Withholding Tax on purchase of software licenses Withholding Tax on purchase of software licenses Withholding Tax on purchase of software licenses

This alert brings to your attention the High Court’s judgment in the case of Seven Seas Technologies Limited (Taxpayer) v Commissioner of Domestic Taxes (KRA) [2021] KEHC 358 (KLR).

KRA carried out an audit on the Taxpayer and among the findings was that the Taxpayer was not withholding tax on payment to nonresident persons in respect of software licenses. KRA demanded KES 21,525,013 comprised of KES 15,320,673 for software meant for resale and KES 6,204,340.67 for software purchased by the Taxpayer for its own use.

The Taxpayer objected to the findings. The KRA reviewed the objection and affirmed its position. The Taxpayer appealed to the Tax Appeals Tribunal (Tribunal). The Tribunal disallowed the appeal and affirmed KRA’s assessment. The Taxpayer then appealed to the High Court. The crux of the dispute at the High Court was whether Withholding Tax applies on payments for copyrighted material purchased by the Taxpayer. The relevant part of Section 2 of the Income Tax Act provides as follows: 

“Royalty” means a payment made as a consideration for the use of or the right to use:

a) the copyright of a literary, artistic or scientific work; or

b) a cinematograph film, including film or tape for radio or television broadcasting; or

c) a patent, trademark, design or model, plan, formula or process; or

d) any industrial, commercial or scientific equipment.

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