is 30 percent.

The Investment Code places foreigners at some disadvantage in comparison to nationals of Uganda. For example, licensing authorities may impose performance obligations on foreign investors, to which nationals are not subject. Foreign-owned banks and insurance companies are subject to higher paid-up capital requirements than are national firms. The Investment Code generally allows foreign participation in any sector. However, due to byzantine land laws and a slow and non-transparent Land Registry, some foreign companies have encountered difficulty in obtaining land. The GOU's privatization program has successfully attracted foreign investors in agri-business, hotels, and banking. The program has moved forward in fits and starts and some observers now question the transparency of certain transactions. Projects that may impact the environment require an environment impact assessment, carried out by the National Environment Management Authority (NEMA). At the end of 2006 President Museveni faced both domestic and international criticism from environmental groups for trying to allocate protected forest reserves to investors for expansion of sugar cane and palm oil plantations. Loss of environmentally protected areas could hurt revenue derived from eco-tourism, a key foreign exchange earner for the country.

The GOU plans to use a USD 24 million credit from the World Bank to set up export processing zones (EPZs) to stimulate investment and promote exports. Under draft legislation, investors locating in these zones would be provided with a variety of incentives, including a 10 year tax holiday, duty drawbacks, and the removal of export taxes on goods produced within the EPZs. The draft law is still under revision but the bill may be presented to Cabinet in early 2007. The Investment Code is also being revised. Currently, 800 hectares of land have been demarcated at Namanve, 15 kms east of Kampala, as a potential EPZ site.

The World Bank has provided a USD 70 million credit for the Private Sector Competitiveness Project, which will enable Uganda to improve the basic infrastructure for business development and to promote international competitiveness by eliminating key constraints. Emphasis will be placed on investment in skills; raising productivity; improving quality, standards, and reliability of micro, small and medium enterprises. Efforts will include improving the land registry, the business registration service and supporting the Uganda Law Reform Commission in the revision of key legislation, in particular export-related laws.

Conversion and Transfer Policies

The Investment Code guarantees that investors who have invested USD 500,000 can repatriate their investment and dividends and receive foreign exchange to pay debts incurred in the business. Investors have no trouble obtaining foreign exchange. Most investors are reinvesting profits in their business in Uganda.

Expropriation and Compensation

Ugandan law states that the interests of a licensed investor may only be expropriated in accordance with the constitution of Uganda, and that investors are guaranteed a fair market value within twelve months of the expropriation. Uganda is a member of the Multilateral Investment Guaranty Agency (MIGA) and the International Center for the Settlement of Investment Disputes (ICSID). The GOU has shown a willingness to consider debt/equity swaps in which government ownership in companies is transferred to private sector minority shareholders on mutually acceptable terms.

Dispute Settlement

With donor assistance, the GOU has reformed the commercial justice system, including the creation of a mandatory mediation session for all commercial disputes. Uganda opened its first commercial court ten years ago and now boasts four commercial court judges. The court strives to deliver to the commercial community an efficient, expeditious and cost-effective mode of adjudicating disputes. Despite a shortage of judges, lack of funds, and minimal space, the commercial courts normally dispose of disputes within seven months, as opposed to the several years it used to take litigation to wind through the Ugandan judiciary. However, the majority of business people prefer to settle disputes out of court to save time and money. Commercial court judges estimate that eighty percent of commercial disputes are resolved through Alternative Dispute Resolution. The Center of Arbitration for Dispute Resolution (CADER) can assist in commercial disputes. Commercial cases that are particularly complex or politically sensitive can drag on for years. Foreign businesses have complained that some judges delay ruling on disputes involving politically well-connected parties.

Uganda is a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Pursuant to the Reciprocal Enforcement of Judgment Act, judgments of foreign courts are accepted and enforced by Ugandan courts where those foreign courts accept and enforce the judgments of Ugandan courts. See Chapter 21, Volume 2, Page 481 of the “Laws of Uganda 2000”. Monetary judgments normally are made in local currency. Ugandan penalties may not be a sufficient deterrent since the amounts have not been revised upward to take into account depreciation in the value of currency. Pursuant to Section 73 of the Arbitration and Conciliation Act, the GOU accepts binding arbitration with foreign investors. The Arbitration and Conciliation Act, which incorporates the 1958 New York Convention, also authorizes binding arbitration between private parties.

