Investment Guide - Kenya - Africa Legal Network

Investment Guide 2015 - Kenyainfrastructure projects include railway expansion (a new standard gauge railway will be built in 3 phases for a total of US 13 billion), LAPSSET (with a new port at Lamu, railway, road, oil terminal & pipeline and resort cities at Lamu, Isiolo and LakeTurkana), 4 dams at a cost of US 16.8 billion and the replacement of the Mombasa-Nairobi oil pipeline.Regulatory EnvironmentMuch of Kenyan investment law is modeled on English law. One of the most significant changes to take place in Kenya inthe last few years is the enactment of the Constitution. The period following the promulgation of the new Constitution hasseen the enactment of an unprecedented number of new laws in Kenya. In 2011, 35 new statutes were enacted and in2012 at least 25 new statutes were enacted. 2013 was a similarly busy year as 39 new statutes were enacted. However, in2014, only 12 new statutes were enacted with many more awaiting confirmations from the Senate. Kenya’s sources of laware the Constitution; written laws; English statutes of general application in force as at 18th August, 1897; the commonlaw and doctrines of equity and customary law. In addition, the Constitution provides that the general rules of internationallaw and treaties or conventions ratified by Kenya form part of the laws of Kenya. The key corporate and investment lawsare the Companies Act (Cap 486) and the Investment Promotion Act, 2004. The Constitution envisions numerous pieces oflegislation to be enacted by Parliament covering a wide range of subjects, including land ownership, consumer protectionand the exploitation of natural resources.Kenya has taken steps to overhaul several key commercial laws, which are largely based on legislation adopted during thecolonial period, to make them more compatible with current global trends and the investment environment. Consequently,there is proposed legislation covering company law, insolvency, and banking and payment systems. A new Competitionlaw which seeks to ensure a more competitive market was brought into effect in 2012. In June 2013, the Capital Markets(Real Estate Investment Trusts) (Collective Investment Schemes) Regulations (REITS Regulations) and the Capital Markets(Futures Exchanges) (Licensing Requirements) Regulations came into force.Over the past few years there have been major efforts to privatise commercial sectors that were previously governmentowned or managed in order to encourage foreign investment in these sectors. The stated aim of the Government is tohave minimal interference in business, and the Government is increasingly adopting the role of a regulator rather than anactive market participant.To promote investment in Kenya, the Government overhauled Kenya’s licensing regime in 2006, reducing the number oflicences required to do business, while making licensing regimes simpler and more transparent. In 2008, the Governmentreduced the number of licences required to set up a business from 300 to 11. The Business Regulatory Reform Unit in theMinistry of Finance continues this streamlining process. In general, foreign and local investors receive equal treatment.Foreign and local investors can operate in all sectors except where state corporations still enjoy a statutory monopolysuch as in infrastructure, or where there are quotas on minimum local ownership, such as the insurance, banking andtelecommunications sectors. Ownership restrictions also apply to listed companies. Kenya has taken steps towards partialliberalisation of state monopolies in certain sectors. A number of state corporations have been privatised and essentialsectors such as energy have been opened to private investors. Residents and non-residents are permitted to hold foreigncurrency accounts.7

