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Revised Kenya-India double taxation agreement comes into force

20 October 2017
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On 11 July 2016, the Governments of Kenya and India signed a revised double taxation agreement (the DTA). The DTA, which entered into force on 30 August 2017, will apply in Kenya from 1 January 2018 and will replace the previous Kenya-India DTA which entered into force on 20 August 1985.

The revised DTA was entered into with a view of promoting the existing economic cooperation between Kenya and India, India being one of the largest investors in Kenya. The DTA modernizes the provisions of the previous DTA to be more in line with the evolving international tax practices and the domestic tax laws applicable to both Kenya and India and offers numerous incentives such as reduced withholding tax rates.

We highlight the key provisions of the DTA below.
 
Withholding tax rates

The DTA provides for the following reduced withholding tax rates:

Nature of Payment;

Rate under the income Tax Act on payments to a non-resident person without a permanent establishment in Kenya (non – DTA country)

Rate in previous DTA between Kenya and India

Rate in revised DTA between Kenya and India

Dividends

 10%

 15%*

 10%

Interest

 15%

 15%

 10%

Royalties

 20%

 20%

 10%

Management and professional fees

 20%

 17.5%

 10%

*since this rate was higher than the withholding tax rate of 10% under the Kenyan Income Tax Act, the rate of 10% was applicable.

As you will note from the above, the withholding tax rates for interest, royalties and management fees have been reduced.

However, application of the reduced withholding tax rates is subject to the limitation of treaty benefit/ anti-treaty shopping provisions in the Kenyan Income Tax Act as discussed below.

Definition of a Permanent Establishment (PE)
 
The DTA expands the definition of a PE to include:

  • a sales outlet (for instance, a sales outlet set up in Kenya by a company resident in India);
  • the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose if the activities continue for a period or periods aggregating more than 90 days within a 12 month period. This should be noted as the usual test is 6 months; and
  • the activities of a dependent agent undertaken on behalf of an enterprise of the other contracting state (for instance India) in his state of residence (in this instance Kenya) where the dependent agent either (a) habitually concludes contracts in the name of the enterprise (unless the activities of the dependent agent are specifically not deemed to create a permanent establishment under the DTA), (b) habitually maintains stock of goods or merchandise in his state of residence (for this purpose Kenya) from which he regularly delivers goods or merchandise on behalf of the enterprise, or (c) habitually secures orders in his state of residence (for this purpose Kenya), wholly or almost wholly, on behalf of the enterprise.

Limitation of treaty benefits/ anti-treaty shopping provisions

Since the limitation of treaty benefit/anti-treaty shopping provisions in the Kenyan Income Tax Act came into force on 1 January 2015, there have been varied opinions on whether the provisions of the Income Tax Act override the provisions of double tax agreements.

The limitation of treaty benefit/ anti-treaty shopping provisions in the Kenya Income Tax Act provide that a person can only take advantage of tax benefits under a double tax agreement (for example the Kenya-India DTA) if (a) 50% or more of the underlying ownership of that person is held by an individual or individuals who are resident in that country (in this case India) for the purposes of the DTA; or (b) if the person is a company listed on the stock exchange in that other contracting state (in this case India).

It should be noted that the revised DTA contains express provisions to the effect that the provisions of the revised DTA do not prevent a contracting state from applying the provisions of its domestic law concerning tax avoidance or evasion whether or not described as such.

For further assistance please contact Paras Shah, Partner and Head of M&A and Projects, Alex Mathini, Partner and Head of Tax, or your relationship partner at Bowmans Kenya