Capital gains tax was introduced in Kenya effective January 2015. The rate is 5% which is lower than neighboring countries. Services for goods in transit are now VAT exempt. Meal benefits for employees are expanded to be non-taxable up to 48,000 KSH per year. A new excise act separates excise from customs and is effective in 2015. Real estate investment trusts (REITs) are proposed to be exempt from corporate and income tax with the exception of withholding tax on interest.

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October 2014 | Ace Group | :
Ace Bulletin
Capital Gains Tax –in Kenya
VAT Exempt Services for Goods in Transit
Effective 19th September 2014, businesses providing services for transit goods will be VAT exempt. Mainly effects cross border Transporters.
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Contents
Special Interest Articles
Capital Gains Tax – In Kenya 1
VAT Exempt-Services for Goods in Transit 1
Withholding VAT – 6% of tax payable 4
Exempt Goods 4
Tax remission for official aid funded projects 4
Meals on Low income employees 4
Import duty exemption 4
Duty on imported paper 4
Excise Act 2014 4
Features
Capital Gains Tax – Application 2-3
Trust V/S Foundation 5
Mauritius- Kenya Double Tax Treaty 6
Taxation of Real Estate Investment Trust’s 7 Capital gains tax (CGT) is a tax on capital gains, i.e. the profit realized on the sale of Property that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, and real estate. The Finance Act 2014 introduces Capital Gains Tax effective from 1st January 2015, once again in Kenya. Previously, it had been applicable in Kenya between 1975 and 1985, when it was suspended. (See page 2 for more details of application.). The rate of Capital Gains tax is 5%, which is considered favorable compared to Uganda which has a rate of 30% and Tanzania at a rate of 20% for non-residents and 10% for residents.
[Volume 1, Issue 1]

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Capital Gains Tax – Applied
Based on the Eighth Schedule of the Income Tax Act Kenya, capital gain is determined as follows:
Chargeable Gain = Transfer Value – Adjusted Cost
The transfer value could be in various forms such as the amount of or value of consideration for the transfer of property; or sums received under a policy of insurance for damage to or for loss of property.
The adjusted cost is the sum total of the original cost of acquiring or constructing the property, the cost of capital expenditure wholly and exclusively incurred on the property after its acquisition and the incidental costs to the transferor of acquiring the property.
Definition of Property
Companies
 Money, goods, choses in action, land and every description of property whether moveable or immovable;
 Property acquired or held for sale investment purposes but does not include a motor vehicle.
Individuals
 Land situated in Kenya and any right or interest in or over that land;
 A marketable security situated in Kenya, other than shares listed and trading in the NSE.
Exemptions from Capital Gains
The following income are exempt from Capital Gains Tax
 Other specified sources of income under the Income Tax Act
 Gain from sale of shares and stock of the Government, High Commission and County Government
 Transfer of private residence occupied by the owner for at least 3 years, immediately prior to sale.
 Transfer of property involving the incorporation, recapitalizing, acquisition, amalgamation, separation, dissolution, or similar restructuring of corporate identity, involving one or more companies approved by the cabinet secretary for The National Treasury.
 Gain accruing to on transfer of machinery qualifying for wear and tear under 2nd schedule of ITA.
 Investment shares transferred by a unincorporated associations or individuals of a Public Character, which are exempt for Income Tax under paragraph 10 of the of the 1st Schedule of the ITA.
 Gains from transfer of investment shares for or in connection with a pension fund, trust scheme, or provident fund registered with the commissioner.
 Transfer of land by an individual whose value is below Kshs 30,000 or agricultural property less than 100 acres situated outside of urban area.
 Transfer by an individual, of land which has been adjudicated under the Land Consolidation Act or Land Adjudication Act, when the title to that land has been registered under the Registered Land Act and transferred for the first time.

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Capital Gains Tax – Applied
Transfer value of property
 Amount of or value of consideration
 Sums received in return for abandonment, forfeiture or surrendering the property.
 Sums received for the use of exploitation of the property.
 Sums received by way of compensation for the damage, injury of loss of property.
 Insurance compensation.
 Benefits realized upon reduction of charge on behalf of another party.
Adjusted Cost
Property excluding Investment shares
 Amount of or value of consideration for acquisition or construction of property.
 Amount of expenditure incurred wholly and exclusively on the property after its acquisition by or on behalf of the transferor for the purpose of enhancing or preserving the value of the property.
 Amount of expenditure incurred wholly and exclusively after its acquisition by the transferor establishing, preserving or defending the title of the property, to him or a right over the property.
 Incidental cost to the transferor of acquiring the property.
Incidental Costs
These are cost incurred wholly and exclusively for the acquisition or transfer of property.
Investment Shares
 Investment shares acquired before 13 June 1975, the market price at which they were bought in an arm’s length transaction, immediately prior to the close of business in the NSE on 12th June 1975. However, if evidence of purchase at higher price, this is cost.
 Investment shares acquired after 13th June 1975, the amount or value of consideration.
Transactions not considered “transfer of property” hence CGT does not apply
 Charge and discharge of property
 Issuance of a company of own shares or debentures
 Vesting in executor by operation of law of property of a deceased person
 Transfer of property by an executor to a legatee
 Vesting in a liquidator by an order of court of property of a company
 Vesting to an official receiver or other trustee in bankruptcy of property of a bankrupt
 Transfer by a trustee of property, subject of a trust to a beneficiary on becoming entitled.
 Transfer of property between spouses or former spouses as part of divorce/separation.
 Compensation from Government for infrastructure development.

