Accounts Receivable Financing in Uganda

The Legal and Commercial Issues

Cristal Advocates

Accounts Receivable Financing in Uganda

The Legal and Commercial Issues

Cristal Thought Leadership Series

February 2019

Cristal Advocates 1
Accounts Receivable Financing in Uganda
The Legal and Commercial Issues

1. Introduction The financing entity charges a collateral monthly

management against the outstanding invoice amount.
This publication provides an overview of the legal Interest is also imposed by the funding institution
and commercial issues relevant to the technique of on the actual amount of money borrowed against
accounts receivable financing that some business the qualifying receivables base. To count towards
enterprises in Uganda use to raise funds for their the receivables borrowing base, an invoice must
operations. be evaluated as collectible and creditworthy by the
financing company.
Accounts receivable represent the balance of funds
due to a business for goods and services provided but Invoice discounting is generally cheaper than debt
not yet paid for by customers. factoring and it is also easier to move to a traditional
bank line of credit when the business becomes
Accounts receivable (also known as trade receivables) bankable again for traditional financing.
are recorded as part of the current assets of a business
in its balance sheet or statement of financial position. (b) Debt factoring
Accounts receivable financing enables traders to
receive early payment on their outstanding invoices. Debt factoring is an arrangement where the funder or
A business using accounts receivable financing factor purchases the business trade receivables outright
commits some or all of its outstanding invoices to a and is entitled to the full proceeds of the settlement of
funder for early payment. The funder earns a fee for the the receivables acquired.
finances advanced. Normally, the funder advances to the business finances
in excess of 70% of the value of the receivables
purchased. The funder earns a factoring fee which
is based on the total value of the purchased invoices
commercially determined by reference to the
assessment of the collection risk. The balance, less the
factoring fee, is paid to the business when the invoice
is collected.
The business can choose the invoices to sell under
the debt factoring arrangement. Once the invoices
are purchased, the factor manages the receivables
including following up on payment. By determining
which invoices to sell to a factor, debt factoring offers
2. Accounts receivable financing more flexibility than accounts receivable financing.

There are two categories of accounts receivable fi- 3. Legal considerations

nancing namely invoice discounting and debt fac-
toring. Both are transitional sources of finances that
It is important that the legal form of the envisaged re-
can carry a business through a time when it does not
ceivables financing transaction meets the expectations
qualify for traditional bank financing (e.g. a start-up or
and intention of the parties. Though both are classi-
temporary business downturn) until its balance sheet is
fied as receivable financing transactions, the legal sub-
strengthened sufficiently to become bankable.
stance of invoice discounting and debt factoring differs
given that the former represents a secured borrowing
(a) Invoice discounting
transaction and the latter an outright sale of receiv-
ables. Below are some of the legal issues to take into
Invoice discounting is a secured borrowing transaction
account while reviewing accounts receivable financing
more like a traditional bank loan but with some
arrangements.
differences. Bank loans are secured by collateral that
can include though not limited to fixed assets while
a) Formal legal contract
invoice discounting is backed by a pledge of the unpaid
invoices. Trade receivables arise on the sale of goods or ser-
Under the invoice discounting arrangement, typically vices by a business to a buyer originating a debt that is
over 70% of the business qualifying receivables booked as an asset by the business. It is therefore im-
establish the base against which money is borrowed. portant to have in place a properly executed contract

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 Accounts Receivable Financing in Uganda
The Legal and Commercial Issues

between the parties to the transaction. In the absence transferor and its creditors. The evaluation of whether
of this, it is difficult to establish the contractual terms this requirement has been met is generally based on
of the transaction purportedly crystallising a trade re- an analysis of the legal implications of the terms of the
ceivable. receivables transfer.