In 2006 Uganda completed a major revision of its Commercial laws, many of which date to the colonial era. The Uganda Law Reform Commission focused on strengthening intellectual property rights protections, a new set of provisions on mortgages, updating commercial contract law as well as modernizing laws to provide provisions for e-commerce and electronic signatures. The revisions also updated Uganda's Bankruptcy laws which had dated back to British rule. Some of the new commercial laws have been passed by Parliament and others are still before Cabinet. It is anticipated that most of these laws will be passed in early 2007. Courts apply English common law where there is no applicable written provision. Under the laws, creditors can prove their debts to the court-appointed receiver for payment. Secured debtors receive payment priority.

Performance Requirements and Incentives

There are no mandatory performance requirements in the Investment Code, but obligations may be imposed on a foreign investor as a condition for licensing. In 2005 the government drafted a bill to reintroduce tax holidays, which had been eliminated under the Income Tax Act of 1997, in order to spur new investment. The new bill includes an exemption on withholding tax on interest on external loans, repatriation of dividends to provide relief from double taxation and a 10-year corporation tax holiday. Other incentives include exemptions from duty on raw materials and machinery, and a waiver of export tax. The Income Tax Act of 1997 eliminated tax holidays for certain foreign investments, replacing them with differential depreciation allowances. In addition, losses may be carried forward indefinitely. Foreign investors should carefully evaluate depreciation allowances by region and subsector prior to investing. The GOU will work with foreign investors to tailor incentive programs to specific projects. This ad hoc approach, which can include tax incentives, government subsidies, or the provision of land, may benefit specific investors. However, the lack of sector wide or comprehensive investment schemes may disadvantage other investors in those areas.

The GOU places few caveats or restrictions on foreign investment. The GOU does not require that foreign investors purchase from local sources or export a specified percentage of output, nor does it require local ownership of a certain amount of shares. American investors have reported few problems with visas or work permits. However, the GOU encourages businesses to work with local partners.

Right to Private Ownership and Establishment

The Land Act of 1998 codified the complex land laws in Uganda. While foreign companies may hold land under long-term lease, they may not own it freehold. Currently, foreigners must seek cabinet approval through the Uganda Investment Authority for land to be used for agricultural or animal production purposes. The Ugandan land registry is antiquated and operates with little transparency. It is generally viewed as a hindrance to investment and development. It is estimated that there are more than 8,000 fake land titles floating around Uganda. In 2005, the GOU proposed to invest over USD 20 million over five years to update and modernize the land registry, but progress has yet to be seen. While the GOU has not initiated any changes to allow foreign investors to purchase freehold property, these procedural upgrades, when completed, may make land transfers easier for joint ventures with majority Ugandan ownership.

Protection of Property Rights:

Domestic private entities have the right to own property and other businesses and may dispose of them at will. Foreign private entities share these rights, but there are restrictions in land ownership. The mass expropriation of Asian properties under the Idi Amin regime three decades ago was the largest such aberration in the history of Uganda. Over the past decade, the GOU has actively returned confiscated property to those who lost it. Most of the property has been returned, but the Departed Asians' Property Custodian Board still reviews contentious issues.

Protecting Products from IPR Infringement:

The Uganda Law Commission drafted new intellectual property laws in 2006, with much more stringent enforcement provisions, but gaps in protection remain. Counterfeit goods, mostly manufactured in China, are becoming increasingly more sophisticated. Imported counterfeits hurt legitimate manufacturers and serves as a deterrent to future foreign direct investment in Uganda. The GOU is also losing hundreds of thousands of dollars in tax revenue every year, due to understated custom duties from those transacting in counterfeit goods.

Under section 32 of the patents statute of 1991, the Registrar of Patents awards patents for an initial period of 15 years, with a possible five-year extension if a request is made one month before expiration of the original term. Ugandan laws provide similar protections for copyright and trademark holders. The new laws impose criminal penalties of fines and up to two years in jail for patent infringement and for selling counterfeit trademarked or copyright goods. Previously, section 379 of the Ugandan Penal Code Act only criminalized selling goods marketed with a counterfeited trademark, but the penalties were nominal. As these new IPR laws take effect, it will be crucial for the judiciary to establish a legal precedent showing strong enforcement of IPR laws in the country. Uganda signed the Patent Law Treaty in June 2002, but has not yet ratified the World Intellectual Property Organization (WIPO) treaties.

