Directors, Shareholders and PAYE in Uganda

Published
October 5, 2026
3 min read

1. Introduction

Few areas of Ugandan tax practice generate as much avoidable dispute as the taxation of directors. Two assumptions come up again and again in URA audits, and both are costly for taxpayers who do not know how to push back.

The owner manager assumption. In small, owner run companies, officers often treat every shareholder as a director, and every director as someone the company pays a salary. The company is then assessed for PAYE on notional remuneration that was never agreed, never paid and never recorded, frequently by reference to shareholder drawings or simply to the fact that the shareholder is “running the business”.
The multinational director assumption. Where a multinational group appoints an executive based in another country as a director of its Ugandan subsidiary, alongside that person’s primary job, the assumption is that the director’s entire salary, including the salary paid abroad for work done abroad, falls into the Ugandan tax net and that the Ugandan company should operate PAYE on it.

Both positions blur distinctions that the law keeps separate: between owning a company and governing it, between holding an office and being paid for it, and between income sourced in Uganda and income sourced elsewhere. This article sets out the statutory framework, separates shareholding from directorship in smaller entities, works through the cross border position of group appointed directors, and closes with practical checklists for companies, directors and advisers facing an assessment.

2. Three separate capacities: owner, officer and employee

The starting point, and the one most often lost in audits of smaller companies, is that one individual can relate to a company in three legally distinct capacities. Each has its own source of rights, its own type of payment and its own tax treatment.

	Shareholder (owner)	Director (officer)	Employee (worker)
Where the role comes from	Holding shares, as shown in the register of members	Appointment under the Companies Act 2012 and the articles, filed with URSB	A contract of service, written or implied
What the person does	Owns; votes at general meetings; appoints and removes directors	Governs; attends board meetings; oversees management; owes fiduciary duties	Performs work under the direction and control of the employer
What the person may receive	Dividends when declared; return of capital; interest or rent if they lend or lease to the company	Directors’ fees or sitting allowances, if the company resolves to pay them	Salary, wages, allowances and benefits
Income tax treatment	Dividend withholding tax (15% generally); rental or interest rules as applicable	Employment income, but only to the extent remuneration is paid or benefits provided	Employment income
Does PAYE apply?	No	Only on fees or benefits actually paid or provided	Yes

In a large company these capacities are usually held by different people. In an owner managed company, they are often held by the same person or by a husband and wife. That overlap is precisely why the distinctions matter: the tax consequence depends on the capacity in which a particular payment is made, not on who happens to receive it.

3. What the Income Tax Act actually says about directors

1.1. A directorship is “employment”

Section 2 defines “employment” to mean (a) the position of an individual in the employment of another person; (b) a directorship of a company; (c) a position entitling the holder to a fixed or ascertainable remuneration; or (d) the holding or acting in any public office. An “employee” is an individual engaged in employment, and an “employer” is a person who employs or remunerates an employee.

URA relies heavily on paragraph (b). It is correct that a director need not have a contract of service to be treated as holding employment. Directors’ fees, sitting allowances and board retainers are therefore employment income, taxed through PAYE, and not fees for professional services subject to withholding tax.

1.2. But tax attaches to employment income, not to the title

The definition of employment tells us what kind of position is in scope. It does not create income. The charge to tax falls on employment income, which section 19 defines as income derived by an employee from employment, including wages, salary, leave pay, fees, commission, gratuity, bonus, allowances, the value of benefits in kind, and termination payments.

Every item in that list is a payment or a benefit. There is no provision in the Act that deems a director to earn a notional salary, imputes a market rate of remuneration to an unpaid office, or treats the value of a shareholder’s labour as employment income. If a director receives nothing from the company in respect of the directorship, the director has derived no employment income from it, and there is nothing on which PAYE can be computed.

1.3. PAYE follows payment

The PAYE obligation in section 126 is imposed on an employer who pays employment income to an employee: the employer withholds tax from the payment. The withholding mechanism presupposes a payment from which tax can be withheld. A company cannot be in default of an obligation to withhold from a payment it never made, and it has no obligation to withhold from income paid to the individual by somebody else. Where a benefit is provided rather than cash, the value of the benefit is added to the cash remuneration for PAYE purposes, but again, only where a benefit has in fact been provided.

