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AFRICA | Taxation of plant construction projects in KENYA

11.06.2020

As part of the WTS Global network ICON has excellent contacts to reliable cooperation partners in more than 35 African countries. Since Africa is becoming increasingly important for Austrian and European entrepreneurs, we dedicate a newsletter series to the taxation of plant construction projects in selected African jurisdictions. In the following newsletter, we would like to briefly describe the most important tax regulations for international plant construction projects in Kenya.  

At the moment there is no double tax agreement (DTA) applicable between Kenya and Austria. Accordingly the taxation of Austrian plant construction companies is governed by domestic Kenyan law only.

Unlimited/limited tax liability – permanent establishment (PE)  

According to the Kenyan Income Tax Act (ITA), a company is resident in Kenya in a tax year if it meets one of the following criteria: 

  • it is incorporated under Kenyan law; or
  • the management and control of the affairs of the company is exercised in Kenya in that tax year; or
  • the company has been declared, by the Cabinet Secretary responsible through a gazette notice, to be resident in Kenya for the tax year. 

Although the ITA does not provide a definition of management and control, the Kenya Revenue Authority (KRA), which is the Kenyan tax authority, places reliance on management and control rules adopted in countries such as the United Kingdom, as provided for in case law.  According to various court decisions, a company is resident for purposes of income tax in the place where its real business is carried on. 

Kenya also relies on the definition of residence as contained in Article 4 of the OECD Model Tax Treaty, according to which a company’s place of residence for tax purposes is the place of its effective management, that is, where key management and commercial decisions that are necessary for the conduct of the company’s business are in substance made. 

According to Section 3(1) of the ITA, any person, whether resident or non-resident, is subject to income tax on all the income which accrued in or was derived from Kenya in a year of income. 

The ITA also defines a permanent establishment (PE) as a fixed place of business and includes among others, a place of management, a branch, an office or a building site, or a construction or installation project which has existed for six months or more.

Corporate Income Tax (CIT)

Kenyan sourced income received by non-resident companies with a PE will be subject to CIT in Kenya.  For non-residents without a PE, income accruing in or derived from Kenya will be subject to a final withholding tax (WHT) at the non-resident rates (please refer to the section below).  

The taxable income of a PE derived from Kenya will be subject to 37.5% CIT.  For Kenyan resident entities, the standard CIT rate which was previously 30% was reduced to 25% with effect from 25 April 2020 through an amendment by the Tax Laws (Amendment) Act, 2020.  The reduced rate will be applicable for the year of income 2020 and subsequent years. 

In the case of comprehensive turnkey projects (delivery of equipment, provision of services in Kenya and abroad) subject to CIT, only the gains or profits attributable to the PE will be subject to tax in Kenya.  The profits of the PE need to be well supported with primary documentation used to generate financial statements.  This is particularly important as turnkey projects are an area of focus for the KRA which seeks to deem all profits generated from projects of this nature as being taxable in Kenya.  This position has been challenged by a few taxpayers and remains contentious.   

For purposes of computing the taxable profits of a PE in relation to the business carried on in Kenya, deductions of certain expenditure incurred outside Kenya will not be allowed unless the Commissioner for Domestic Taxes finds that adequate consideration has been given.  For instance, overhead costs such as executive and general administrative expenses as incurred by a PE may only be deductible subject to approval of the Commissioner for Domestic Taxes.  In addition, costs such as management or professional fees, interest or royalties paid by the PE to its foreign head office are not deductible in the computation of taxable profits for CIT purposes.

Withholding Taxes (WHT)

A Kenyan PE of a non-resident company is considered as resident for tax purposes.  Accordingly, payments made to a resident person and a non-resident person with a PE will be subject to the resident WHT rates as follows 

  • Interest -> 15%
  • Royalties -> 5%
  • Management and professional fees -> 5%
  • Contractual fees (work done in respect of building, civil or engineering works) -> 3%

WHT chargeable on payments made to resident persons and non-resident persons with a PE is treated as an advance tax. 

Resident persons and non-resident persons with a PE in Kenya making payments that are subject to withholding tax must withhold the tax and remit it to the KRA by the 20th day of the month following the month when the payment was made. 

