South Africa-Kenya tax treaty takes effect Tax Insights

Tax Insights
from International Tax Services
South Africa-Kenya tax treaty takes
effect
December 1, 2015
In brief
South Africa and Kenya have ratified a tax treaty entered into in 2010. The treaty will apply to amounts
generated at their respective sources on or after January 1, 2016. The treaty will apply for years of
assessment (South Africa) or years of income (Kenya) beginning on or after January 1, 2016.
The treaty includes favorable provisions for transactions occurring between South Africa and Kenya. It
also introduces some anti-avoidance rules taxpayers should consider. The key provisions of the treaty are
discussed below.
In detail
The South Africa-Kenya treaty is
a significant development for
two large African economies.
South African entities are the
largest African investors in
Kenya. The treaty should allow
multinational corporations
(MNCs) to place holding
companies with Kenyan
investments in South Africa.
Permanent establishment
Service PE
The definition of a permanent
establishment (PE) extends
beyond the traditional OECD
definition to include a ‘services
PE.’ A services PE exists if an
enterprise furnishes services
through its employees or other
personnel in the source state on
a project for more than 183
aggregate days in any 12-month
period.
A building site, construction
site, assembly or installation
project, or supervisory projects
connected to such efforts will be
considered a PE if the project or
activity lasts for more than six
months.
Force of attraction
The business profits provision
(Article 7(1)) contains a ‘force of
attraction’ rule that allows the
source state to tax certain
profits in addition to the profits
attributable to the PE, namely,
profits from:
 Sales in the source state of
goods or merchandise of the
same or similar kind as those
sold through the PE; and
 Other business activities
carried on in the source state
of the same or similar kind as
those performed through the
PE.
The force-of-attraction rule will
not apply if the enterprise
demonstrates that the sales or
activities have been carried out
for reasons other than obtaining
a benefit under the treaty (i.e.,
there are legitimate commercial
reasons for such sales, or that
the activities are not taking
place through the PE).
Attribution rules
The treaty does not follow the
latest OECD attribution method
(notional income and expenses).
Instead, the treaty adopts the
UN attribution rules.
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Pursuant to the treaty, profits will not
be attributed to a PE solely because it
bought goods or merchandise for the
enterprise.
on capital gains on the sale of shares
of companies that derive more than
50% of their value from immovable
property situated in that state.
Summary of withholding tax
rates
Tax rate reduction
The domestic withholding tax rates
and the reduced rates under the treaty
are as follows:
Kenya SA
%
%
Treaty
Rates
%
20
15
10
Services and 20
management
fees
0
0
Interest
15
15
10
Dividends
10
15
10
Royalties
Note: Kenya has introduced a
unilateral limitation on treaty benefits
under the Kenya Income Tax Act
(discussed below).
Capital gains on property
investments
The treaty includes a property-richcompany clause in Article 13. The
source state will have full taxing rights
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For investments into Kenya, the treaty
will offer a number of favorable tax
rate reductions compared to Kenya’s
treaties with European countries. For
investments into South Africa, the
treaty is similar to most of South
Africa’s other treaties.
The treaty allows the source state to
impose a maximum tax rate of 10% on
dividends, interest, and royalties
when the beneficial owner of the
income stream is a resident of the
other state. There is no minimum
participation threshold to qualify for
the dividend rate, but the new Kenyan
unilateral limitation on benefits
provision discussed below may apply.
The treaty does not have a
management or professional services
article. Accordingly, fees for such
services should be exempt at source
unless the source state has taxing
rights in accordance with Article 7.
Kenya imposes a withholding tax on
management fees of 20%, while South
Africa plans to introduce a
withholding tax of 15% on service fees
in 2017.
Unilateral limitation on benefits
Kenya has added a unilateral
limitation on benefits (LOB) to its
Income Tax Act, effective January 01,
2015. The LOB clause is designed to
prevent access to treaty benefits if the
underlying ownership of an entity is
more than 50% held by individuals
that are not residents of the same
contracting state as the resident of a
contracting state that is claiming the
reduced rate pursuant to the treaty.
Underlying ownership is defined to
include direct and indirect ownership
by individuals through interposed
companies.
The takeaway
The treaty will significantly reduce or
eliminate double taxation on
transactions between Kenya and
South Africa.
While the benefits are noteworthy,
MNCs should consider the antiavoidance rules when determining
applicability of the treaty. These rules
include the ‘services PE’ provision, the
force-of-attraction rule related to PE
business profits, the treatment of
property-rich companies, and Kenya’s
unilateral limitation on benefits rule.
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Let’s talk
For a deeper discussion of how this may affect your business, please contact:
International Tax Services, United States
Msindiseni Masetle
+1 (646) 313 3912
[email protected]
Omoike Obawaeki
+1 (713) 356 6046
[email protected]
Gilles de Vignemont
+1 (646) 471 1301
[email protected]
International Tax Services, South Africa
(Prof) Osman Mollagee
+27 (11) 797 4153
[email protected]
Norman Mekgoe
+27 (11) 797 5405
[email protected]
International Tax Services, Kenya
Steve Okello
+254 20 285 5116
[email protected]
Rajesh Shah
+254 20 285 5326
[email protected]
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