1.4. The courts have resisted category shortcuts

The High Court has already rejected one URA shortcut on the definition of employment. In Infectious Diseases Institute v Uganda Revenue Authority (Civil Appeal No. 006 of 2022, judgment of 25 October 2024), URA had treated consultants, trainers, volunteers and persons it described as directors as employees, relying in part on a Tax Appeals Tribunal position that anyone receiving a fixed fee for more than two months was an employee. Justice Ocaya set that aside, holding that there is no legal basis for such a rule and that the question must be answered by examining the actual relationship, including control, integration into the organisation, and whether the position and the entitlement to remuneration have some degree of permanency.

The case is not a directors case as such, but its reasoning applies directly. URA cannot convert a label into a tax liability. Whether someone is a director is a question of company law and fact. Whether that director derived employment income is a question of what was actually paid or provided.

4. Misconception one: shareholders in owner run companies

1.1. A shareholder is not automatically a director

Under the Companies Act 2012, shareholders and directors occupy different positions. Shareholders own the company and act through general meetings; directors are appointed, in accordance with the articles and the Act, to manage the company’s business, and their particulars are filed with the Uganda Registration Services Bureau. A private company may have shareholders who are not directors (a spouse, a relative, an investor) and directors who hold no shares at all.

The question of who is a director is therefore answered by the company’s statutory records: the register of directors, the filed particulars at URSB, and board and shareholder resolutions. It is not answered by the fact that someone owns shares, founded the business, has signing rights on the bank account or is referred to as “the owner”. Where URA asserts that a shareholder is a director, the first response is to ask on what record that finding is based.

1.2. A director is not automatically a paid director

Even where a shareholder is also validly appointed as a director, that person is not entitled to remuneration merely by reason of the appointment. Directors’ remuneration must be authorised in accordance with the articles, usually by the members or the board. Many small companies never resolve to pay their directors anything. In that case the directorship exists, the position is “employment” under section 2, and the employment income from it is nil.

URA officers sometimes reason that because the shareholder director “must be living on something”, the company must be paying a disguised salary. That is an inference about the individual’s personal finances, not evidence of a payment by the company. The correct enquiry is to trace what the company actually paid to or for the individual, and to classify each payment by the capacity in which it was made.

1.3. How money actually leaves an owner managed company

In practice, value moves from a small company to its owners through several channels, each with its own tax treatment. An audit that labels all of them as salary is simply wrong in law; an owner who records none of them properly invites exactly that result.

Channel	What it is	Tax treatment	Documentation that protects the company
Salary or directors’ fees	Remuneration for services as an employee or director	Employment income; PAYE; deductible to the company; NSSF where the person is an employee	Employment contract or board resolution; payroll records; PAYE returns
Benefits in kind	Car, housing, school fees, utilities, low interest loans provided because of the employment	Employment income at the value determined under section 19; PAYE on the benefit	Benefits register; board approval; valuation workings
Dividends	Distribution of after tax profits to shareholders as owners	Dividend withholding tax (generally 15%); not deductible; not employment income	Audited or management accounts showing distributable profits; declaration resolution; WHT returns
Shareholder or director loans to the company, and their repayment	The owner funded the company and is being repaid	Repayment of principal is not income; interest is subject to the interest rules and withholding	Loan agreement; loan account in the ledger; board approval
Loans from the company to the owner	The company advances money that must be repaid	Not income if a genuine loan; a low or nil interest loan to an employee or director is a benefit; a loan that is never intended to be repaid risks recharacterisation	Written loan terms; repayment schedule; board resolution
Rent or interest paid to the owner	The owner leases property or lends money to the company	Rental income or interest in the owner’s hands; not employment income	Lease or loan agreement; withholding where applicable

