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[ESTABLISHING A BUSINESS ENTITY IN KENYA]
foreigner or a foreign company shall not be granted. Consequently, this statutory mandate engenders the legal consequence that foreign individuals and foreign corporate entities are precluded from entering into lease agreements or acquiring agricultural land within the sovereign territory of Kenya. In the realm of taxation, it is imperative to note that the Republic of Kenya has entered into Double Taxation Treaties with several nations, including but not limited to the United Kingdom, Zambia, Germany, and Canada. In situations where such bilateral treaties are not in place, it is conceivable that subsidiaries of foreign entities operating within the jurisdiction of Kenya may find themselves subject to the imposition of corporate taxes at the rate of 30% in Kenya, while concurrently being obligated to meet their tax obligations in their respective countries. This dual taxation scenario inevitably amplifies the fiscal burdens borne by these entities. Moreover, it is noteworthy that Double Taxation Treaties serve to delimit the permissible withholding rates applicable to income derived within the Kenyan jurisdiction. Nevertheless, it is imperative to emphasize that both contracting countries retain the authority to levy taxes on dividends, interest, and management fees arising from such income sources. Capitalization obligations In accordance with the Finance Act of 2023, significant modifications have been introduced to the thin capitalization rules, delineating a refined framework for the restriction of deductible interest expenses incurred on foreign loans. These changes carry implications for tax planning strategies, particularly in regard to thinly capitalized entities. A key provision of these amendments is the limitation placed on the deductibility of realized foreign exchange losses, which is now confined to a 5-year
window, thereby imposing a temporal constraint on tax planning considerations. Under the revised regulations, the restriction pertaining to interest deduction will be expressly applicable to the gross interest disbursed or payable to non-resident individuals or entities. This delineation effectively retains the allowance for interest expenses incurred on locally sourced borrowings. Notably, the Finance Act constitutes an alteration to the previous interest restriction rule, which previously imposed a cap on deductible interest at 30% of earnings before interest, tax, depreciation, and amortization (EBITDA), regardless of the origin of the loan. The resultant effect of these statutory changes manifests as a considerable alleviation for taxpayers who genuinely rely on borrowing as a means to facilitate and augment their business activities. The prior restrictions on interest deductions were perceived as onerous, and the latest amendments are poised to provide a measure of relief in this regard. Significantly, these revisions align substantively with the recommendations set forth by the Domestic Tax Base Erosion and Profit Shifting (BEPS) project. It is pertinent to note that BEPS, denoting Base Erosion and Profit Shifting, encompasses a spectrum of tax planning strategies employed by multinational enterprises to capitalize on inconsistencies and disparities in tax regulations, thereby mitigating their tax liabilities. The essence of these amendments is to ensure that interest expenses arising from loans obtained from residents are less likely to be exploited as a means to erode the taxable base. This initiative underscores the ongoing commitment to fortifying the integrity of the taxation system in addressing the challenges posed by international tax planning strategies.
ILN Corporate Group – Establishing a Business Entity Series
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