Investment Guide 2015 - KenyaThe new Public Private Partnerships (PPP) Act, 2013 aims to expand the participation of the private sector ininfrastructure and development projects through concessions or contractual profit sharing arrangements. The PublicPrivate Partnership Regulations, 2014 were gazetted on the 17th October, 2014 and set out the mechanisms for givingeffect to various provisions of the PPP Act.Pursuant to these Regulations, the PPP Unit is working on a number of projects. With the evolution of a devolved system ofgovernment, county governments are targeting private investors to collaborate with them through PPPs in order to enablethe county governments to carry out their functions pursuant to Schedule 4 of the Constitution. Potential projects includeadministration of county transport and infrastructure (including construction, street lighting, traffic and parking), providingcounty health services, fire fighting services, pre-primary education, disaster management and the implementation of otherspecific national government policies.Bilateral and Multilateral TreatiesKenya is a member of the EAC, COMESA, African, Caribbean and Pacific States and the World Trade Organisation (WTO).Currently, Kenya has signed double taxation agreements with Canada, Denmark, France, Germany, India, Norway, Sweden,the United Kingdom and Zambia.A double taxation agreement between Mauritius and Kenya was scheduled to come into force in January 2015; however,the Kenyan Government did not issue the requisite notifications to the Mauritius Government to bring the Kenya-Mauritiustreaty into force. It therefore remains ineffective and will not come into force before 1 Jan 2016. Kenya signed a doubletaxation agreement with Qatar in 2014 and treaties with the UAE and Iran remain under negotiation. The East AfricanCommunity Double Taxation Agreement has been ratified by the Kenyan Government but is yet to enter into force. TheKenyan Government has also entered into a double taxation agreement with the South Africa, but the agreement is alsoineffective. The treaties will come into force once the requisite notifications are made to the respective foreign governments,but in any case not earlier than 1 January 2016.It is noteworthy, that with effect from 1 January 2015, the Income Tax Act limits the relief from double taxation to a personresident in a country that has a double taxation agreement with Kenya, or a company that is resident in a country that hasa double taxation agreement with Kenya, and where 50% or more of its underlying ownership is held by an individual(s)resident in that country.Investment PromotionInstitutions Governing Investment PromotionKenya Investment AuthorityIn a bid to encourage investment in Kenya, the National Assembly enacted the Investment Promotion Act, 2004 (theIPA). The IPA aims to reduce bureaucratic delays in relation to licensing, immigration and negotiating tax incentives andexemptions from the relevant authorities. The IPA established a corporate body known as the Kenya Investments Authority8

Investment Guide 2015 - Kenya(KenInvest) to implement the goals of the legislation. For a foreign investor to qualify for an investment certificate, theminimum value of his proposed investment should be US 100,000 or the equivalent in another currency. In decidingwhether to issue an investment certificate, KenInvest considers the extent to which the investment will contribute to theKenyan economy by increasing the number and quality of jobs in Kenya, training Kenyans in new skills or technology,encouraging economic development, allowing the transfer of technology, adding to tax revenue or affecting foreignexchange.Investment IncentivesAn investment certificate granted under the IPA offers investors some important benefits, the principal one being thatKenInvest facilitates the issuance of all necessary licences and permits required for the investor’s operations. Investmentcertificate holders are entitled to apply for entry work permits for 3 members of the holder’s management or technical staffand three co-owners, shareholders or partners.According to KenInvest, Kenya has entered into Investment Promotion and Protection Agreements with France, Finland,Germany, Italy, Netherlands, Switzerland, China, Libya, Iran, Burundi and the United Kingdom and is currently negotiatingagreements with other countries.Both local currency and foreign currency debt is available in Kenya. In addition, there are no restrictions on repatriation ofdividends or on foreign currency. Kenya does not restrict remittances to a foreign recipient. However, the Central Bankof Kenya has promulgated regulations, under the Central Bank of Kenya Act (Chapter 491), which require that where atransaction undertaken in Kenya involves the payment of “hard” currency to a foreign recipient, such remittance mustbe effected through a bank licensed by the Central Bank of Kenya to conduct banking business in Kenya. Therefore, allpayments in and out of Kenya have to be remitted through an authorised bank in Kenya.Payments out of Kenya below US 10,000 can be made freely. Payments between US 10,000 and US 499,999 requireevidence of the purpose of the payment being made to be provided to the authorised bank (payments of interest andprincipal under a loan agreement would be permitted). Notification of any payment above US 500,000 has to be givenby the authorised bank to the Central Bank of Kenya.Export Processing Zones (EPZs)Kenya has established ‘special economic zones’ under the Export Processing Zones Act (Chapter 517) to promote andfacilitate export oriented investment. The activities eligible to be carried out within EPZs include manufacturing, commercialand service activities geared towards exportation. Persons may set up an EPZ by obtaining a licence to develop or operatea zone on land gazetted as an EPZ.EPZ licensed businesses are granted certain tax exemptions including: Exemption from VAT and customs duties on raw materials, machinery and equipment, spare-parts, tools, rawmaterials, intermediate goods, construction materials and equipment, office equipment and supplies as wellas transportation equipment; Exemption from income tax for the first 10 years from the date of the first sale as an EPZ enterprise, and income taxshall be limited to 25% for the next 10 years following the expiry of the exemption; Exemption from withholding tax on dividends and other payments made to non-residents, during the period thatthe EPZ enterprise is exempted from payment of income tax; and Exemption from stamp duty on the execution of any instruments relating to the business activities of an EPZ enterprise.9

