Last Updated May 23, 2019

Law and Practice

Contributed By MMC Africa Law

Author



MMC Africa Law was established in 1995 and is headquartered in Spring Valley, Nairobi, with a full-service office in the coastal city of Mombasa. The firm is made up of 12 Partners and over 30 lawyers with expertise in a wide variety of legal matters. As well as being a member of ALFA International, a global network of independent law firms, it has a close association with the leading global law firm of Orrick, Herrington & Sutcliff LLP. MMC Africa Law’s dedicated real estate team comprises three partners and 12 lawyers who pride themselves on their extensive experience handling sophisticated and complex transactions such as those relating to mixed-use developments, an emerging market in real estate. The team also offers specialised services in urban regeneration projects, construction law, REITs, hospitality and hotels, residential developments, commercial and farmland leases, land use and planning, environmental compliance, contractual agreements, conveyancing and conducting due diligence on property.

As discussed in 6.7 Payment of VAT, above, VAT is payable by the purchaser on the purchase price at a rate of 16%.

The first schedule of the VAT Act exempts sale, renting, and leasing, hiring, letting of land or residential premises from payment of VAT.

There is an ongoing court case in respect of payment of VAT on the sale of commercial premises. The case (David Mwangi Ndegwa v Kenya revenue Authority) seeks to challenge the requirement to pay VAT on the sale of commercial premises based on the common law definition of land. Land is defined as the soil and the developments thereon. The argument is therefore that since sale of land is exempt from payment of VAT, commercial premises which are comprised in the definition of land, are also exempt from such tax. The matter is pending determination at the Court of Appeal.

Rates are paid in Kenya pursuant to the Rating Act. Rates are levied by county governments in relation to properties in urban areas and cities in order to meet all liabilities that are to be discharged out of the general rate fund.

The following properties are exempt from payment of rates under the Valuation for Rating Act:

  • properties used for purposes of public religious worship;
  • cemeteries, crematoria and burial or burning grounds;
  • hospitals or other institutions for the treatment of the sick;
  • educational institutions;
  • charitable institutions, museums and libraries;
  • outdoor sports facilities; and
  • national parks and national reserves.

Withholding tax is payable by foreign investors. This is dependent upon on the category of income. For instance, the withholding tax rate applicable to management and professional fees is 20%. Dividends earned from a REIT will be subject to withholding tax of 5% for East African residents and 10% for non-residents.

Under the Income Tax Act, tax at a rate of 10% of the gross rental income is payable in respect of rent from residential property which is in excess of KES144,000 but less than KES10 million.

CGT is charged at the rate of 5% of the net gain. It is paid by the transferor.

The following are exempt from CGT:

  • income that is taxed elsewhere as in the case of property dealers;
  • issuance by a company of its own shares and debentures;
  • transfer of machinery, including motor vehicles;
  • disposal of property through transmission;
  • vesting of property in the hands of a liquidator or receiver; and
  • transfer of individual residence occupied by the transferor for at least three years before the transfer;
  • transfer of assets between spouses, including as part of a divorce settlement; and
  • sale of land by an individual where the proceeds are less than KES3 million.

Depreciation deductions do not apply to buildings. Such deductions do, however, apply to furniture and fittings in a building.

Under Section 20(1) of the Income Tax Act, REITs are exempt for corporation tax purposes but are subject to payment of withholding tax on interest income and dividends.

Exemption is not automatic; the REIT must apply for an exemption under the Income Tax Act Registered Unit Trust/Collective Investment Scheme (Rules 2003) and must show that:

  • the REIT will undertake portfolio investments in accordance with CMA policies and guidelines;
  • the sole purpose of the REIT is to carry on investments on behalf of the REIT's securities holders;
  • six months after registration/exemption, no REIT securities holder shall hold more than 12.5% of REIT securities in the REIT; and
  • the REIT shall, within six months of its commencement, maintain at least 25 REIT securities holders at any particular time.

If the above cannot be proven, REITs will be subject to corporation tax and required to pay tax on all income they receive before distributing dividends.

Stamp duty is not applicable to transfers of real estate into a REIT. This is pursuant to Legal Notice No 73 of 2008, which provides that any instrument that is executed in respect of the transfer of property on setting up a listed property investment vehicle shall be exempt from the provisions of the Stamp Duty Act.

The Finance Act, 2017, amending the First Schedule of the VAT Act, 2013, provides for exemption from VAT for transfers of assets into REITs.

MMC Afica Law

MMC Arches,
Spring Valley Crescent,
Off Peponi Rd.
Westlands

+254 020 2329898

+254 720 585 785

eomulele@wakili.com www.wakili.com
Author Business Card

Author



MMC Africa Law was established in 1995 and is headquartered in Spring Valley, Nairobi, with a full-service office in the coastal city of Mombasa. The firm is made up of 12 Partners and over 30 lawyers with expertise in a wide variety of legal matters. As well as being a member of ALFA International, a global network of independent law firms, it has a close association with the leading global law firm of Orrick, Herrington & Sutcliff LLP. MMC Africa Law’s dedicated real estate team comprises three partners and 12 lawyers who pride themselves on their extensive experience handling sophisticated and complex transactions such as those relating to mixed-use developments, an emerging market in real estate. The team also offers specialised services in urban regeneration projects, construction law, REITs, hospitality and hotels, residential developments, commercial and farmland leases, land use and planning, environmental compliance, contractual agreements, conveyancing and conducting due diligence on property.

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.