FINANCE ACT, 2016 REVIEW SERIES – ISSUE 1
The Repeal of the 30% Local Shareholding Requirement for Foreign Companies in Kenya. The Finance Act, 2016, which was assented to by the president on 13 September 2016, has brought about two desirable changes:
1. The 30% local shareholding requirement for foreign companies in Kenya has been repealed.
Section 975 (2) (b) of Companies Act 2015, made it mandatory for foreign companies, establishing branches in Kenya, to demonstrate that at least 30% of the company's shareholding is held by Kenyan citizens by birth. Section 85 of the Finance Act has amended this requirement by deleting the said sub-section from the Companies Act. This provision however, will come into effect on 1 January 2017.
With effect from 1 January 2017, foreign companies can now register branch offices in Kenya.
2. Tax Amnesty on investment income earned outside Kenya has been passed.
The Finance Act has introduced a new section 37B to the Tax Procedures Act, No. 29 of 2015 which provides for amnesty from tax against foreign sourced income earned on or before 31 December 2016.
The new Section 37B provides that the KRA will not assess or recover taxes, penalties or interest in respect of foreign sourced income earned on or before 31 December 2016, and will not follow up on the sources of such income provided that the income is declared to KRA as income for the year 2016 and returns and accounts for the year 2016 are submitted on or before 31 December 2017.
The provision is not applicable in respect of any person who has already been assessed in respect of the tax (had a formal assessment issued) by KRA, or who is under audit or investigation by the KRA in respect of the undisclosed income. Accordingly, persons in respect of whose foreign income KRA has already commenced an audit or investigations or has issued an assessment will not be entitled to benefit from the amnesty.
This provision is helpful to enable amnesty against taxes, interest and penalties for;
(a) Foreign sourced income which is subject to tax in Kenya, earned at any time on or before 31 December 2016, and which has not been declared in Kenya for taxation. The only types of foreign sourced income that are taxable in Kenya are (i) employment income earned by a Kenyan tax resident person; and business income earned by a business conducted partly within Kenya and partly outside Kenya by a Kenyan tax resident person. Such income if now declared would be entitled to benefit from the tax amnesty; and
(b) since the KRA is not to follow up on the sources of such foreign sourced income, it is arguable that if a person earned income in Kenya on or before 31 December 2016 which was not taxed in Kenya, and such income was invested offshore, once the investment proceeds are declared as income for the year of income 2016 and returns thereto submitted, then such income including the Kenyan income which was not taxed is entitled to the amnesty from taxes, interest and penalties.
We understand that regulations are in the process of being made to clearly explain the manner in which the tax amnesty provision will work.
Kenya recently signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters which provides for exchange of information between countries on tax matters, and assistance on tax collections. The above provision could be aimed at encouraging persons who have foreign sourced income that is taxable in Kenya to declare such income before information in relation to such income is obtained from other jurisdictions as part of the exchange of information.
We are constantly reviewing the new amendments under the Finance Act, 2016 and will advise you of the major changes introduced.