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DealMakers AFRICA Q3 2022


Is it time to have a KENYA-MAURITIUS DOUBLE TAXATION Agreement in force?

Alex Kanyi

Kenya is among the leading investment destinations in Africa. The Africa Private Equity and Venture Capital Association (AVCA) 2022 H1 report, highlighted Kenya’s remarkable growth in deal volume compared to the corresponding period last year (a 153% increase compared to 2021 H1).  

Double taxation agreements (DTAs) are an important consideration for investors. Kenya currently has 14 DTAs in force. While Kenya has signed a DTA with Mauritius, the DTA is not yet in force. Nevertheless, Kenya is among the largest recipients in Africa of investments from Mauritius.

The Kenya-Mauritius DTA has faced a myriad of challenges; the DTA was subject to litigation in the High Court (the Court) for a period of six years. The Tax Justice Network Africa (TJNA) challenged the DTA in the case of Tax Justice Network Africa v Cabinet Secretary for National Treasury & 2 others [2019] eKLR. TJNA argued that the DTA conferred special rights to Mauritius-based investors by reducing withholding tax rates. TJNA further argued that companies were selling shares at the Mauritius level to avoid paying capital gains tax in Kenya, and this meant that Kenya was losing revenue. Finally, TJNA argued that the treaty did not follow the procedure laid out in law and was, therefore, unconstitutional.

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The TJNA case was opposed by the Cabinet Secretary, National Treasury, the Kenya Revenue Authority, and the Attorney General, on behalf of the Government of Kenya (GoK). GoK argued that the DTA with Mauritius was meant to attract foreign investment and compared well with other African countries that have a DTA with Mauritius. GoK further argued that the treaty was ratified by Cabinet and published in Legal Notice 59 of 2014, as required by the law. 

In determining the case, the Court observed that TJNA did not demonstrate how the DTA contravened the Constitution of Kenya. However, the Court noted that Legal Notice 59 of 2014 was a statutory instrument and should have been tabled in Parliament for approval as required under the Statutory Instruments Act. The Court declared the DTA void for this reason. The Court did not delve into whether the DTA was beneficial to Kenya or not.

It is important to note that certain things have changed since the case started in 2014. As an example, while Kenya and Mauritius did not have Capital Gains Tax (CGT) in 2014, Kenya introduced CGT at 5% in 2015. The Kenya Finance Act, 2022 has increased the rate to 15% with effect from 1 January 2023. In addition, Kenya and Mauritius re-signed the DTA on 10 April 2019, and the renegotiated DTA was published in the Kenya Gazette as Legal Notice 114 of 2020. The DTA is not yet in force, and the process that was initially signed on 7 May 2012 is still not complete after 10 years!

The renegotiated DTA comes with some changes, including a change on withholding tax rates. An example includes an increase in withholding tax rate on royalties from 10% to 12%, and an introduction of withholding tax on technical fees (managerial, technical or consultancy fees) at 10%. The withholding tax rates are attractive to investors based in Mauritius because the corresponding rates for investors in countries that do not have a DTA with Kenya are higher. For example, while the withholding tax rate on management fees in the DTA is 10%, the rate for a country without a DTA is 20%. The reduced rates may offer a good reason to push for the DTA to come into force. 

The new DTA, however, has other changes which might make an investor want to have its coming into force delayed further. The most significant is the CGT on transfer of shares. The DTA provides that gains derived by a Mauritius resident from selling shares may be taxed in Kenya if, at any time during the past year, these shares or comparable interests derived more than 50 percent of their value directly or indirectly from immovable property situated in Kenya. In addition, gains derived by a Mauritius resident from selling shares of a Kenyan company may be taxed in Kenya if the seller, at any time during the 12-month period preceding such sale, held directly or indirectly at least 50 percent of the capital of the Kenyan company. The new changes seek to give power to Kenya to collect CGT in some instances where the sale of shares happens at the Mauritius level. The changes may not be attractive to some investors who set up holding companies (Hold Cos) in Mauritius and use such Hold Cos to transfer their underlying shares in Kenyan companies. 

The new, renegotiated DTA between Kenya and Mauritius was approved by Kenya’s National Assembly on 22 December 2020, and now we await notification for it to come into force. It is not clear why Kenya is yet to notify Mauritius that it has completed procedures required by its law for the DTA to come into force. 

Whether it is time for the DTA to come into force will depend on the perspective that you take. For investors who are resident in Mauritius, it is a delicate balance because, while they may want to benefit from the reduced withholding tax rates, they may not want to pay CGT in Kenya, where applicable. For the civil society in Kenya, such as TJNA, the renegotiated DTA is better when compared with the one signed in 2012, although there is still room for improvement. Other stakeholders may prefer to keep the status quo, because Kenya is still attracting investment from Mauritius even without a DTA. 

Kanyi is a Partner in the Tax & Exchange Control Practice | CDH Kenya 

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