The Tax Appeals Tribunal (TAT) has ruled that withholding tax does not apply to management or professional fees paid to non-resident entities under the Kenya-France and Kenya-South Africa Double Tax Treaties (DTTs). The decision has been viewed as a significant victory for foreign businesses operating in Kenya.
The case involved an appeal by a Kenyan company, the Appellant, against the KRA’s demand for withholding tax on agency fees paid to marketing agents based in France and South Africa. The KRA argued that these fees fell under the other income articles of the respective DTTs, granting Kenya taxing rights.
However, the TAT disagreed, noting that, “The DTTs, Kenya had no taxing rights on the income received by the marketing agents, as they did not have a PE in Kenya.”
The Tribunal further emphasized that the other income article did not supersede the fundamental principle that income derived by a non-resident is only taxable in Kenya if a Permanent Establishment (PE) exists within the country.
This ruling echoes previous TAT decisions in Total Kenya Limited vs. Commissioner of Domestic Taxes and McKinsey and Company Inc. Africa Proprietary Limited vs. Commissioner of Legal Services and Board Coordination. These cases established that management or professional fees paid to non-residents are not subject to withholding tax in Kenya unless a PE is triggered.
According to a recently published Tax Alert by PwC Kenya, this decision provides much-needed clarity on the interpretation of DTTs, particularly those lacking specific provisions on management or professional fees. It reinforces the principle that the existence of a PE is crucial in determining taxing rights on such payments.
The KRA’s potential appeal of this judgment, particularly in light of the High Court’s ruling in Commissioner of Domestic Taxes vs Total Kenya Limited, will be closely watched. This ruling offers a welcome reprieve for businesses operating in Kenya and underscores the importance of challenging tax assessments that may not align with DTT provisions.