KENYA Law and Practice Contributed by: Ombo Malumbe, Jack Ong’anya and Faith Ngarama O’Bang Law (Ong’anya Ombo Advocates LLP)
services directly related to the vaccine manufacturing process. Motor Vehicle Assembly An entity engaged in local assembly of motor vehicles will pay 15% corporate tax for the first five years from the commencement of operations. This period will be extended for a further five years should the entity meet the local content requirements, which is equivalent to 50% of the ex-factory value of the motor vehicles. Special Operating Framework Agreement The government offers a special tax rate if an entity enters a special operating framework with the gov - ernment, specifically for purposes of undertaking the manufacturing of human vaccines or other manufac - turing activities including refining, where the capital investment is at least KES10 billion. 2.4 Loss Relief Where a loss is in line with the regulations on allow - able deductions, the law allows a deduction to be carried forward for a maximum period of five years upon approval by the Cabinet Secretary. This follows recommendation from the Commissioner, whereby a person applies for such an extension, giving evidence of inability to extinguish the deficit within the provided period. 2.5 Deduction of Interest There are parameters when deducting interest as one of the allowable deductions under the relevant law. The interest should arise from funds borrowed with a view to advancing a particular investment income (excluding qualifying dividends and interest) for a particular taxable income. However, the deduc - tion of interest on loans from non-resident lenders is capped at 30% of the company’s EBITDA. If the inter - est expense exceeds this limit, the excess cannot be fully deducted in the current year but may be carried forward and deducted in the subsequent five years, provided it remains within the 30% limit in those years. 2.6 Consolidated Tax Grouping Consolidated Tax Group Kenya does not allow consolidated tax grouping for the purpose of offsetting profits and losses between related companies; each entity is taxed as a separate
legal person. However, the Commissioner requires an entity with Kenyan residence that is an ultimate parent or constituent of a multinational enterprise (MNE) to file transparency reports concerning its activities in Kenya and other jurisdictions. An entity qualifies for this category if the group has a consolidated gross turnover of not less than KES95 billion. This qualify - ing entity must file country-by-country (CbC) reports through a master file and local file. While the master file includes consolidated financial statements, this is for transfer pricing risk assessment only and does not allow the group to file a single consolidated tax return. Exemption A Kenyan resident constituent entity is exempt from local CbC reporting where the MNE’s ultimate parent entity (UPE) or surrogate parent entity (SPE), whether in Kenya or another qualifying jurisdiction, files the said report, provided that the filing jurisdiction has an active qualifying competent authority agreement for automatic exchange with Kenya, and no “systemic failure” has been notified. For such an exemption to be valid, the Kenyan entity must submit a formal notification to the Commissioner by the last day of the MNE’s financial year, identify - ing the specific reporting entity and its tax residence, allowing KRA to successfully and effectively retrieve the data through international channels. 2.7 Capital Gains Capital gains tax (CGT) in Kenya is currently at the rate of 15%, which is applicable to gains made upon the transfer of property, including land, buildings, and unlisted shares. An entity determines the taxable gain by calculating the difference between the transfer value (selling price) and the adjusted cost (purchase price plus improvement and incidental costs). Cru - cially, gains on shares traded on the Nairobi Securi - ties Exchange (NSE) or any CMA-approved exchange are currently exempt from CGT to encourage capital market growth. In the event there is a different tax applicable such as income tax for a “property dealer” who buys and sells land as a business, then CGT will not be applied, as the profit is treated as business income taxed at 30% instead. The CGT applicable when transferring a prop -
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