Bootlegging of CDs, cassettes, software, and videos is common. American manufacturers of consumer goods, particularly shoe polish and batteries, have been victimized by counterfeit products smuggled in to the Ugandan market from abroad. After a slow start, the Ugandan customs, police, and prosecutors have initiated criminal proceedings against the recipients of some shipments of illegal goods. However, enforcement remains haphazard and legitimate producers must proactively engage Ugandan officials to enforce Ugandan law. Generally, the political will for enforcement of IPR violations is lacking. The Uganda National Bureau of Standards takes an active role in protecting the health and safety of Ugandan consumers, resulting in the confiscation and destruction of substandard counterfeit products, including matches and cosmetics.

The Investment Code of 1991 makes provisions for foreign exchange remittances with respect to transfer of foreign technologies. In order to benefit from this, investors must have registered agreements with the Uganda Investment Authority regarding the transfer of technology.

Transparency of Regulatory System

While Ugandan laws and regulations are published in the Government Gazette, the regulatory system lacks internal transparency and varies substantially by regulatory body. Outside parties, both public and private sector, usually have an opportunity to comment on draft legislation and regulations. Government agencies often have open hearings on proposed regulations at which impacted interests can participate. However, agencies at times do not follow standard practices and may not observe all legal provisions. Additionally, the government at times provides ad hoc assistance to well-connected local businessmen. The Uganda Investment Authority provides assistance to potential investors in navigating the regulatory process.

Many Ugandan agencies maintain substantial red tape and a 2006 World Bank International Finance Corporation report found that it takes 30 days (and 17 separate steps) on average to open a business in Uganda. Some sectors, such as mining, may take substantially longer. While the Government of Uganda continues to modernize, some government officials do not have computers or internet connections and so cannot communicate through e-mail. Regulatory inefficiencies usually do not target foreign investors or exporters. However, at times, technical limitations favor local parties or businesses with substantial local connections. For example, many government procurement opportunities require cash payment in Uganda shillings in person at local agency offices.

The central bank is reasonably open and transparent, but the legal system is less so. Courts, particularly at the upper levels, have a good reputation, though some parties to legal proceedings can manipulate the system to take advantage of its inherent delays.

Efficient Capital Markets and Portfolio Investment

Capital markets are open to foreign investors. There is a 15 percent withholding tax on interest and dividends. Credit is allocated on market terms, but lending to the private sector is relatively limited, and rates are high. Many banks have large GOU Treasury bill portfolios that are often larger than their commercial loan portfolios. Rates of return on Government issued bills and bonds have declined over the past year so banks are starting to shift their focus to commercial lending. During 2004/05 fiscal year, commercial bank lending to the private sector grew by 22 percent, according to the BOU.

The Capital Markets Authority Statute of 1996 and subsidiary regulations address the licensing of broker/dealers and of stock exchanges, and established the Capital Markets Authority (CMA) as the securities regulator in Uganda. Uganda’s stock exchange was inaugurated in June 1997, and with the 2007 addition of shares in Stanbic Bank is now trading the stock of eight companies. Foreign owned companies are allowed to trade on the stock exchange, subject to some share issuance requirements, and the Kampala exchange contains cross listings of two Kenyan companies – Kenya Airways and East African Breweries. The CMA expects more listings in 2007, which may include Kinyara Sugar, Uganda telecom and National Insurance Corporation. However, some large local businesses may be reluctant to list on the stock exchange for fear that the disclosure requirements could expose them to greater tax liabilities. Additionally, many of Uganda's largest firms are family-owned operations reluctant to open up to outsider control. The East African Development Bank also trades bonds on the exchange. Four companies currently provide brokerage services, including one American-owned firm, MBEA. The license to operate the exchange is held by the Uganda Securities Exchange (USE), a company formed by licensed broker/dealers and investment advisers.

In November 2003, the GOU enacted a collective investment law to allow investors to pool funds to be invested on the USE and in government T-bills. In December 2004, CMA licensed African Alliance Uganda to operate the first Ugandan collective investment scheme. Since 2004, the Bank of Uganda successfully issued 2-, 3-, 5-, and 10-year government bonds. The GOU hopes that by creating a benchmark yield curve it will encourage private companies to access the debt markets. These longer-term government bonds absorbed excess liquidity from the market, and helped bring down short-term interest rates.

