East African Govts Charge Less Taxes On Long-Term Bonds

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Government securities including treasury bills, bonds, and government-backed infrastructure bonds are widely considered low-risk investment vehicles and form a foundational component of institutional portfolios, particularly for retirement funds like the National Social Security Fund.

It is useful therefore for investors and portfolio managers to have a comparative analysis of the tax treatment applicable to these instruments in Uganda against other key East African jurisdictions, so that they can evaluate and thereafter optimize investment strategy and net returns.

In Uganda, the Income Tax Act establishes a clear and incentivised tax framework for government securities. Interest earned on standard treasury bills and bonds is subject to a tiered withholding tax (WHT) of 20% for maturities of less than 10 years, and a reduced 10% rate for those held for 10 years or longer. Infrastructure bonds receive a full income tax exemption on interest, provided they are listed, have a minimum maturity of 10 years, and the proceeds are used to fund public infrastructure and social services. This exemption is a strategic policy tool designed to attract long-term capital for national development projects by making infrastructure bonds a more attractive investment.

According to the Uganda Income Tax Act, specifically Schedule 4, Part V (2) with reference to Section 82, non-resident investors are subject to WHT on interest from government securities, mirroring the structure that applies to residents of 20% rate for maturities of 10 years or less, and a 10% rate for maturities exceeding ten years. They are also exempted from tax for infrastructure bonds

The withholding tax applied to interest from these government securities is designated as a final tax. Consequently, no further income tax liability arises for the investor on the same interest income.

In Kenya, the withholding tax on bearer bonds depends on the instrument type, the holder’s residency status, and its maturity. Government bearer bonds issued externally are subject to a 7.5% WHT for residents and 15% for non-residents. In contrast, all other bearer bonds carry a uniform WHT rate of 25% for both residents and non-resident holders. A reduced rate of 10% applies to bearer bonds with a maturity of ten years or more for both residents and non-residents, Furthermore, infrastructure bonds designated as tax-exempt by the Central Bank of Kenya, are entirely free from withholding tax.

In Tanzania, interest earned on government securities such as treasury bonds is generally subject to a 10% withholding tax (WHT). However, exemptions have been introduced for interest on listed corporate and municipal bonds with a maturity of more than three years, as part of measures to deepen the capital markets. While the Income Tax Act does not explicitly classify infrastructure bonds as exempt, government-issued infrastructure bonds that are listed on the Dar es Salaam Stock Exchange may qualify for exemption under the Finance Act provisions that came into effect on 1 July 2022. Consequently, government-issued infrastructure bonds could be exempt from WHT, provided they meet the listing and designation criteria.

In Rwanda, interest earned on government bonds is generally subject to a 15% withholding tax (WHT). However, preferential rates apply in certain cases to encourage investment in the capital markets. Specifically, a 5% WHT is charged on interest from government securities that are listed on the capital market when the beneficiary is a resident of Rwanda or another East African Community member state. The same reduced 5% rate applies to interest on treasury bonds with a maturity of at least three years, providing an incentive for investors to hold longer-term government debt.

Across East Africa, the taxation of government securities shows a clear policy trend toward encouraging long-term capital investment through lower WHT rates or outright exemptions on infrastructure bonds and listed instruments. Uganda’s full exemption on qualifying infrastructure bonds, Kenya’s tax-free designation for infrastructure bonds, Tanzania’s listing-based exemptions, and Rwanda’s preferential 5% rate on longer-dated securities all underscore the use of tax policy as a tool to mobilise domestic savings for infrastructure financing. For institutional investors such as pension funds, understanding these fiscal policies is critical to optimising portfolio yields, ensuring compliance, and supporting national development goals through targeted investment.