1.4. Where URA has a fair point

Not every URA challenge in owner managed companies is misguided. Assessments are often provoked by weak records rather than bad law. The most common genuine problem areas are:

Personal expenses paid by the company. School fees, household bills, personal fuel and holidays paid from the company account for a working shareholder director are, in substance, benefits provided in connection with the directorship or employment. If they are not treated as benefits, URA will say so, and often correctly.
Regular fixed “drawings” booked as expenses. A fixed monthly sum paid to a working owner and deducted as an expense looks like remuneration because it functions as remuneration. The company cannot deduct it as a business cost and simultaneously deny it was pay.
Unrecorded withdrawals. Cash taken without a dividend declaration, a loan agreement or a loan account entry is unexplained, and unexplained payments are resolved against the taxpayer. Company law also restricts dividends to distributable profits, so “drawings” in a loss year cannot simply be relabelled as dividends after the event.
Dividends in place of salary purely to reduce tax. Where a full time working owner receives no salary at all but regular “dividends” that track a monthly pay pattern, URA may explore recharacterisation or the general anti avoidance provisions. A considered mix of reasonable salary and properly declared dividends, supported by resolutions and accounts, is far easier to defend.

The principle cuts both ways. URA may tax what was actually paid as remuneration, whatever label the company put on it. What URA may not do is invent a payment that was never made.

1.5. Governance steps for small companies

Keep the register of members and the register of directors current, and make sure URSB filings match them.
Decide, by resolution, whether any director is to be paid, how much, and in what capacity. Record a nil remuneration decision where that is the position.
Where a shareholder works in the business, decide whether they are an employee, and if so put a simple contract in place and run payroll.
Declare dividends by resolution, supported by accounts showing distributable profits, and file the withholding tax.
Run all personal payments through a director’s or shareholder’s current account, and settle or document the balance at year end as a loan, remuneration or dividend.
Keep a benefits register for cars, housing, loans and similar items provided to directors.

5. Misconception two: directors appointed by multinational groups

1.1. The typical fact pattern

A multinational group establishes or acquires a Ugandan subsidiary. Company law and good governance require a board, so the group appoints one or two senior executives employed elsewhere in the group, for example a regional finance director based in Johannesburg or a group legal counsel in London, as directors of the Ugandan company. The executive attends a handful of board meetings a year, some in Kampala and many be online. The executive’s salary is paid by the foreign employer for the foreign job. The Ugandan company pays no directors’ fees.

The URA position frequently taken in audit is that because the executive is a director of a Ugandan company, the executive is an employee of that company, and the executive’s salary, including the foreign salary, should have been subjected to Ugandan PAYE by the Ugandan company. That conclusion does not follow from the Act. The analysis runs in five steps.

1.2. Step one: is the director resident in Uganda?

Under section 9, an individual is resident for a year of income if the individual has a permanent home in Uganda; is present in Uganda for 183 days or more in any twelve month period that commences or ends during the year; is present during the year and in each of the two preceding years for periods averaging more than 122 days a year; or is a Government of Uganda employee posted abroad.

A group executive who flies in for board meetings is almost never resident. A nonresident is taxed in Uganda only on income derived from sources in Uganda. The worldwide income rule applies only to residents, and even then subject to the exemptions discussed below.

1.3. Step two: where is the income sourced?

Section 78 treats employment income as derived from sources in Uganda where it is derived in respect of employment exercised, or services rendered, in Uganda, wherever it is paid, and where it is paid by the Government of Uganda. The focus is on where the work is done.

A salary paid by a South African employer for work performed in South Africa is foreign source income. The fact that the recipient also holds a separate office in Uganda does not change where the South African work was performed. To the extent that the executive physically performs duties in Uganda, a portion of employment income may be Uganda source. The usual approach is a working day apportionment, based on days spent working in Uganda over total working days, and only for the duties actually performed here.

1.4. Step three: is there any remuneration for the Ugandan directorship?

The Ugandan directorship is a separate position from the executive’s foreign employment. Employment income “from” the Ugandan directorship consists of whatever is paid or provided in respect of that directorship. If the Ugandan company pays no fees, no allowances and provides no benefits, and nobody else pays anything on its behalf for the directorship, the employment income from the directorship is nil.