The banking industry generally is sound, well capitalized and without serious non-performing loan problems. Tighter BOU supervision, including more stringent inspections and higher capital requirements, has helped the sector recover from the closing of several domestic banks in 1998/99. The total size of the commercial banking system is roughly UGS 3 trillion (approximately USD 1.6 billion). Most banks are foreign owned, including major international institutions such as Citigroup, Barclays, and Standard Chartered. Standard Chartered, the largest bank, has assets of over USD 900 million, followed by Stanbic with assets of nearly USD 800 million. Ugandan banks remain conservative and have been criticized for a lack of enthusiasm when it comes to lending to all but the largest blue-chip operations. While the BOU remains largely respected, its independence has been called into question by evidence that the GOU pressured it to cover nearly USD 12 million in debts run up by a politically well-connected local businessman. The GOU is contemplating moving government accounts from commercial banks to the BOU.

Political Violence

The GOU and the Lord's Resistance Army (LRA) are negotiating an end to the 21 year old conflict in the north. The GOU pushed the LRA out of northern Uganda in 2005 and there have been no attacks in the second half of 2006. Hundreds of thousands of Internally Displaced Persons (IDPs) are retuning to or near their homes. Armed cattle rustlers of the Karamojong and related ethnic group continue to raid cattle and villages in Northeastern Uganda. In early 2004, two U.S. missionaries were murdered in Northwestern Uganda. The motives remain unclear but the killers may have been motivated by political or sectarian prejudices. In 2005 and 2006 the LRA conducted several attacks against Westerners and international NGOs in Northern Uganda and Southern Sudan. Uganda has been included in several State Department travel advisories covering the whole of East Africa due to risks from international terrorism. Although security concerns are on the whole no greater than in 2006, American citizens considering travel, employment or investment in Uganda should read the consular information sheet and contact the U.S. Embassy for current security information.

Corruption

There is ample evidence of corruption in Uganda at all levels of society. However, the nature of corruption in Uganda is a subject of some debate. While outright bribe-taking (and requesting) does exist, factors of bureaucratic apathy and ignorance of rules within public organizations contribute to the perceptions of corruption. Some observers also point to collusion by bribe-payers and donor blindness to project malfeasance as compounding the problem. Britain, Ireland, Sweden, Netherlands and Norway withheld some aid in 2005 and 2006 over concerns about corruption and delays in political reforms. Public intolerance of corruption is growing, fuelled by press reporting and parliamentary investigations. The GOU argues that corruption has not increased, but rather that investigations have brought existing problems to light and increased public awareness. However, lack of GOU action on the recommendations of several high profile anti-corruption commissions calls into question the government's commitment or ability to combat corruption at the highest levels. Additionally, the run up to the general elections in 2006 increased pressure on businesses and individuals to contribute to political campaigns. From 2004-2006, Uganda failed to qualify for assistance under the U.S. Millennium Challenge Account (MCA) largely due to a perceived lack of progress in fighting corruption. However, in 2007 the U.S. has determined that Uganda qualifies as a "threshold country" and may be eligible for USD 12 million in funding to combat corruption.

Foreign businesses are not specifically targeted for bribes and payoffs. Nor are they immune. American firms have noted some difficulties due to lack of transparency and possible collusion between competing business interests and government officials. Reportedly, some foreign businesses have been urged to take on prominent local partners. Government procurement, particularly for defense items, is not transparent. In 2005 and 2006 several high profile government tenders for infrastructure projects were suspended under allegations of corruption.

Over the past few years, Uganda has developed anti-corruption legislation, regulations, and ethics policies. The Penal Code Act (Chapter 120, Laws of Uganda) and the Prevention of Corruption Act (Chapter 121, Laws of Uganda) criminalize the receipt of bribes. Penalties range from fines up to 6,000,000 Uganda Shillings (USD 3,200) and/or up to ten years in prison. President Museveni has appointed a cabinet level official and an Inspectorate of Government to focus on the issue, but meaningful progress remains to be seen. Uganda is a signatory to the United Nations Convention Against Corruption. In 2006, the Transparency International Corruption Perceptions Index 2006 (CPI), which measures the perceived prevalence of corruption in a given country gave Uganda a score of 2.7 out of 10. This is a 0.2 improvement from last year’s score of 2.5. A score of less than 3 indicates countries having "rampant corruption". Uganda shares the same score with Iran, Macedonia, Libya and Malawi. At the same time the World Bank Institute registered a slight increase in corruption in their ranking which is used by the Millennium Challenge Corporation (MCC).

