Impact of Kenya-Mauritius treaty on US Multinational companies

04 November 2014

The Mauritius and Kenya parliaments ratified the double-taxation treaty between Mauritius and Kenya on May 23, 2014. Kenya already had in-force treaties with the United Kingdom, Canada, Denmark, Norway, India, Sweden, Zambia, France and Germany

The Kenya-Mauritius treaty will enter into force following the exchange of the ratification instruments. If these procedures are completed before the end of 2014, the treaty could apply to income derived on or after January 1, 2015.

The Insight attached addresses the treaty’s aspects that could affect multinational companies doing business in either country. Such aspects include the definition of permanent establishment (PE), reduced withholding tax rates, taxing rights on capital gains arising from disposals, and overall considerations for planning investments into either country. The Insight also discusses the impact of proposals in the Kenya 2014 Finance bill regarding beneficial ownership.

The Finance bill has now been enacted with the proposed changes mentioned in this article expected to come in force from January 2015. Some relevant updates include:

  • The reintroduction of Capital Gains Tax (CGT) in the non-extractive industry after 29 years of suspension in Kenya. Following the amendment to the Income Tax Act (ITA), any capital gains arising from the sale of “property” situated in Kenya would be subject to a 5% CGT. Property is widely defined and includes amongst others, land, movable and immovable property, property held for investment purposes. In respect of individuals, the definition of property includes land situated in Kenya and marketable securities.

    The extractive industry is taxed differently and the Finance Act has also amended the relevant sections of the ITA. Kenya has already reintroduced the CGT for entities engaged in the oil, mining, and mineral prospecting industries; the latest proposal would extend it to other sectors. With effect from 1 January 2015, the net gain arising from farm out transactions and disposal of shares (direct/indirect) will be taxed at the corporate tax rate subject to certain restrictions. The current tax rate is 10%/20% of gross consideration.

    The Mauritius treaty will ease taxes for treaty beneficiaries.
     
  • The introduction of unilateral anti-treaty-shopping rules. Treaty relief can be withdrawn where 50% or more of the underlying ownership of the overseas entity is held by persons who are not residents of the treaty country. It remains to be seen how these would affect treaty beneficiaries in Kenya but these rules would impose an increasing need to demonstrate substance to enjoy treaty

The reduced WHT rates on dividends and relief on CGT make it advantageous to hold Kenyan investments using a Mauritius holding company. Kenya already has a position as a key hub for East African countries and in some cases investments across the continent. We expect that the Kenya−Mauritius treaty should further facilitate foreign direct investment in Kenya. 

Insight – Kenya-Mauritius Treaty Ratified

Emuesiri Agbeyi | Director, International Tax Services – Africa Desk, PwC US
Profile | Email | +1 (646) 471 8211

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