This alert highlights the place of effective management as the basis of taxation of offshore transactions in Kenya. We highlight three key determinations of the TAT in this regard, noting how the concept has evolved from the first to the most recent determination.

Place of effective management as the determinant of residence for tax purposes

The place of effective management of a company being disposed offshore is usually a determining factor in assessing whether the proceeds will be subjected to tax in Kenya. This is pursuant to section 2 of the Income Tax Act Cap 470 Laws of Kenya, which stipulates that in a year of income, a company will be deemed to have been resident in Kenya if the management and control of its affairs were done from Kenya.

The TAT’s recent determinations on an entity’s proper place of effective management

Naivas Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal No. 934 of 2022)

In this case, Gakiwawa Family Investments (GFI) disposed of a minority stake of its share in Naivas International Limited in Mauritius to Amethis Retail, in a deal priced at KES 5,2 billion. This amount was assessed for corporation tax, interest and penalties, and Naivas Kenya Limited (Naivas) was appointed as the tax representative liable to remit the tax on behalf of GFI.

The TAT determined that Naivas and its holding company were both being managed and controlled from Kenya, meaning that both entities were therefore tax residents in Kenya and liable to pay tax in Kenya. The idea that management and control were happening from Kenya was deduced from the fact that the majority of GFI’s directors were Kenyans resident in Kenya, had significant knowledge about the business and were a key part of it, most of the meetings for GFI were held virtually, and there was no evidence of travel of all the directors except one, to Mauritius. Importantly, the TAT noted that Kenyan directors had the power to initiate and authorise transactions of the bank accounts in Mauritius, confirming that the financial management was done from Kenya. 

Naivas was ultimately found liable to pay corporation tax assessment of KES 1,794 billion inclusive of penalties and interest. Naivas appealed against the decision in the High Court and reached consensus with the KRA to settle the case.

ECP Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal No. 335 of 2022)

In this case, the KRA demanded corporation tax from an offshore transaction in which ECP Africa Fund III PCC (ECP Fund) disposed of 100% of its stake in Java House Mauritius Limited. At the time of the sale, Java House Mauritius Limited owned 100% stake in Nairobi Java House Limited. The KRA asserted that the income from the offshore disposal was chargeable to tax in Kenya because it had determined (through a set of documents filed with the US tax authorities) that ECP Fund was being managed by its fund manager based in the US through ECP Kenya Limited (ECP Kenya). A taxable presence for ECP Fund had been established in Kenya on that basis.

The TAT was able to deduce from the evidence before it that the discretionary control of ECP Fund was being done by the US-based fund manager through ECP Kenya. It arrived at this conclusion by assessing the job descriptions of some of ECP Kenya’s key employees. Their roles included, among other things, identifying new opportunities, negotiating and structuring transactions, as well as monitoring and executing an exit strategy. This, in the TAT’s view, constituted an integral part of the business and had created a permanent establishment for ECP Fund in Kenya. Accordingly, it ruled that the KRA had not erred in taxing the gains from the sale of Java House Mauritius Limited in Mauritius. The matter has been appealed to the High Court.

M-KOPA LLC (C/O M-KOPA Kenya Limited) v Commissioner of Domestic Taxes (Tax Appeal No. 65 of 2023)

On 23 February 2024, the TAT determined that an entity’s place of effective management for tax purposes is where the top management who make key decisions sit.             

Briefly, the facts are that the KRA audited M-KOPA LLC’s (M-KOPA) operations for the year 2017 and demanded tax for the reason that during that year of income, it had been managed and controlled from Kenya. It based its argument on the fact that M-KOPA’s executive directors were tax residents in Kenya, the chairperson of the board was a Kenyan citizen, and a majority of M-KOPA’s board of managers’ meetings (19/27) were held in Kenya between 2012 and 2017. On this basis, the KRA demanded principal taxes together with penalties and interest.

The TAT, however, found in favour of M-KOPA, defining a whole new way of assessing place of effective management to establish residency for tax purposes. To begin with, it refused to buy the assertion that Kenya was the place of effective management because a majority of the board meetings for several years of income had been held in Kenya.

It found that the number of meetings held in 2017 were not sufficient to make Kenya the place of effective management for M-KOPA. It further found that even though a majority of the directors were resident in Kenya, key business decisions affecting the company were not being made in Kenya by these directors. Rather, they were being made by a board of managers, each of whom was located outside Kenya. Therefore, the place of effective management for the year 2017 was the UK where the board of managers met and made decisions. Having met in Kenya just once that year, Kenya was not the place of effective management. M-KOPA’s appeal succeeded on this basis. The KRA has appealed against this decision.

Commentary and conclusion

The M-KOPA case is a laudable one given the level of clarity it has provided when it comes to assessing the place of effective management of a company for purposes of determining its tax residency. The TAT has correctly determined that what is to be looked at is not where management meetings were done over a long period of time, but rather during a particular year.

It is also now clear that the place of effective management of a company in Kenya is where the top management of the company, who make key decisions affecting the affairs of the company, sit. It is therefore immaterial whether a senior member of the entity is resident in Kenya, provided that they are not solely involved in key decision-making; the place of effective management cannot be said to be Kenya. It is, however, important to note that having employees in Kenya can still trigger taxable presence through the permanent establishment principle.

The TAT has importantly determined that:

“[T]he place of effective management is a legal issue that requires a sequential analysis, it can never be conclusively obtained and or determined based on what one of the parties has filed or stated in their documents or filings. Its determination can only arise from a wholesome analysis of the facts and circumstances of the case"