KENYA Law and Practice Contributed by: Walid Khan, Ruth Wangui Rukwaro and Christina Wanjiku Wood, Africa Law Partners
tax for the non-resident recipient. The Kenyan bor- rower is responsible for deducting and remitting it to the Kenya Revenue Authority (KRA) at the time of payment. Borrowers cannot offset this withholding against their own corporate income tax liability. There are instances where withholding tax would apply where the payments fall into other categories of payments that are subject to withholding tax, eg, dividends and royalties. Withholding tax would not apply where interest is paid to a tax-exempt person or to foreign lenders financing projects that are specifically exempt from tax – eg, energy, water, roads, ports, railways or aerodromes projects. 4.2 Other Taxes, Duties, Charges or Tax Considerations In addition to withholding tax on interest, lenders and borrowers in Kenya should consider the following. • Stamp duty – Security documents such as charg- es, mortgages and debentures must be stamped under the Stamp Duty Act (Cap. 480). The rate is typically 0.1% of the amount secured, with no statutory cap. Stamping is necessary for enforcea- bility in court and for registration at the Companies Registry or Lands Registry. • VAT – Under the VAT Act, 2013, most financial ser- vices (including the granting of credit and interest on loans) are VAT-exempt. However, certain ancil- lary fees (eg, arrangement fees, commitment fees, legal and advisory fees) may attract VAT at the standard rate of 16% unless specifically exempt. • Other fees (other than interest charged by lenders) would be subject to excise duty. • Other tax considerations would include thin capi- talisation rules and transfer pricing regulations. 4.3 Foreign Lenders or Non-Money Centre Bank Lenders Foreign lenders, including non-money centre bank lenders, face a 15% withholding tax on interest paid by Kenyan borrowers, as per the Income Tax Act. Related-party loans are scrutinised by the Kenya Revenue Authority (KRA) for transfer pricing (ensur-
ing arm’s-length interest rates) and thin capitali- sation (debt-to-equity ratio not exceeding 3:1 for non-financial entities). Non-compliance may lead to disallowed interest deductions. Additional concerns include stamp duty on loan agreements and potential exchange control issues. To mitigate, lenders can do the following: • structure loans through DTA jurisdictions; • ensure arm’s-length terms; • maintain compliant debt ratios; and • work with local banks or law firms to handle compliance, documentation and enforcement efficiently. Assets used as collateral take the following forms: • immovable assets such as land and buildings may be used in the form of a charge or mortgage over the land; • movable assets such as machinery, vehicles, cash deposits or bank savings may be used in the form of an account charge, debenture, company or per- sonal guarantee, or pledge; and • intangible assets such as intellectual property rights, receivables or shares may be used in the form of a deed of hypothecation or share pledges. Formalities and perfection requirements are as fol- lows. • Immovable property – Generally secured by way of a charge, which must be stamped and registered at both the Lands Registry and Companies Registry. • Movable security – Generally secured by way of charges, debentures, guarantees or pledges. Charges and debentures over movable property must be stamped and registered at the collateral registry and the Companies Registry. • Intangible security – Form of security is deed of hypothecation, assignment, guarantees or share pledges. 5. Guarantees and Security 5.1 Assets and Forms of Security
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