KENYA Law and Practice Contributed by: Anne Kinyanjui and Bonface Abuya, DLA Piper Africa, Kenya (IKM Advocates)
• performance bonds from reputable insurers; • payment guarantees from the contractor’s bankers; • letters of credit from reputable financiers; or • holding the contract sums in an escrow account, with payments being released to the contractor upon the attainment of relevant milestones. 7.6 Liens or Encumbrances in the Event of Non-Payment Unless restricted in the construction contract, an unpaid contractor has a builder’s lien over the con - structed property so long as it maintains possession of the property. Financiers may require a contractor to sign a waiver of a builder’s lien. Notably, the Govern - ment Proceedings Act prohibits the exercising of liens over government property. 7.7 Requirements Before Use or Inhabitation For a project to be inhabited, a certificate of practical completion must be issued by a qualified architect, and a certificate of occupation must be issued by the relevant county government. The sale of commercial premises is subject to VAT, while the sale of land and residential premises is exempt from VAT. The VAT Act also exempts the trans - fer of business as a going concern. That exemption may be relevant when structuring a transaction involv - ing sale of income-producing real estate. 8.2 Mitigation of Tax Liability Large real estate investors mitigate tax liability by: • sector-specific incentives where available, such as applying for the development to be declared an SEZ under the SEZ Act, which has many tax benefits, including reduced corporate taxes and exemption from the payment of CGT on transfers of property within the SEZ, stamp duty and excise duty – further, royalties, interest, management fees, professional fees, training fees, consultancy fees, agency or contractual fees paid by an SEZ developer, operator or enterprise to a non-resident person are exempt from tax for the first ten years 8. Tax 8.1 VAT and Sales Tax
of the establishment of the SEZ developer, opera - tor or enterprise; • setting up a REIT, which has the benefit of being tax exempt and avoids double taxation of both the REIT and the unitholders; • where possible, structuring an acquisition as a share deal rather than a direct asset transfer since stamp duty on a transfer of shares lower than stamp duty on a direct transfer of immoveable property, although this does not eliminate other taxes (including CGT), and the wider tax conse - quences must still be considered (see 2.10 Taxes Applicable to a Transaction ); • investing in special programmes such as the AHS, which benefits from various tax incentives includ - ing a reduced corporate income tax rate of 15% in the case of a company that constructed at least 400 residential units in a year of income; or • reliance on available statutory tax exemptions. 8.3 Municipal Taxes The landlord or owner is obliged to pay land rates to the relevant county government if the premises are within an urban area. Tenants may contribute towards land rates by way of the payment of service charges. 8.4 Income Tax Withholding for Foreign Investors WHT Foreigners are subject to WHT, which is levied at dif - ferent rates depending on the category of income earned. The rate also depends on whether the for - eigner is a resident or a non-resident. WHT is 30% on rental income earned by a non-resident, 15% on dividend and interest income earned by a non-resi - dent and 20% on professional fees earned by a non- resident. WHT is deducted by the payer at source and remit - ted to the KRA. Interest earned from loans obtained from foreign sources for purposes of investing in the energy or water sectors, or in roads, ports, railways or aerodromes, is exempt from WHT pursuant to Legal Notice No 91 of 2015. CGT Gains from the disposal of real estate are subject to CGT; see 2.10 Taxes Applicable to a Transaction .
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