b) Receivables due diligence (a) Outright sale

Given the risk of fraud, a proper due diligence should An outright sale of trade receivables requires that the
be carried out on the receivables in question the basis seller surrenders control over the receivables. Specific
of the proposed financing. guidance is provided by accounting guidelines to
determine if the seller has indeed surrendered control.
c) Assignment of receivables restriction If these requirements of surrendering control are met,
then the receivables are removed from the seller’s
Some sale contracts restrict the transfer or assignment books and a gain or loss is recognised. The buyer then
of rights held by the supplier to any other party with- records the receivables received on its books at fair
out the consent of the buyer. If the supplier purports value.
to transfer and assign the receivable to the financier in
The direct sales or transfers of receivables to third
breach of such a restriction, the transfer or assignment
parties with no continuing involvement by the
is not valid against the buyer.
transferor are generally straightforward and easily
d) Dillution of receivables qualify as an outright sale provided control has been
surrendered. Whether the control of receivables has
Receivables may be subject to set-off rights, rebates, been surrendered is mainly a legal determination and
discounts, or penalties that may erode the value of the not an accounting one.
receivables that the financing company is purchasing.
(b) Secured borrowing
e) Contracting parties
In case of a secured borrowing, the business maintains
It is important to ensure that the receivable is bought the receivables on its books, records a liability, and
from the correct entity, i.e. the one which owns the re- recognises interest expense over the term of the loan.
ceivable otherwise the underlying transaction may be Transfers of receivables with continuing involvement
void from outset. by the transferor present challenges and usually require
a much more detailed analysis to confirm that the
transferor has ceded control.
4. Accounting considerations
Continuing involvement refers to any involvement
The accounting treatment of trade receivable financing by the business after the receivables have been
arrangements depends on whether the transaction is transferred and includes any involvement that permits
an outright purchase or secured borrowing. This is a the seller to receive cash flows or other benefits that
determination that is made on the basis of all facts, arise from the purportedly sold receivables. The usual
circumstances and economics of the transaction. approach based on accounting standards is to treat
such transactions as secured borrowing. Involvement
Revisions to accounting standards have significantly
with respect to transferred receivables can include:
altered the accounting analysis of receivables financing
obtaining servicing of the financial assets, pledges
making it more likely that common structures used are
of collateral, commitment to transfer more financial
to be accounted for as secured borrowing or invoice
assets; representations and warranties with respect to
discounting.
the transferred receivables.
Accounting for trade receivable financing as outright
sale or debt factoring has become more difficult but 5. Tax considerations
not impossible.
Whether a transfer of receivables is accounted for as Tax accounting ordinarily follows the rules of gener-
ally accepted accounting principles though there are
a sale or secured borrowing is therefore premised on
instances when the tax and accounting position can
who controls the asset after the transfer is complete. A
differ.
key consideration of control is whether the transferred
assets have been isolated beyond the reach of the

Cristal Advocates 3
Accounts Receivable Financing in Uganda
The Legal and Commercial Issues

(a) Secured Borrowing transaction consequences below:

As already highlighted above, invoice discounting is • Debt factoring arrangements attract VAT in Ugan-
classified as a secured borrowing transaction following da at the standard rate of 18%;
from which the tax consequences set out below: • On assignment of the receivables as an outright
sale, the seller recognises a loss or gain on disposal.
• A secured borrowing transaction is a financial It is unlikely a gain can arise on a debt factoring
transaction. Financial services in Uganda are transaction but if it does, the gain is taxable for
exempt from Value Added Tax (“VAT”). Financial corporate income tax purposes while the loss on
services are defined under the VAT Act to include disposal is deductible for corporate income tax
amongst others the granting, negotiating and purposes;
dealing with loans, creditors, credit guarantees and • Stamp duty is chargeable on the instruments
any security for money including management of executed to perfect the transaction.
loans, credit or credit guarantees by the grantor;
• The interest repayment on the funds advanced to
the borrower is potentially subject to withholding 6. Conclusion
tax (“WHT);
• Stamp duty is chargeable on the instruments It is not surprising that accounts receivable financing is
executed to perfect the transaction. gaining popularity in Uganda considering it gives busi-
ness the opportunity to convert credit sales into im-
(b) Outright sale mediate cash flow easing operational working capital
requirements. It frees up valuable time previously spent
Debt factoring transactions are typically treated as on chasing debtors that can be devoted towards build-
outright sales following from which the following tax ing the business. ■

Cristal Advocates accepts no responsibility for any loss occasioned to any person acting or refraining from acting as a result
of material contained in this publication. Further advice should be taken before relying on the contents of this publication.

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 Contacts for this Publication Accounts Receivable Financing in Uganda
The Legal and Commercial Issues
Denis is the Managing Partner at Cristal Advocates where he also leads the energy and tax practice. He is
qualified both as a Lawyer and Chartered Accountant with vast experience serving various industries in Sub
Saharan Africa. Before joining Cristal Advocates, he had worked for close to 10 years with Deloitte and Touche
where he started his career and rose to senior managerial positions.

At Deloitte, he lived and worked in Uganda, Kenya, Tanzania and the United Kingdom for over 6 years and
subsequently became the firm’s chief of staff for the Energy and Resources Industry Group seeing him play a
lead advisory role in Uganda, Kenya, Tanzania, Mozambique, South Sudan, Somalia and Ethiopia.

