Kenya: Evolving Tax Landscape for PE and VC Funds

Recent tax determinations taken by the Tax Appeals Tribunal (TAT/Tribunal) have caused some disquiet within the PE and VC sector in Kenya.  In particular, the TAT, in ECP Kenya Limited v Kenya Revenue Authority, Tax Appeal No.335 of 2022 made determinations that are quite concerning for stakeholders in the sector.  We highlight some of the implications of the judgment, below.

a. Gains made by Funds are subject to Corporate Income Tax (CIT) rather than Capital Gains Tax (CGT)

The Tribunal in the ECP case agreed with the Kenya Revenue Authority’s (KRA) assessment and found that the gains made by ECP (a PE Fund structured out of Mauritius) on its exit from Java House Mauritius Ltd (Java House Mauritius Ltd has its operating companies in Kenya) were subject to CIT for each year of income rather than CGT.  Essentially, this means that the activities of PE Funds such as ECP would be viewed as trading activities subject to CIT rather than investment activities subject to CGT. 

b. Determination of Residency or Permanent Establishment

In its evaluation, the TAT determined that the ECP Fund in question had established a permanent establishment in Kenya and was therefore subject to CIT in Kenya on its worldwide trading/business income.  In reaching its decision the Tribunal made an error of fact that the ECP Fund Manager carried on business in Kenya through its local advisor ECP Kenya Limited. 

The Tribunal was of the view that the pre and post deal services provided by ECP Kenya Limited to the ECP Fund Manager were sufficient to reach a finding that the ECP Fund Manager had a permanent establishment in Kenya.  To link the outcome on the Fund Manager to the Fund, the Tribunal found that the ECP Fund Manager exercised discretionary control over the Fund.

Consequently, the TAT found that by virtue of the Fund Manager exercising discretionary control over the Fund and such control being exercised out of Kenya through the local advisory team, this had created a presence for the Fund Manager in Kenya.  Hence, a portion of the sale proceeds from the Java transaction should have been taxed in Kenya.  ECP Fund Manager’s income accruing from Kenya would thus be subjected to CIT for each year of income.  

Conclusion

This case and the interpretation accorded by the TAT puts into question many of the structures currently adopted by the PE and VC sector in Kenya, as the ring-fencing between the Fund, the Fund Manager and the local advisor is ordinarily informed by legal, financing, and commercial necessities based on international best practice. 

We understand that this matter is being appealed in the High Court of Kenya.

If you wish to discuss these topics, please contact:

Viva Africa Consulting LLP (WTS Kenya)