Investment Guide 2015 - KenyaTaxIncome TaxResident and non-resident corporate entities with a permanent establishment in Kenya are subject to tax on all incomeaccrued in or derived from Kenya. A company is tax resident if it is incorporated under Kenyan law, if the managementand control of its affairs are exercised in Kenya, or if the Cabinet Secretary in charge of the National Treasury declares theentity to be tax resident for a particular year of income in a notice published in the Kenya Gazette. An individual is residentif he or she has a permanent home in Kenya and is present for any time during the year; if he or she is present in Kenyafor at least 183 days in the tax year; or if he or she has been in Kenya for an average of 122 days in the tax year and theprevious two years.The corporate income tax for a locally incorporated company is 30%. The corporate income tax rate for a non-residentcompany having a permanent establishment in Kenya (a foreign branch) is 37.5%. Newly listed companies on the NSEreceive a reduced tax rate for the first 3 to 5 years following the year of listing. The reduced tax rate varies between 20%and 27% and applies for a period of 3 to 5 years, depending on the percentage of capital listed by the entity on the NSE.Individual income tax rates are based on a graduated scale based on income brackets with the lowest tax rate being 10%and the highest tax rate being 30%. It is worth noting that senior officers of corporate bodies may be held personally liablefor tax offences committed by their corporate employer. The Finance Act, 2013 provides that the High Court of Kenyamay order a person to pay the Commissioner of Income Tax the entire amount or such part as remains unpaid, of the taxassessed by the Commissioner either in addition to, or in substitution of any other penalty.Withholding Tax (WHT)For dividends paid to Kenyan residents or on listed shares for citizens of the EAC, the rate of WHT is 5%. A 10% rate appliesfor the dividend payments to other non-residents. No WHT is imposed if the recipient is a resident company which controls12.5% or more of the capital in the paying company. Loan interest paid to residents and non-residents is subject to a 15%WHT. No WHT is imposed if the recipient is a qualifying Kenyan financial institution. Royalties paid by a resident person toanother resident person are subject to a 5% WHT. Royalties paid by a resident person to a non-resident person are subjectto a 20% WHT.WHT is chargeable on management and professional fees. Payments of management and professional fees made by aresident person to another resident person are subject to a 5% WHT. Payments of management and professional fees madeby a resident person to a non-resident person are subject to 20% WHT. Although exempted from taxation in 2012, as of1 January, 2014, winnings from betting and gaming, whether payable in cash or in kind, are subject to WHT at the rateof 20% of cash proceeds or the fair market value of the winnings if paid in kind. This rate is applicable to both residentsand non-residents and the tax deducted shall be final.In June 2014, the Government of Kenya introduced various changes relating to taxation of entities engaged in the extractivesector. These changes abolished the WHT regime that was applicable on farm-out and share sale transactions and haveattempted to align the provisions of the Income Tax Act to the tax provisions in the Production Sharing Contracts. Witheffect from 1 January 2015, farm-out transactions are taxed by including the net gain as part of the taxable income of thetransferor. Farm-out transactions may be taxed at the corporation tax rate in certain circumstances.10