The harder case is where the foreign group recharges part of the executive’s cost to the Ugandan company, through a management fee, a cost allocation or a secondment recharge. URA’s published and practical position is that where the cost of a director’s services is borne directly or indirectly by the Ugandan company, the amount so borne is remuneration for the Ugandan role and taxable in Uganda, whether or not the director attended meetings in person. Three observations follow:

The taxable amount is the portion borne by the Ugandan company for the director’s services to it, not the executive’s entire global salary.
A recharge that is really for management or technical services supplied by the group (finance, IT, legal support) is a management charge, subject to withholding tax on payments to nonresidents and to the transfer pricing rules. The same payment should not be taxed twice, once as a management charge and again as PAYE. The group should decide which it is and document it consistently in the intercompany agreement, the invoice and the benchmarking.
Where the recharge includes an identifiable element for board services, it is cleaner for the Ugandan company to pay a modest directors’ fee directly, operate PAYE on it at nonresident rates, and keep the management charge confined to genuine services.

1.5. Step four: what does the tax treaty say?

Uganda has double taxation agreements in force with, among others, the United Kingdom, South Africa, India, Mauritius, the Netherlands, Norway, Denmark and Italy. Two articles matter:

Dependent personal services (Article 15 in the OECD and UN models). Salaries of a resident of the other state are taxable in Uganda only if the employment is exercised in Uganda, and even then are exempt in Uganda if the person is present for no more than 183 days in the relevant period, the employer is not a Ugandan resident, and the remuneration is not borne by a permanent establishment in Uganda. The exact wording varies by treaty and should be checked.
Directors’ fees (Article 16). Directors’ fees and similar payments derived by a resident of the other state in the capacity of a member of the board of directors of a Ugandan resident company may be taxed in Uganda. This gives Uganda a taxing right over board remuneration regardless of where the meetings take place.

Article 16 is sometimes cited by URA as if it extended Uganda’s taxing rights to the executive’s whole salary. It does not. The article is confined to payments for the board function. The OECD Commentary is explicit that remuneration for other functions, for example as an ordinary employee, adviser or consultant, is not covered by the directors’ fees article and falls instead under the employment article. A salary paid in South Africa for a South African job is therefore governed by Article 15, and on the typical facts is taxable only in South Africa. Treaties cannot create a tax that domestic law does not impose; they can only allocate or restrict taxing rights.

1.6. Step five: who has a PAYE obligation?

The Ugandan company is an employer under the Act only in relation to remuneration it pays (or provides as benefits) to the director. It cannot withhold tax from a salary paid by a foreign company into a foreign bank account, and section 126 does not require it to. Where the director does have Uganda source employment income that is not paid through a Ugandan payroll, for example because the executive worked in Uganda for part of the year and was paid abroad, the correct compliance route is for the individual to register and file, or for the group to put a Ugandan shadow payroll in place for the Uganda source portion. That is quite different from the Ugandan company being liable for PAYE on the full foreign salary.

1.7. If the director is in fact resident in Uganda

Some group directors do relocate to Kampala, for example a regional managing director who lives here while remaining on a foreign payroll. Residence changes the analysis, but less than is often assumed:

Employment exercised in Uganda is Uganda source income wherever paid, so salary for work done here is taxable in Uganda, and PAYE or a shadow payroll should be operated. This is the scenario where URA’s instinct is correct.
Under section 79, foreign source employment income derived by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of that income. A resident who performs part of their duties abroad and suffers foreign tax on that part is not taxed on it again in Uganda.
A short term resident (broadly, an individual resident in Uganda for a period of less than two years) is exempt on foreign source income under section 21, together with members of their immediate family.
Where foreign source income remains taxable, a foreign tax credit is available, limited to the Ugandan tax on that income.