Denis is widely published and a regular commentator in the local, regional and international media and
speaker at various forums regarding the taxation and financing of energy projects as well as the protection of
Denis Yekoyasi Kakembo large capital projects within the framework of international investment law.
(Author)
[email protected] He holds a Master of Laws degree in Petroleum Taxation and Finance from the University of Dundee in the
+256 751 834 168 United Kingdom, a Post Graduate Diploma in Legal Practice and a Bachelor of Laws degree from Makerere
University. ■

Bill is a Senior Advisor with Cristal Advocates. He has concentrated on working with energy companies with
a particular focus on cross border transactions and M&A since 1989 and is a leading global energy and tax
practitioner with wide international experience. Between 1986 and 1998, he worked in London with the UK tax
authorities and Big Four accounting firms. From 1998 to 2004, he was based in Kazakhstan working across the
Caspian region with Deloitte. He was in the region at the time it was developing its infrastructure for crude oil
production with international investment following the collapse of the Soviet Union.
From 2004 to 2008, he worked in Russia where he led Deloitte’s oil and gas industry group and established
Deloitte’s office in Sakhalin. He moved to East Africa in 2009 leading Deloitte’s energy and resources industry
group in Uganda, Kenya, Tanzania, Rwanda, Ethiopia and Mozambique. He was initially based in Kampala,
Uganda later relocating to Dar es Salaam, Tanzania. Bill returned to the UK in 2014 supporting Deloitte UK
Bill Page teams working on outbound projects investing in Africa and was a key member of Deloitte UK‘s energy and
[email protected] resource practice until his retirement from the firm in September, 2018.

Bill is a graduate of Oxford University and completed his inspectors’ training with the UK Inland Revenue in
1989. ■
John leads the public policy and advocacy practice at the firm and combines unique public and private sector
experience.

Prior to joining Cristal Advocates, he had worked as a Private Secretary to the President of the Republic of
Uganda. During this time, he participated in several public and private sector engagements that included
advising and coordinating activities relating to oil and gas as well as infrastructural projects of national
significance. John had earlier worked with the Post Bank Uganda Limited and Shonubi Musoke and Co.
Advocates.

He holds a Bachelor of Laws degree from Makerere University and a Post Graduate Diploma in Legal Practice
John Teira from the Law Development Centre and various other qualifications. ■
[email protected]
+256 704 493 997

Dickens leads the oil and gas practice at Cristal Advocates. He has an in depth appreciation of Uganda’s oil and
gas sector having served as the maiden Company Secretary of the Uganda National Oil Company (UNOC)
and the Uganda Refinery Holding Company Limited (URHC). UNOC represents the Government of Uganda
commercial interests in the oil and gas sector while URHC represents government interests in the refinery
project as well as managing the petrol based industrial park.
Dickens was instrumental in UNOC’s formation and initial period of operation and also served as its head of
Contracts, Negotiations and Advisory until May 2018. Prior to joining UNOC, Dickens was Legal Counsel at
the Petroleum Directorate of the Ministry of Energy playing key legal advisory roles on the negotiation and
implementation of PSAs, Joint venture and other oil and gas agreements. He was also part of the team that
shepherded the process of enacting the current Ugandan oil and gas Legislations and Regulations including
Dickens Asiimwe Katta the local content requirements.
[email protected]
+256 772 370 021 He is a certified project control specialist (IFP) and holds a Master of Laws Degree in Petroleum Law and
Policy from the University of Dundee in the United Kingdom, a Post Graduate Diploma in Legal Practice and a
Bachelor of Laws degree from Makerere University. ■

Francis leads the litigation and dispute resolution practice at the firm. He is an Advocate of the High Court of
Uganda with expertise in oil and gas, infrastructure and dispute resolution. He has been part of teams advising
on projects in Uganda, Tanzania, Mozambique and South Africa. He specializes in regulatory compliance,
national content, health and safety and dispute resolution.

He joined Cristal Advocates from Kizza, Tumwesige, and Ssemambo Advocates. He previously worked with
the Advocates Coalition for Development and Environment (ACODE). He also undertook a traineeship with
the oil and gas division of Webber Wetzel in Johannesburg, South Africa.

He holds a Master of Laws degree in Petroleum Law and Policy from the University of Dundee in the United
Francis Tumwesige Ateenyi Kingdom and various other qualifications. ■
[email protected]
Cristal Advocates 5
+256 702 540 936
Accounts Receivable Financing in Uganda
The Legal and Commercial Issues

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