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Other Items of Special Interest
Meals to low income employees
Section 5 (4) (f) has been amended to expand the scope of meal benefit to cover all employees unlike in the past where the non-taxable meal benefit was restricted to low income employees. The value of meals provided to an employee by the employer will not be taxable subject to a maximum of forty eight thousand shillings per year (KShs. 4,000 per month). The meals can be provided in a canteen or cafeteria operated or established by the employer or provided by a third party at the employer’s premises or at the third party’s premises. The third party supplier however must be a registered taxpayer.
Withholding VAT – 6% of tax payable
Government Ministries, departments and agencies are now required to withhold 6% of the tax payable on supplies received at the time of paying for the supplies with effect from 19th September 2014.
Remission of tax for official aid funded projects
Remission of tax expressly provided under agreements for official aid-funded projects will remain in force for 5 years from 19th September 2014. However, these agreements must have been concluded before 2nd September 2013.
Exempt Goods
The following previously VATABLE are now EXEMPT:
 Tractors
 Aeroplanes and other Aircrafts of unladen weight exceeding 2,000 Kgs
 Other parts of aeroplanes and helicopters
 Inputs or Raw Material supplied to solar equipment manufacturers for manufacture of solar equipment or deep cycle sealed batteries which exclusively use or store solar power.
Exemption of Import Duty
The following items are exempted from import duty:
 Machinery, spares and inputs for direct exclusive use in Solar and Wind energy development and generation,
 Importation of inputs for use in processing and preservation of seeds for planting.
This has been affirmed under the EAC Gazette of 20th June 2014. The effective date was 1st July 2014
Duty on Imported Paper
Duty on imported paper was increased from 10% to 25%, this is likely to affect prices for paper products and have adverse effect on the publishing industry.
Excise Act
A new Excise Act has been enacted, it is effective 1st January 2015, (separated from Customs & Excise Act). This is a positive development.

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Trust V/S Foundation
Which is better between a trust and a foundation? The following provides a basic overview of the two structures as well as the key differences, advantages and disadvantages of each.
Trusts
At the very basic level, the concept of the Trust is relatively easy: a person (Settlor) places assets in the legal custody of another (Trustee) held for the benefit of some third party (Beneficiary). The Trust is not a separate legal entity, but more of a legal "obligation" agreed between two parties: the Settlor and the Trustee. There are three minimum criteria for a Trust to be valid:
Intention: the Settlor must have clearly intended to settle the Trust and confer legal control of assets;
Assets: the Trust is not operative until assets have been transferred;
Objects: it must be clear for whom the Trust was created and subsequent assets transferred to the Trust are being held.
Surprisingly, a fair percentage of offshore Trusts being established likely fail at least one of these critical criteria. This could lead to a great deal of money is spent on legal fees trying to defend the validity of the Trust at some later date when the Settlor is sued by a creditor or a family member. A court could determine that the Trust is a "Sham Trust" and order any assets transferred (assuming they ever really were) to be repatriated and part of a settlement.
Private Interest Foundations
A Private Foundation is an independent self-governing legal entity, set up and registered or recorded by an official body within the jurisdiction of where it is set up, in order to hold an endowment provided by the Founder and/or others for a particular purpose for the benefit of Beneficiaries. Unlike Trusts, Private Foundations are separate legal entities, similar to a company. It does have a few common characteristics, but there are also clear distinctions. First and most important is that Foundations typically may not carry on commercial activities. Secondly, the Foundation has no shareholders. Assets placed into a Foundation may come from the Founder and/or a third party. This is different from a Trust whereby the Settlor places assets into the custody of a Trustee to be administered and held on behalf of the Beneficiaries named by the Settlor.
Unlike companies, there are no shares or shareholders in a Foundation, rather there are Beneficiaries. Unlike the Beneficiaries of a Trust however, the Beneficiaries of a Foundation generally have no legal or beneficial participation in the Foundation until the assets are actually distributed to them from the Foundation. The Foundation Council is also bound by fiduciary and legal duties to act in the best interest of the foundation similar to the directors of a company.
So which is better?
Probably the biggest advantage of a Trust lies in the fact that it can be used for business purposes whereas most Foundation jurisdictions limit the use of a Foundation to non-commercial uses. A strong case can be made that a Private Foundation is "better" than the Trust for most common purposes due to the following advantages:
1. A Foundation is a separate legal entity unlike a Trust;
2. Assets placed into a Foundation become the property of the Foundation itself both legally and beneficially and are separate from the Founder and any Beneficiaries whereas with Trusts ownership is less clear and is split between the Trustee and the Beneficiaries;
3. Reassurance to the client that the Foundation is an incorporated body with clear statutory laws and regulations governing it in the jurisdiction;
4. No question about the "validity" of a Foundation;
5. Foundations are clearly governed by the law in the jurisdiction where established. Trusts are somewhat similar, however questions about where they are "managed and controlled" and hence what law should apply are not always so apparent;
6. One can place assets into a Foundation and then transfer "ownership" of the Foundation in a number of ways to indirectly transfer the underlying assets of the Foundation. This is not possible with a Trust;
7. For succession planning, a Trust that is to take effect after the death of the Settlor must conform to the formalities of a will. When a Foundation is created to take effect after the Founder's death, the formalities need not conform to making a will.

