The Kenyan commissioner of income tax has issued guidelines on the collection and accounting of Capital Gains Tax (CGT) on land, buildings, marketable securities, unlisted shares, and other financial assets effective January 1, 2015. CGT applies to all gains from property transfers regardless of the acquisition date, and is charged at a rate of 5% of net gains. The guidelines clarify taxpayers' obligations, the definition of taxable transfers, determination of gains, documentation requirements, exemptions, and implications for related industries. Stockbrokers are obligated to collect and account for CGT on listed shares and the Central Bank of Kenya is responsible for discountable securities.

1. East African Tax Consulting
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Date of Alert: 22 January 2015
Capital Gains Tax (CGT) Guidelines –Implications
The commissioner of income tax has issued guidelines on collection and accounting
for Capital Gains Tax (CGT) on land, buildings and marketable securities.
This Alert looks at some of key aspects of the guidelines and implications thereof.
1. Commencement
CGT is chargeable on the whole gains which accrue to a person after 1 January 2015,
whether or not the property was acquired before 1st January, 2015.
2. Rate of tax
The rate of tax is 5% of the net gain and is final tax.
3. Definition of property
In addition to land, buildings and listed shares, the commissioner has clarified that
CGT applies to unlisted shares and other financial securities like Bonds, Treasury
Bills and corporate papers whether listed or not.
4. Liability to pay the tax
The transferor has an obligation to pay CGT. The stockbroker and the Central Bank
of Kenya have obligations to collect and account for CGT on listed shares and
discountable securities (e.g. treasury bills and commercial paper) respectively.
Where the transferor is not resident in Kenya, his attorney, factor, agent, receiver or
manager is responsible for collection and accounting for CGT.
Implications – Under paragraph 20 of the 8th Sch. to the ITA, the transferor
is jointly and severally liable with the stockbroker for payment of CGT on listed
shares where the stockbroker fails to collect and account for the tax.
Transferors should make a declaration and pay the CGT where the stockbroker
fails to do so.
Implications – The commissioner’s guidelines do not cover moveable/
intangible properties like goodwill, licences gains/losses arising from
appreciation/depreciation of currencies.
Taxpayers should review their specific circumstances to establish whether CGT
would be payable on transfer of all their assets.
Implications - Paragraph 16 of the Eighth Schedule states that the CGT rate
on listed investment shares is 7.5%. The guidelines confirm that this was a
drafting oversight. We expect Paragraph 16 to be amended/ deleted in due
course.
Capital Gains will not trigger compensating tax upon distribution of sales
proceeds to shareholders. This is a relief for companies since the rate of
compensating tax would have been 43% of the distributed proceeds.
Implications – Industry stakeholders particularly stockbrokers had called for
postponement/ suspension of CGT.
All covered taxpayers and collecting agents are expected to comply with the
ITA and guidelines otherwise penalties and interest will accrue.

2. East African Tax Consulting
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Date of Alert: 22 January 2015
5. The concept of transfer
i. Transfer occurs where property is sold, exchanged, conveyed or disposed of
in any manner (including by way of gift).
ii. Transfer also occurs where property is lost, destroyed or extinguished
whether or not compensation is received.
iii. Lastly, there is a transfer where property is abandoned, surrendered,
cancelled or forfeited, or rights to property expire.
6. Determining net gain
The net gain is the excess of the transfer value over the adjusted cost of the property
that has been transferred. The excess is subjected to tax at 5%.
The commissioner has provided reference prices for listed shares as follows:
Time of purchase Reference cost
From 2005 The actual cost as per the CDS account
statement.
1998 – 2004 The highest price of those shares in the
year they were acquired, per the NSE
records.
Before 1998 The highest price of those shares in 1998,
per the NSE records.
Pool with different acquisition
dates and prices sold
First In First Out (FIFO).
7. Related party transactions
Where a transaction is between related parties, the declaration for CGT should be
supported by an independent valuation.
8. Tax point/ due date
CGT should be paid upon transfer of property but not later than the 20th day of the
month following that in which the transfer was made.
Where a transfer dates is different from the settlement date (when the buyer pays
and takes delivery), the date of transfer is the tax point.
Tax shall be paid through Commercial Banks into the Capital Gains Collection
Account No. 1000223577 at the Central Bank of Kenya.
9. Declaration of tax
Taxpayer will do a self assessment using Form CGT1 for land and buildings and
Form CGT2 for marketable securities.
Implications – Mode of collection and accounting for CGT has been
clarified. Further, KRA is working on a Stamp Duty & CGT Module on iTAX to
enable electronic declaration and payment of Stamp Duty and CGT by April
2015.
Implications – Makes it practical for stockbrokers to account for CGT where
data is not available for actual acquisition costs.
Implications – The second and third classifications of transfer are particularly
relevant for capital losses purposes. Where loss, destruction of property etc
results in capital losses, the losses can be offset against capital gains.

3. East African Tax Consulting
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Date of Alert: 22 January 2015
Stockbrokers should fill form CGT2 on behalf of their clients for listed shares.
10.Capital losses
A tax payer is allowed to deduct capital losses against capital gains in the same year
of income. Non-exhausted capital losses can be carried forward to be utilised in the
next four succeeding years. A taxpayer can apply for an extension of the four year
period.
11. Documentation
The transferor should maintain the following documentation to support a CGT
declaration: Completed CGT form, copy of Sale Agreement, proof of incidental costs,
copy of title document and valuation report for transactions between related parties.
12. Exemptions
The guidelines state that income that is taxed elsewhere as in the case of
property dealers is exempt from tax.
The commissioner has however directed stockbrokers to collect and
account for CGT on shares that are listed and traded on the NSE for all
taxpayers, including companies.
13. Extractive industries
Net gain on disposal of interest in a person is taxable where the person derives 20%
or more directly or indirectly from a mining right, an interest in a petroleum
agreement, mining information or petroleum information in Kenya.
The rate of tax is 30% for residents and 37.5% for non-residents.
Implications – gains/losses arising from the transfer of interests in the
extractive industries are taxed at the resident and non-resident corporation
tax rates.
Implications - CGT is a fallback tax provision under the ITA.
Consequently, the taxpayer/tax authority should first consider whether
the transaction would be taxed under another provision of the Act.
It is common for companies to engage in securities business. This is the
case where a company is formed to engage in stock trading and in fact
engages in trading stocks.
Where profits arise from active trading(as opposed to passive
investment), the company should be entitled to deduct other operating
and financing costs in determining the taxable profits.
In our view, the commissioner has made an error directing the stock
brokers to collect CGT on listed shares for corporate clients
Implications – Investors should gather relevant information and
documentation to support the costs of sale, acquisition, improvements,
mortgage, stamp duty, professional fees, advertising, valuations etc to support
CGT declarations.
Implications –We expect investors to take a more active approach towards
managing their portfolio property investments.
Implications – The declaration process is simplified. You can download the
forms on this link http://eastafricantax.blogspot.com/

4. East African Tax Consulting
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Date of Alert: 22 January 2015
Contact us:
East African Tax Consulting Mobile +254 722 332729
Branton Court, Ndemi Lane Email: info@taxeac.com
Off Ngong Road Starlings Muchiri; starlings@taxeac.com
P.O. Box 19893-00100 GPO Samuel Karanja; skaranja@taxeac.com
Nairobi, Kenya
This Tax Alert has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this Tax
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