Africa-Press – Mauritius. Kenya is among the leading investment destinations in Africa. The Africa Private Equity and Venture Capital Association (AVCA) 2022 first-half report highlighted Kenya’s remarkable growth in deal volume compared to the corresponding period last year, registering a 153 per cent increase compared to the corresponding period a year ago.
Double taxation agreements (DTAs) are an important consideration for investors. Kenya has 14 DTAs that are in force. While Kenya has signed a DTA with Mauritius, it is not in force.
Nevertheless, Kenya is among the largest recipients of investments in Africa from Mauritius. The Kenya-Mauritius DTA has faced challenges. It was subject to litigation for a period of six years.
The Tax Justice Network-Africa (TJNA) challenged the DTA in the case in High Court, arguing that the DTA conferred special rights to Mauritius-based investors by reducing withholding tax rates.
TJNA further argued that companies were selling shares at the Mauritius level to avoid paying capital gains tax in Kenya and this meant that Kenya was losing revenue. Finally, TJNA argued that the treaty did not follow the procedure laid out in the law, therefore, it was unconstitutional.
In determining the case, the court observed that TJNA did not demonstrate how the DTA contravened the Constitution of Kenya, but noted that Legal Notice 59 of 2014 was a statutory instrument and should have been tabled in Parliament for approval as required under the Statutory Instruments Act.
The Court declared the DTA void for this reason. It is important to note that certain things have changed from the time the case was lodged in 2014. As an example, while Kenya and Mauritius did not have capital gains tax (CGT) in 2014, Kenya introduced the tax in 2015 at five per cent.
The Kenya Finance Act, 2022 has increased the rate to 15 per cent with effect from January 1, 2023. In addition, Kenya and Mauritius re-signed the DTA on 10 April 2019 and the renegotiated DTA was gazetted in 2020.
A process that began with the DTA that was initially signed on May 7, 2012, is not yet complete after 10 years. The renegotiated DTA comes with some changes, including a change in withholding tax rates.
An example includes an increase in the withholding tax rate on royalties from 10 per cent to 12 per cent and an introduction of a withholding tax on technical fees at 10 per cent.
The withholding tax rates are attractive to investors based in Mauritius because the corresponding rates for investors that are in countries that do not have a DTA with Kenya are higher.
For example, while the withholding tax rate on management fees in the DTA is 10 per cent, the rate for a resident of a country without a DTA with Kenya is 20 per cent.
The reduced rates may offer a good reason to push for the DTA to take effect. The new DTA, however, has other changes which would want an investor to have its coming into force delayed further. The most significant is on CGT on the transfer of shares.
The DTA provides that gains derived by a Mauritius resident from selling shares may be taxed in Kenya if, at any time during the past year, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property situated in Kenya.
In addition, gains derived by a Mauritius resident from selling shares of a Kenyan company may be taxed in Kenya if the seller, at any time during the 12-month period preceding such sale, held directly or indirectly at least 50 per cent of the capital of the Kenyan company.
The new changes seek to allow Kenya to collect CGT in some instances where the sale of shares is happening at the Mauritius level. The changes may not be attractive to some investors who set up holding companies in Mauritius and use such companies to transfer their underlying shares to Kenyan companies.
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