6. URA assumption versus the legal position

Common URA assumption	Legal position	Key authority
Every shareholder is a director	Directors are those validly appointed under the Companies Act and the articles; shareholding alone does not confer office	Companies Act 2012; register of directors; URSB filings
Every director is paid, so PAYE is due	A directorship is employment, but tax is charged only on employment income actually derived; there is no deemed salary	Income Tax Act, sections 2, 19 and 126
Shareholder drawings are disguised salary	Each payment is classified by the capacity in which it was made: remuneration, dividend, loan, loan repayment, rent or interest	Section 19; company records; dividend and loan documentation
Anyone paid regularly is an employee	Rejected by the High Court; the relationship must be examined on its facts	IDI v URA, Civil Appeal No. 006 of 2022 (25 October 2024)
A Ugandan board seat brings the director’s foreign salary into Uganda	Nonresidents are taxed only on Uganda source income; salary for work abroad is foreign source	Sections 9 and 78
Article 16 lets Uganda tax the director’s whole salary	Article 16 covers only payments for the board function; other salary falls under Article 15	Applicable DTA; OECD Commentary on Article 16
The Ugandan company must operate PAYE on the foreign salary	PAYE applies to employment income the employer pays or bears; the individual or a shadow payroll covers other Uganda source income	Section 126
A resident director is taxed on all foreign salary	Foreign source employment income is exempt where foreign tax was paid; short term residents are exempt on foreign source income	Sections 79 and 21

7. Practical checklists

1.1. For owner managed companies

Reconcile the register of directors with URSB records and correct any discrepancy before an audit, not during it.
Pass an annual resolution on directors’ remuneration, including a nil resolution where applicable.
Separate personal and business spending; run all owner withdrawals through a current account and classify the balance at year end.
Declare dividends formally, only out of distributable profits, and remit withholding tax.
Treat company paid personal expenses as benefits and include them in PAYE.

1.2. For multinational groups and their Ugandan subsidiaries

Keep a directors file for each nonresident director: appointment letter, confirmation of no Ugandan remuneration (or the fee resolution), residence evidence and a record of days in Uganda.
Map every intercompany charge that includes personnel cost and decide whether it is a management charge or reimbursement of employment cost. Document the choice consistently across the agreement, invoices and transfer pricing file.
Where a board fee is intended, pay it through the Ugandan payroll and apply PAYE at nonresident rates.
For relocated or frequently travelling executives, set up a day count and a shadow payroll for the Uganda source portion.
Obtain a certificate of residence from the director’s home country where treaty relief is claimed.

1.3. When URA raises an assessment

Ask for the factual basis: on what record URA concludes the person is a director, and what payment it says was made.
Respond with the company records: registers, resolutions, payroll, ledgers and intercompany agreements. Most of these disputes are won or lost on documentation.
Object within 45 days of the assessment under the Tax Procedures Code Act, setting out the grounds fully. If the objection decision is unfavourable, an application for review lies to the Tax Appeals Tribunal within 30 days of the decision.
Be realistic. Where the records show personal expenses or fixed payments that were in substance remuneration, negotiating a correct settlement on those items is usually better than contesting the whole assessment.

8. Conclusion

The Income Tax Act gives URA a clear basis for taxing directors on what they are paid, wherever the board meets. It does not give URA a basis for treating ownership as employment, for imputing salaries that were never paid, or for reaching into a foreign salary earned for foreign work because the earner also sits on a Ugandan board.

For owner managed businesses, the best protection is ordinary company law discipline: know who your directors are, decide what they are paid, and record every payment to an owner for what it actually is. For multinational groups, the answer lies in separating board remuneration from employment cost and management charges, and keeping evidence of residence, workdays and foreign tax. Getting those foundations right will resolve most director PAYE disputes long before they reach the Tribunal.

About Alfred Habaasa

Alfred assists companies in resolving complex cross-border commercial disputes, international tax structuring, and developing robust Transfer Pricing defense portfolios within the East African Community. For specialized consulting, reach out to our advisory teams at REDMOND TAX & ADVISORY for Uganda Taxes and TAX IQ Africa for International Tax and Transfer Pricing

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