Kenya: Withholding tax on purchases of software licenses (court decision)

A judgment concerning withholding tax on purchases of software licenses

A judgment concerning withholding tax on purchases of software licenses

The High Court issued a judgment finding that a taxpayer was not liable for withholding tax on purchases of software licenses. The High Court reversed the findings of a lower tribunal.

The case is: Seven Seas Technologies Ltd v. Commissioner of Domestic Taxes (KRA) [2021] KEHC 358 (KLR)


In this case, the tax authority conducted an audit of the taxpayer and found, among other items, that the taxpayer was not withholding tax on payments made to nonresident persons with respect to software licenses. The taxpayer first administratively objected to the findings and then sought judicial review by the Tax Appeals Tribunal which upheld the tax assessment and rejected the taxpayer’s claim.

The taxpayer appealed to the High Court. At issue before the High Court was whether withholding tax applied on payments for copyrighted material purchased by the taxpayer.

The High Court reviewed the applicable provision (Section 2) of the Income Tax Act concerning royalties and concluded that the taxpayer was not subject to pay royalties and, in turn, was not liable to remit withholding tax to the tax authority. Critical points in the decision reveal that the taxpayer had paid a license fee but had not acquired any partial rights in the copyright and thus was not liable for tax on a royalty (as argued by tax authority).

KPMG observation

As indicated by this decision, taxpayers need to evaluate whether their software agreements allow them to modify the software or transfer certain rights to the software. The right to exploit the copyright (not the copyrighted material) falls within the definition of royalty and is subject to withholding tax.

Read a February 2022 report [PDF 111 KB] prepared by the KPMG member firm in Kenya


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