This is the first in a series of three articles summarising the key points of discussion during Bowmans’ 12th Annual Africa Competition Law Conference, held in Nairobi, Kenya, in February 2024.
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On 19 March 2024, the President signed into law the Affordable Housing Act, 2024 (Act). The enactment of this Act is the culmination of a record lawmaking process following the High Court Ruling on 28 November 2023 that rendered the affordable housing levy as introduced by the Finance Act, 2023, unconstitutional.
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The Cabinet Secretary for the National Treasury and Planning recently gazetted the Capital Markets (Alternative Investment Funds) Regulations, 2023 (the AIF Regulations), which took effect on 15 December 2023. These new regulations are an off-shoot of the Capital Markets (Collective Investment Schemes) Regulations, 2023, also gazetted simultaneously.
From our preliminary enquiries with the Capital Markets Authority (CMA), we understand that the AIF Regulations aim to bring private equity, venture capital, hedge funds and similar entities within the CMA’s regulatory ambit. We summarise some of the key features of the AIF Regulations below.
Alternative investment funds (AIFs)
An AIF has been widely defined as “a collective investment scheme that privately pools funds from at least two (2)but not more than one hundred (100) investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement”. Therefore, the AIF Regulations shall also apply to entities established outside Kenya, including those already in existence. However, AIF Regulations will not apply to family trusts, employee share ownership programmes, holding companies or securitisation SPVs. Entities that are currently operating within the definition of an AIF have been given until 15 December 2024 to seek licensing from the CMA.
It is not evident at this time whether a fund that has more than 100 investors would then be exempt from the application of the AIF Regulations, and we foresee that further guidance will be required from the CMA regarding the scope of application of the AIF Regulations.
Licensing of alternative investment funds
AIFs will now require to be licensed by the CMA in order to pool funds from private investors, by submitting an application in the prescribed form under the AIF Regulations. The application fee for an AIF licence is KES 10,000 (USD 68) with an annual licensing fee of KES 250,000 (USD 1,728).
An entity shall not operate as an AIF unless they have obtained approval from the CMA. Still, they may pool money (which can only be done by private placement) from prospective investors provided the pooled funds are not invested until the CMA issues the license.
The CMA also has wide authority with respect to regulation of an AIF including but not limited to requesting information about the fund manager or fund management activities of the AIF, approving the investment policy of the AIF and approving any amendments made to the investment policy, fit and proper approvals for the directors and partners of an AIF in accordance with the Capital Markets Act, Chapter 485A, Laws of Kenya (the Act).
Investment Requirements
The AIF Regulations seek to restrain the investment criteria applicable to AIFs, including not having more than 100 participants, not permitting an initial investment from members of less than KES 1 million, and requiring the CMA’s prior approval of the private placement memorandum related to any fundraising.
The fund manager of an AIF will also be required to appoint a custodian licensed by the CMA to safeguard the assets under management.
Conclusion
An amendment to the Act empowering the CMA to regulate private equity funds that “have access to public funds” was made in 2020, but the effect of enforcing this provision has not been evident.
The AIF Regulations beckon a novel regulatory space that the CMA is entering. Their implementation is likely to be met with differing interpretations and practical enforcement challenges, given the dynamism of the diverse number of entities they try to capture. It also remains to be seen how their application will interface with the regulatory regime under the Capital Markets (Public Offers, Listings and Disclosure) Regulations 2023 (and their predecessor regulations) that entities have so far been complying with in their fundraising.
It will be prudent for entities that fall within the definition of an AIF to engage the CMA for clarity or seek legal advice on the implications of the AIF Regulations to their operations, taking advantage of the grace period provided.
The Competition Authority of Kenya (CAK) has silently published its Final Consolidated Administrative Remedies and Settlement Guidelines (Guidelines), which outline the general methodology and analytical framework that the CAK will follow and apply in determining both administrative remedies as well as settlement arrangements for infringements of the Competition Act No. 12 of 2010 and the Competition (General) Rules, 2019.
These Guidelines are not binding and as such, would not fetter the CAK’s ultimate discretion in the calculation of administrative penalties or settlement terms. The Guidelines further prescribe that in the event of any inconsistency with the Competition Act or the Rules, the Competition Act and the Rules would prevail.
The CAK sets out that the objectives of the Guidelines include enhancing transparency, predictability and consistency in the determination of administrative penalties and are aimed at providing a cost-effective and efficient dispute resolution mechanism for micro, small and medium enterprises.
