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Kenya: Tax Appeals Tribunal elaborates on rules for determining management and control of foreign companies

29 February 2024
– 4 Minute Read
| Tax

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Overview

  • In a case we recently handled, the Tax Appeals Tribunal (Tribunal) upheld an appeal lodged by a foreign company on the question of whether its management and control was exercised in Kenya in a particular year of income, thus making it a tax resident in Kenya for that year of income.
  • The Tribunal’s judgment affirms the position that in assessing where the management and control of a company is exercised, it is important to determine where the key decisions of the company are made.
  • The place in which the decisions of the company are made is the place in which the company is resident for tax purposes.

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: 

  • a majority of the Company’s board meetings (the Board) for several years of income were held in Kenya; 
  • a number of the Company’s directors holding key positions on the Board were tax residents in Kenya; 
  • the key strategic decisions of the Company were made by the Company’s senior management based in Kenya and therefore the tax residency of the senior management was Kenya; and 
  • that the meetings of the Board were merely to rubberstamp the decisions of the senior management which had been made in Kenya. 

Judgment  

In its judgment, the Tribunal rejected the KRA’s contentions. Some of the key issues arising from the judgment include: 

  • where residency is deemed by virtue of management and control, the meetings to be considered are with respect to that particular year of income. This was a key holding since the Company was able to demonstrate that the number of meetings held in Kenya in the year was not sufficient to conclude that the Company was managed and controlled from Kenya; 
  • that it is important to discern where the key business decisions of a company are made in determining the question of residency. Even where the senior management of a foreign company sits in Kenya, what matters is who has the ultimate authority to make key decisions necessary for running the business, and where those decisions are made. It is a question of fact, and in this case, the Company was able to adduce evidence demonstrating that control and management of the Company was vested in the Board, which held a majority of its meetings in different jurisdictions and made decisions in those jurisdictions; and 
  • the location where a board meets to make decisions is the place of effective management of the company. This is notwithstanding the tax residency status of the individual directors making up the board. 

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.