Contributed By MMC Africa Law
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:
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:
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:
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.