Payments made to non-resident persons without a PE will be subject to WHT at the non-resident rates of tax as follows

  • Dividends -> 15 % 
  • Interest -> 15 - 25%
  • Royalties -> 20%
  • Management and professional fees -> 20%
  • Contractual fees -> 20%  

WHT chargeable on payments made to non-residents without a PE is treated as a final tax.

Elimination of double taxation 

Up to now, no double tax agreement (DTA) is applicable between Kenya and Austria. The elimination of a double taxation is accordingly governed by Austrian domestic law only.  

According to regulation § 48 of the Austrian Federal Tax Code (Bundesabgabenordnung [BAO]), the exemption method applies if the foreign taxation is comparable with the Austrian CIT and the foreign Corporate Tax burden exceeds 15%.  Furthermore, the exemption method only applies for several types of income. If the conditions for the exemption method are not fulfilled, the credit method, in consideration of the maximum credit amount, is applicable instead. 

Kenyan Value Added Tax (VAT)

Kenyan VAT, a net all-phase tax with input deduction, is governed by the Value Added Tax Act, 2013 (VAT Act).  

According to the VAT Act, VAT is chargeable on the following supplies 

  • a taxable supply made by a registered person in Kenya;
  • the importation of taxable goods; and
  • a supply of imported taxable services. 

Further to the above, goods are treated as being supplied in Kenya if 

  • the goods are delivered or made available in Kenya by the supplier; or
  • the supply of the goods involves their installation or assembly at a place in Kenya; or
  • the goods are delivered outside Kenya, and these goods were in Kenya when their transportation commenced. 

The standard VAT rate in Kenya is 14%.  Previously, VAT was chargeable at the rate of 16%.  This was however reduced to 14% with effect from 1 April 2020 under the Value Added Tax (Amendment of the Rate of Tax) Order, 2020.  The VAT Act in its Schedules lists supplies that qualify as exempt or zero-rated supplies for purposes of VAT. 

With regards to the VAT on the supply of services, the same is chargeable with reference to the place of business of the supplier of the services rather than the place of consumption of the services.  Section 8 of the VAT Act provides that a supply of services is deemed to be made in Kenya if the place of the business of the supplier from which the services are supplied is in Kenya.  The place of taxation of services has over the years been a source of dispute.  It should however be noted that the exportation of services (and goods) is listed as a zero-rated supply under the Second Schedule to the VAT Act and in this case the place of consumption of the service is material.   

A company is required to register for VAT in Kenya if it has supplied or expects to supply taxable goods or services with a value of KShs.5 Million (approx. € 43,100) or more in any year.  Non-resident persons with a PE in Kenya are subject to the same rules regarding registration as resident persons.  However, a non-resident without a Kenyan PE is not required to register for VAT. 

Where supplies are imported into Kenya, the importer will be liable for the VAT chargeable on the imported supplies and the same will be payable as if it were customs duty and will be due at the time of the importation. 

A plant construction project (delivery of equipment + installation in Kenya) is also subject to Kenyan VAT. In this case, the delivery of equipment additionally will be subject to VAT on importation unless the importation of such equipment is regarded expressly as an exempt supply under the VAT Act. There is no possibility to get a refund of the VAT on importation or make use of the Kenyan input tax deduction without Kenyan VAT registration.  

SUMMARY

If you are planning a project in Kenya in the future or have already received an order, we would be pleased to support you with our local cooperation partner Viva Africa Consulting LLP in relation to the development and implementation of a suitable tax concept. Due to the tax peculiarities and especially the lack of a DTA between Austria and Kenya, it is highly recommended to obtain expertise even before signing the contract. 

 
  • Main Contact
    Mr. Edward Mwachinga
    Email: emwachinga@remove-this.vivaafricallp.com

  • Year of Foundation: 2009

  • Employees: 25

  • Services: Services include tax compliance services, tax planning and risk management, transfer pricing, transaction advisory, structuring and support, international tax and offshore tax planning, resolution of tax disputes.


In case of any questions, please do not hesitate to contact Mr. Oliver KARTE, our expert for taxation in AFRICA, or our Service Line „International Tax“

Verfasser:
Manager Tax
Steuerberater

+43 / 732 / 69412 - 2796
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Assistant Tax

+43 / 732 / 69412 - 8413
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Fachbereich: International Tax

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