Kenya double tax agreements with South Africa and Mauritius

The long-awaited double tax agreements entered into by Kenya with South Africa and Mauritius respectively did not come into force on 1 January 2015 as expected.

The treaty between Kenya and South Africa that was signed in November 2010 was ratified by Kenya in October 2014, following earlier ratification by South Africa. The Mauritius treaty, signed on 7 May 2012, was ratified by Kenya in May 2014. Despite the ratification by Kenya, the final step required to bring the treaties into force (a notification by each contracting state to the other of the completion of the procedures required by its law for the entering into force of the treaty) was not completed by Kenya by 31 December 2014. Consequently, the treaties can now, at the earliest, only enter into force on 1 January 2016 as it is stipulated that the treaties will become effective on the first of January following the date of the required notification.

Both treaties are based on a combination of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital and the United Nations (UN) Model Tax Convention.

In the case of a corporate entity that is resident of both Kenya and the other contracting state in terms of their domestic legislation, in terms of the treaties it shall be deemed to be resident only of the state in which its place of effective management is situated.

The definition of “permanent establishment” in the South Africa and Mauritius treaties in principle follow the UN definition. However, the Mauritius treaty also specifically include in the definition a warehouse, in relation to a person providing storage facilities for others and any installation or structure used for the exploitation of natural resources. In terms of the South Africa treaty a building site, construction, assembly or installation project or any supervisory activity in conjunction with such site will create a permanent establishment if such site, project or activities lasts for more than six months (as per the UN Model), whereas per the Mauritius treaty, a permanent establishment will only exist after 12 months (as per the OECD Model).

Both treaties also include the UN Model provision that an insurance enterprise of a contracting state shall (except in regard to re-insurance) be deemed to have a permanent establishment in the other contracting state if it collects premiums in such territory or insures risks situated therein through a person other than an independent agent.

Comparing the two treaties, Mauritius holding companies seem to be favoured. In terms of the Mauritius treaty the standard non-resident withholding tax rate on dividends are reduced from 10% to 5% if the beneficial owner is a company which holds directly at least 10% of the capital of the company paying the dividend. The South Africa treaty does not provide for any reduction in the 10% dividend withholding tax rate.

In terms of the Mauritius treaty, capital gains arising from the transfer of shares in a company shall generally only be taxable in the contracting state of which the alienator is a resident. Mauritius does not levy capital gains tax, whereas Kenya has, with effect from 1 January 2015, reintroduced capital gains tax at a rate of 5% which also applies to the disposal of shares held in a Kenyan company.

The capital gains tax provisions in the South Africa treaty more onerously stipulate that gains derived from the alienation of shares deriving more than 50% of the value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.

Both the South Africa and Mauritius treaties reduce the standard non-resident withholding tax rate on interest from 15% to 10% and the royalty withholding tax rate from 20% to 10%.

Article 27 of both treaties provides for the contracting states to lend assistance to each other in the collection of revenue claims, which include an amount owed in respect of taxes of every kind and description imposed on behalf of a contracting state or its political subdivisions or local authorities. When a revenue claim of a contracting state is enforceable under the laws of that state, such claim shall, at the request of the competent authority of that state be accepted for purposes of collection by the competent authority of the other contracting state as if it was a claim of that other state.

The 2014 Kenya Finance Act assented to by the President on 14 September 2014 limits the extent to which persons in other contracting states can rely on the treaties entered into between Kenya and such states in an attempt to limit “treaty shopping”. In terms of the 2014 amendment, treaty benefits will only be available to a company listed on the stock exchange in the other contracting state or if more than 50% of its underlying ownership is held by persons who are residents of the other contracting state. This provision would make it difficult for multi-nationals with intermediate holding companies in tax-friendly jurisdictions to access the benefits of Kenya’s treaties.

Ironically, the legislation amendment followed shortly after ratification of the Mauritius treaty by the Kenyan government. The beneficial provisions of the Mauritius treaty would, as a result, be of little use to groups with intermediate hubs held from outside of Mauritius. Kenyan tax advisors are in discussions with the Kenya Revenue Authority regarding the legal standing of this legislative provision in contrast to the treaty provisions, but for now only time will tell how this will be applied in practice