Tax alert - ratification of Income Tax Treaties
Kenya’s ratification of Income Tax Treaties with Korea and the United Arab Emirates.
This briefing has been published by Kiragu Kimani and Andrew Mugambi of Hamilton Harrison & Mathews, Kenya, who have agreed to Simmons & Simmons making it available on elexica.
Kenya has taken significant steps towards expanding its double tax treaty network with the ratification of tax treaties with the Republic of Korea and the United Arab Emirates vide Legal Notices 217 and 218 of 2016 respectively.
What next?
Kenya and each of its treaty partners must notify each other in writing of the completion of the procedures required under domestic law for the tax treaties to enter into force.
Once the formal notification process has been completed, the treaties will only apply from 01 January following the year in which the notification occurs. Therefore, the earliest date that the treaties may be applied is 01 January 2018 although whether this actually happens remains to be seen.
Key features of the treaties
Generally, both treaties are based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention framework with some modifications.
The salient features of the tax treaties are discussed below:
| Issue | Kenya - Korea tax treaty | Kenya - United Arab Emirates tax treaty |
|
Permanent Establishments Timeline for creation of Building site, Installation and Construction PE’s
|
12 months |
six months
|
| Permanent Establishments Creation of Services PE’s |
None | Yes. Where an enterprise provides services through its employees or other personnel in a contracting state for a period of more than four months within a 12 month period |
| Income from Hydrocarbons | No treaty provisions | Treaty expressly provides that domestic tax laws & regulations will apply |
| Dividends |
To a beneficial owner with direct shareholding >25% 8% Any other instances 10% |
5% |
| Interest | 12% | 10% |
| Royalties | 10% | 10% |
| Capital Gains | Source jurisdictions make tax gains arising from the alienation of shares that derive >50% of their value directly or indirectly from immovable property located in their jurisdictions. | No treaty provisions on indirect disposals of immovable property. |
| Limitation on Benefits (LoB) |
The treaty contains an LoB Article which provides that the treaty provisions on Dividends, Interest, Royalties and Capital Gains will not apply in instances where:
Furthermore, the tax treaty expressly states that any anti-avoidance/evasion measures contained in domestic legislation will continue to apply. |
No LoB provisions within the tax treaty. |
Key Facts
Ratification of the two additional treaties is a positive step towards eliminating double taxation between Kenya and Korea and Kenya and the UAE. However, the challenges currently being faced by taxpayers due to the LoB provisions contained in Kenya’s domestic legislation are also likely to greatly restrict access to these new treaties.
In the long-run, it will be necessary to address this and other issues arising in order for taxpayers to fully take advantage of Kenya’s tax treaty network.
The LoB provisions contained in the Kenyan Income Tax Act effectively require that at least 50% of the ownership of an entity which is tax resident in a treaty partner state has to be held by individuals who are also tax resident in that same state.