Bilateral Investment Agreements

Uganda has signed few bilateral investment agreements. In 1998, Uganda signed (but has yet to ratify) an Overseas Private Investment Corporation (OPIC) agreement, allowing OPIC to broaden the scope of its activities here. Uganda has negotiated bilateral tax treaties with several nations, including China and South Africa, but has not begun similar discussions with the United States. In 2006, Uganda was discussing a Trade Investment Framework Agreement (TIFA) with the United States, but it has yet to be agreed upon.

OPIC and Other Investment Insurance Programs

Uganda is a signatory to the Multilateral Investment Guarantee Agency (MIGA) of the World Bank and is a member of the International Center for the Settlement of Investment Disputes (ICSID). In 1965, the U.S. and Uganda entered into an investment incentive agreement. An updated agreement was signed in 1998 by both parties, but has yet to be ratified by the Ugandan government. In 2003, OPIC signed a master guarantee agreement with Citigroup to establish a lending risk-sharing facility for local loans. In 2004, Export-Import Bank signed a similar master guarantee agreement with DFCU Bank.

Labor

Education and expertise are low in Uganda, though Uganda's universal primary education program is improving basic skills. Most urban Ugandans speak English. Labor unrest is sporadic in Uganda, and labor unions are not strong. Employers must contribute an amount equal to 10 percent of an employee’s gross salary to the National Social Security Fund (NSSF). Labor laws also specify procedures for termination of employment and termination payments. Foreign nationals must have a permit to work in Uganda.

Foreign-Trade Zones/Free Ports

Currently, Uganda does not have operational free ports or foreign trade zones. In 2004, Uganda received a USD 24 million credit from the World Bank to establish export processing zones (EPZs). The GOU has been revising a draft Special Economic Zones bill for some time, but it may be tabled before Cabinet in 2007. The GOU has set aside 800 hectares of land 15 km east of Kampala for an EPZ and possibly may set up a second EPZ at Entebbe airport. Under draft legislation, investors locating in these zones will be provided with a variety of incentives, including a 10 year tax holiday, duty drawbacks, and the removal of export taxes on goods produced within the EPZs.

Foreign Direct Investment Statistics

FY02 FY03 FY04 FY05

Net FDI 181.44 192.02 195.68 258

Inflows 230.70 241.53 260.37 ---

Outflows 49.26 49.51 64.69 ---

(Residual)

FDI statistics provided by the World Bank.

Value in U.S. dollars of Projects Licensed by Uganda Investment Authority:

SECTOR 2003 2004 2005

Agriculture, Forestry, and Fishing

159,901,446 116,662,900 66,398,500

Construction

15,440,000 25,453,400 22,117,000

Financial Services

3,672,000 750,000 1,439,000

Manufacturing

39,022,200 44,580,100 158,810,131

Mining and Quarrying

8,431,000 17,185,000 20,401,000

Other Business Services

22,754,000 26,179,000 25,683,000

Professional Services

13,574,000 12,848,000 26,252,000

Real Estate

150,000 19,850,000 10,048,000

Social Services

10,197,970 - -

Tourism

12,852,000 44,323,000 12,106,000

Trade

2,000,000 2,472,000 -

Transport, Communications, and Storage

13,903,583 8,373,000 81,972,000

Water and Energy

53,017,583 116,548,000 303,101,000

Total

354,915,199 435,224,400 728,327,631

SECTOR 2006

Agriculture, Hunting, Forestry and Fishing 72,209,465

Community, Social and Personal Services 2,454,000

Construction

32,463,500

Electricity, Gas, Water

112,827,148

Finance, Insurance, Real Estate and Business Services 351,627,000

Manufacturing

291,297,500

Mining and Quarrying

10,476,000

Wholesale and Retail Trade, Catering, Accommodation Services

335,284,000

Transport, Communication and Storage 468,665,000

Total

1,677,303,613

The values quoted above should not be relied upon for any investment decision. The figures provided by the UIA are highly variable and inconsistent, both year-on-year and by sector. According to the UIA, the values tracked are only for projects listed. No investors provide periodic updates after the initial registration. Historically, actual investment has trailed planned investment totals by a factor of five. Some of the categories for sectors were merged in 2006.

Web Resources

Enter Uganda www.enteruganda.com

Uganda Investment Authority www.ugandainvest.com


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