Investment Guide 2015 - KenyaOther key changes introduced by this regime include the ring fencing of petroleum blocks, indefinite carry forward of taxlosses, tax treatment of the assignment of future work obligations, reporting requirements for changes of more than 10%in underlying ownership and specific thin capitalisation thresholds. The rate of WHT may be reduced where the recipientof the income subject to withholding tax is resident in a country which has a double tax treaty with Kenya. For example,the WHT rate for management and professional fees under the Kenya-United Kingdom double tax treaty is 12.5%.Capital Gains TaxCapital Gains Tax (CGT) had been suspended in Kenya since 1985. The Finance Act, 2014 re-introduced CGT at the rateof 5% on gains arising from transfer of property situated in Kenya. The term ‘property’ is very wide and includes shares inlisted and private companies, land and buildings and other assets. Various exemptions from CGT are available, includingon the transfer of a private residence where certain thresholds have been met and on the transfer of agricultural propertyof less than 100 acres.A transfer of property is deemed to occur when property is sold, exchanged or disposed of in any manner. Gifts, destructionor loss of property are also deemed to be transfers and CGT will be applicable. There are, however, various instances wherea transfer would not be deemed to have occurred and hence CGT would not be applicable. These instances include thetransfer of property to secure a loan, a debt or the issuance of shares by a company and the transfer of property upon thebeneficiary of a trust becoming entitled to the property.The Kenya Revenue Authority (KRA) has recently issued guidelines (the Guidelines) on the application of CGT, as wellas the declaration form for payment of CGT (Form CGT-1). As per the Guidelines, taxpayers will be required to undertakea self-assessment and pay CGT to the KRA by the 20th day of the month following the month in which the transfer wasmade. The Guidelines have also confirmed that CGT will be payable by a non-resident transferor provided that the propertyis situated in Kenya. Unfortunately, the proposed CGT system makes no allowance for inflation and therefore taxpayers willbe assessed on paper gains. Furthermore, some exemption thresholds are based on the law as it stood in 1985 and are notcomparable to present day valuations.Value Added TaxValue Added Tax (VAT) is chargeable on the supply of goods and services in Kenya and on the importation of goods andservices into Kenya. The VAT Act, 2013 (VATA) came into force in September 2013 and brought with it sweeping changesto the VAT regime in Kenya including making various previously exempt households goods subject to VAT . The VATAprovides for 2 rates of VAT, 0% in the case of zero-rated supply specified in the First Schedule to the Act and 16% in allother cases. The VATA repeals the lower rate of 12% previously applicable to electricity and fuel.The supply or importations of goods or services that are designated as exempt are not subject to VAT. Previously exemptgoods, designated in Section B of the First Schedule of the VATA, including fuels and fuel oil, will be exempt for a periodof 3 years and thereafter VAT will be chargeable at the standard rate. Zero-rated VAT is applicable to goods and servicesexported from Kenya, goods and services supplied to EPZs and the supply of coffee and tea for export to coffee and teaauction centres. Exemption also applies to the supply or importation of goods specified in Part A of the First Schedule ofthe VATA. These include goods used in agriculture, health and education.The supply of services which were previously exempt will now attract VAT at the standard rate. The VATA has also clarifiedthe rules with respect to the place and time of the supply of goods and services. Under the VATA, a supply of services ismade if the supplier’s place of business from which the services are provided, is in Kenya. Where the supplier’s place of11

Investment Guide 2015 - Kenyabusiness is not in Kenya, the place of supply shall be deemed to be Kenya if the recipient of the supply is not a registeredperson and:a. the services are physically performed in Kenya by a person who is in Kenya at the time of supply;b. the services are directly related to immovable property in Kenya;c. the services are radio or television broadcasting services received at an address in Kenya; andd. the services are electronic services delivered to a person in Kenya at the time of supply or the supply is a transfer orassignment of, or grant of a right to use, copyright, patent, trademark or similar right in Kenya.With respect to goods, a supply of goods occurs in Kenya if:a. the goods are delivered or made available in Kenya by the supplier;b. the supply of the goods involves their installation or assembly at a place in Kenya; andc. the goods are delivered outside Kenya and were in Kenya when their transportation commenced.Applicants will be required to apply for tax refunds of tax paid in error within 3 months from the date the tax was due andpayable. Previously, the applicable time frame was 12 months. The VATA has made commendable effort to promote theuse of information technology with respect to registering applications, filing returns or statements, making payments andrefunds and issuing notices and other documents provided by

Investment Guide 2015 enya 5 Political Overview Economic Overview The country has a multi-party political system whose hallmark is constitutional democracy. Kenya adopted a new Constitution on 27th August, 2010 (the Constitution). The first general elections under