Kenya: Corporate tax residency in Kenya

Recently, the issue of the corporate tax residency of companies incorporated outside Kenya has arisen, especially for multi-national enterprises with a business presence or related entities in Kenya.

Kenya’s Income Tax Act defines residency in relation to a body of persons under three parameters:

• Incorporation in Kenya;
• The place of management and control of the affairs of the body is in Kenya; and
• Declaration by way of a Gazette Notice by the Cabinet Secretary responsible for the National Treasury that the body is resident in Kenya.The question of management and control therefore arises where the other two parameters do not apply.  Notably, management and control is not defined under the Income Tax Act, necessitating the adoption of the common law interpretation in the determination of corporate residency.

Central Management and Control (CMC) Test

The common law position is enunciated in the case of De Beers Consolidated Mines Ltd v Howe [1906] AC, 455.  The Court explained that a company resides, for purposes of income tax, where its real business is carried out.  The Court elaborated that real business is carried out where its central management and control is carried out.

The CMC test considers the factual and legal management and control of a company.  Residency is a question of fact.  Courts will therefore consider where the key decisions of an entity are made, e.g., the acquisition or disposal of assets, approval of budgets, significant capital expenditure, major operational decisions, approval of contracts and significant borrowings.  This is distinguished from decisions of a more day-to-day operational nature.

The Tax Appeals Tribunal (TAT) in Kenya has applied the CMC test in its recent decisions on the issue of corporate residency of offshore companies.  The TAT has taken a practical approach to the CMC test, which entails a consideration of the following: -

• The types of decisions that are made by the central management of the company. (What)
• The individuals responsible for the decisions. (Who)
• The mode of making decisions, such as meetings and resolutions. (How)
• The place where the decisions are made, and by extension, the place where the decision-makers reside. (Where)

Place of Effective Management (POEM) Test

The Kenya Revenue Authority has also considered the POEM test to determine corporate residency of offshore companies in Kenya.  The POEM test is provided for under the OECD Model Tax Convention on Income and Capital, which involves the consideration of several factors, including: -

• Where meetings of the board of directors or equivalent body are held;
• Where senior executives carry on their activities, senior day-to-day management is carried on and accounting records are kept;
• Where the entity is headquartered; and
• Which country’s laws govern the legal status of the person.

The POEM test is applied where an entity is considered a resident of two contracting states.

In the wake of virtual board meetings, as opposed to physical meetings, it will be interesting to see the interpretation of the CMC and POEM tests on the issue of management and control by the Kenyan courts.

If you wish to discuss these topics, please contact:

Viva Africa Consulting LLP (WTS Kenya)