For all the contraventions covered in the Guidelines, the starting point and the maximum administrative penalty that can be imposed shall not exceed 10% of the gross annual turnover in Kenya of the undertaking in question.
In the case of failure to notify a merger or providing misleading or incorrect information in relation to a merger filing, the CAK will consider the gross annual turnover in the year preceding implementation of the merger.
For anti-competitive practices, penalties will be based on the total gross annual turnover of an undertaking in its preceding financial year – this is a significant departure from the previous Guidelines which applied penalties on the turnover that has been affected by or relevant to the anti-competitive conduct in question (as is the case in jurisdictions such as South Africa, the United Kingdom and the European Union).
These Guidelines supersede previously issued Guidelines in relation to settlements, namely the Fining and Settlement Guidelines, 2018, Administrative Remedies Guidelines for Consumer Protection, 2017 and the Competition Administrative Penalties and Settlement Guidelines, 2020.
Accordingly, it covers the following broad areas of contravention: restrictive trade practices, control of mergers, abuse of buyer power, and violations under consumer welfare as well as the procedure for pursuing settlements. The Guidelines note that any investigation that was instituted before its publication will be considered under Guidelines that were previously applicable.
In a matter where we acted for the Appellant company (the Company), the Tax Appeals Tribunal (the Tribunal) recently issued a judgment reaffirming the position that grant income is not income subject to tax in Kenya.
Background
In this matter, the Kenya Revenue Authority (KRA) had deemed that the Company was a tax resident in Kenya by virtue of being managed and controlled from Kenya and thereby proceeded to assess grant income received by the company to corporation tax at the rate of 30%.
Judgment
The Tribunal faulted KRA for purporting to subject an item that is not expressly set out under section 3(2) of the Income Tax Act to tax. This is in direct contravention of the finding of the High Court in the case of Commissioner of Domestic Taxes v Thika Road Baptist Church Ministries (Tax Appeal E024 of 2021)[2022] where the Court noted that:
“Tithes, freewill donations and offerings to the churches and other religious organisations did not fall within the scope of income which was chargeable to tax as per section 3(2) of the Income Tax Act which is an exclusive and closed list.”
The Tribunal ruled that the exclusion of grant income from the list of sources of income means that KRA could not stretch this list of items to include grant income. The Tribunal further noted that anything that is excluded from the list is not taxable unless it is shown and proved to be a profit or a gain that was raised in the course of business by a taxpayer or it fits any other class of income such as dividends or interest.
This judgment buttresses the literal rule of interpretation of tax statutes which requires that tax legislations be interpreted in their plain and natural meaning while considering what is clearly stated and not what was intended.
Summary
In a case we recently handled, the Tax Appeals Tribunal (the Tribunal) upheld an appeal lodged by a foreign company (the Company) on the question of whether its management and control was exercised in Kenya in a particular year of income, thus making it tax resident in Kenya for that year of income.
Background
In this matter, the Kenya Revenue Authority (KRA) had deemed that the Company was a tax resident in Kenya by virtue of being managed and controlled from Kenya and thereby proceeded to assess corporation tax on its transactions for the particular year of income. In arriving at its conclusion, the KRA contended that:
Judgment
In its judgment, the Tribunal rejected the KRA’s contentions. Some of the key issues arising from the judgment include:
Putting it into perspective
The holding on the above matter reaffirms the position that in assessing where the management or control of a company is exercised, it is important to assess where the key decisions of the company are made. From the same, it then follows that wherever the decision makers sit, be they the board of directors or any other body, that place is where the residency of the company is exercised for management and control purposes.
In addition, this case also explored other salient issues such as whether the decision-makers should apply their skills and knowledge in making decisions. In this regard, the judgment reveals that it is not enough to show where the key decisions of the company were made especially when the KRA alleges that the directors are oblivious of the decisions that they are making. The company must prove that the decision-makers applied their expertise to make the decisions of the company, otherwise, they are then not the makers of the decisions of the company.
Lastly, we should highlight that management and control of a company is a factual assessment and therefore, an entity alleging that it was not managed and controlled from Kenya has the responsibility of adducing the evidence supporting its claims according to the Tax Procedures Act.
We remain available to provide further guidance on this matter and advice on compliance measures that could be taken to reduce the risk that an entity could be deemed resident in Kenya.
