Kenya: Regulations to actualize taxation of gains from financial derivatives
Guidance on taxation of gains accruing to non-resident persons without a permanent establishment in Kenya from financial derivative contracts
Regulations to actualize taxation of gains from financial derivatives
The Cabinet Secretary of National Treasury and Economic Planning published regulations on 27 January 2023 to actualize the taxation of gains from financial derivatives.
The regulations provide additional guidance on the taxation of gains accruing to non-resident persons without a permanent establishment (PE) in Kenya from financial derivative contracts.
The Income Tax Act defines a financial derivative as “a financial instrument the value of which is linked to the value of another instrument underlying the transaction which is to be settled at a future date.”
Under the regulations, gain from financial derivatives (other than those traded on the Nairobi Securities Exchange) will be subject to withholding tax of 15% effective 1 January 2023.
The taxation of derivatives is one of the measures that the Kenya government is implementing to widen the tax base. While the exemption from tax of gains from financial derivatives traded on the Nairobi Securities Exchange is welcome, the new provisions present several challenges for businesses.
For resident persons, separate sourcing financial derivative transactions means that they cannot set-off losses from the transactions against gains from their normal business operations but will need to generate a gain from similar transactions for them to get a deduction.
Many derivative contracts with non-resident persons are negotiated on a net of tax basis which means that the local counterparties will be forced to bear the implications of the withholding tax.
While the change in law initially targeted non-resident persons without permanent residence in Kenya, the regulations have extended the scope to negatively impact resident persons who have been subjected to separate sourcing and have the additional obligation of withholding and accounting for the tax on behalf of the revenue authority.
Read a February 2023 report prepared by the KPMG member firm in Kenya
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