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:
Central Management and Control (CMC) Test
The common law position is enunciated in the case of De Beers Consolidated Mines Ltd v Howe  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: -
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: -
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)
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