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Kenya - Mauritius Double Taxation Avoidance Agreement (DTAA)
The Kenyan Government has ratified the Double Taxation Avoidance Agreement (DTAA) with Mauritius. The DTAA was signed in May 2012 and was already ratified by the Mauritian Government. This brings the total number of DTAA ratified by Mauritius to 39.
The advantages of Using Mauritius Company for Investments in Kenya
A resident of Mauritius derives income or gains from Kenya, the amount of tax on that income or gains payable in Kenya may be credited against the Mauritius tax. Further, a company resident in Kenya pays dividend to a resident of Mauritius who controls directly or indirectly at least 5% of the company paying the dividend, credit shall take into account the underlying tax paid by the Kenyan company on the profits out of which dividend was paid.
In case of exit from the Kenyan investment, gains arising on the disposal of the shares by the Mauritius Company will be taxable only in Mauritius by virtue of the DTAA. There is no capital gains tax in Mauritius. It should be highlighted that the provision applies irrespective of what constitute the assets of the Kenyan company. (This could of special interest to companies operating in the Oil, Gas and natural resource extractive sector)
Under the treaty, the rate is reduced to 5% if the Mauritius company owns more than 10% of the share capital of the Kenyan company. Usually, Dividend paid by a Kenyan company to a non-resident is subject to a withholding tax of 10%.
Tax Information Exchange obligations as part of a Double Taxation Treaty can Include the following:- (a) It provides for exchange of information that is "foreseeably relevant" to the administration and enforcement of domestic tax laws on the Contracting Parties. (b) The information provided under TIEA is protected by confidentiality obligations. Disclosure can be made to courts or judicial forums only for the purpose of determination of the taxation matter in question. (c) Information requested may relate to a person who is not a resident of a Contracting Party. (d) There is an obligation on part of requested Party to gather information if it is not in its possession, notwithstanding that it does not itself need that information. Therefore, no "domestic interest" for tax purposes is required for the provision of information. (e) Information is defined in an expansive manner to cover banking details, ownership details of companies/persons/funds/trusts etc. (f) Apart from exchange of information, representatives of one Party may be permitted to conduct tax examinations in territory of another party including interviews of individuals and examination of records.

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Taxation of Real Estate Investment Trusts A Real Estate Investment Trust (REIT) is a collective investment scheme, which enables several investors to pool their savings to invest in real estate in order to realise economies of scale, scope, diversify their portfolio risk and invest passively by using a regulated professional REIT Manager. Kenya is the third African country to establish a real estate investment trust (REIT) as an investment vehicle LEGAL NOTICE NO. 116 of 18th June 2013 Capital Markets (REITs Collective Investment Schemes) Regulations 2013. A REIT is an entity that mainly owns, develops or operates income producing real estate, such as apartments, shopping centres, offices, hotels and warehouses. REITs have two main characteristics:  The bulk of their assets are in real estate; and  They distribute a large percentage of their income to their shareholders.
Taxation of REIT’s As in other jurisdictions, there are a number of tax incentives for investments made in REITs. The proposals intend to exempt REITs from corporation and income tax, except for the payment of withholding tax on interest from income. It is further proposed to exempt promoters that transfer property into a scheme in exchange for units from paying stamp duty. Section 20 (i) Income Tax Act Kenya see extract below:-
“20.(1) Subject to conditions specified by the Minister under section 130-
(a) a unit trust; or
(b) a collective investment scheme set up by an employer for purposes of receiving monthly contributions from taxed emoluments of his employees and investing them primarily in shares traded on any securities exchange operating in Kenya,
(c) a real estate investment trust
registered by the commissioner, shall be exempt from income tax except for the payment of withholding tax on interest income and dividends as a resident person as specified in the Third Schedule to the extent that its unit holders or shareholders are not exempt persons under the First Schedule.
(2) All distributions of income, and all payments for redemption of units or sale of shares received by unit holders or shareholders shall be deemed to have been already tax paid.”
Opinion
A properly structured REIT does give an opportunity to a group of collective investors to create a tax shelter, which allows their investments in real estate to grow sheltered from tax.

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This newsletter is for general guidance only and does not constitute professional advice. You should not act on this information without getting professional advice concerning your unique situation. No representation is made of the absolute accuracy of the information contained herein, as the information in the relevant Act’s prevail in all circumstances. The information is based on good faith interpretation of the appropriate Act’s relevant to the information contained. ACE Group or any of its entities, accept no liability should anyone act on the contents of this newsletter.