Tax Tribunal rules withholding tax not applicable on management fee under Kenya, France Double Tax Treaty
The Tax Appeals Tribunal (TAT) rendered its judgment on March 25, 2022, in the case Total Kenya Limited v Commissioner of Domestic Taxes (KRA) on the applicability of withholding tax (WHT) to management and professional fees under the Kenya – France Double Tax Agreement (DTA).
The Tribunal held that in the absence of a separate management or professional fees article in the DTA, management or professional fees would be classified as business profits.
According to TAT, such business profits would not be subject to withholding tax in Kenya unless the entity has a Permanent Establishment (PE) in Kenya.
The Judgement affirms the position adopted by the TAT in its earlier decision in McKinsey Vs Kenya Revenue Authority (KRA) on the applicability of WHT on management or professional fees paid to South African entities under the Kenya AND South Africa DTA.
The Appellant in this case had entered into an agreement with Total Outré Mer (TOM), a company incorporated in France, for the provision of general management and other professional services. TOM did not have a PE in Kenya.
KRA raised an assessment demanding withholding tax on professional fees paid to TOM by the Appellant. In support of its assessment, the KRA argued that Article 7 of the Kenya France DTA did not provide for management or professional fees.
As such, absent an article specific to management or professional fees, Kenya has taxing rights over such payments on the premise that they constitute “other fees” under Article 21 of the DTA hence subject to withholding tax in Kenya.
In its appeal against KRA’s decision, the Appellant argued that KRA had misinterpreted Kenya – France DTA by claiming that the management and professional fees paid to TOM are taxable under Article 21 (“other income”) of the DTA rather than business profits under Article 7 of the DTA.
Determination and ruling
In its Judgement, the TAT, while relying on the commentaries to the OECD and UN Model Tax Conventions, held that management and professional fees qualified as business profits.
According to the Tribunal the definition of business profits under Section 2 of Kenya’s Income Tax Act (pursuant to Article 3(2) of the DTA) read together with Article 7 of the DTA places the income from management and professional fees squarely under business profits.
Further, that Article 7(7) of the DTA cannot be relied on as a disqualifying factor given that management fees are not expressly provided for in the treaty.
According to the Tribunal, absent a PE no withholding tax is due and payable on the management and professional fees paid by the Appellant to TOM.
What the ruling means for taxpayers
This decision provides clarity in respect of management or professional fees paid from Kenya under double tax agreements with South Africa, United Arab Emirates, Qatar and Korea.
It also goes to reiterate the earlier decision of the Tribunal in McKinsey v Kenya Revenue Authority which had adopted a similar position in respect of the Kenya South Africa DTA.
It is noted that the clear and detailed ruling by the Tribunal is consistent with international tax law precedents and it is hoped that this issue will now be considered by the KRA as having been decisively pronounced on.