Tax Incentives For Infrastructure Development

To promote investment in energy, road, railway and infrastructure in general, the Government has in the last couple of months rolled out a series of tax exemptions which should go a long way in reducing the costs of such investments and will hopefully accelerate the development of the country’s infrastructure.

Loans From Foreign Sources For Investing In Energy, Water And Infrastructure Exempted From Tax

In exercise of powers conferred by section 13 of the Income Tax Act, the Cabinet Secretary for the National Treasury directed that interest to be paid on loans from foreign sources for investing in the energy or water sectors, or in roads, ports, railways or aerodromes shall be exempt from tax.

Comment: Interest payments to non-residents are subject to withholding tax at 15%. Previously, payments to a lender from a country that does not have a double tax agreement with Kenya or which does not allow unilateral/foreign tax credits (a mechanism used by a country to grant tax credits for taxes paid by its residents in foreign countries), meant the withholding tax payable became an additional cost to the lender. In such instances, lenders would in most cases, pass on this cost to the borrower which ultimately increased the cost of the infrastructure.

Even in cases where the interest payment was to a country with which Kenya has a double tax agreement or allowed unilateral/foreign tax credits, lenders would still insist on passing on the withholding tax cost to the borrower due to challenges faced in taking advantage of such foreign tax credits or treaty provisions. Due to the scale of loans typically borrowed to fund infrastructure projects, the withholding taxes were significant and the exemption will serve to significantly reduce the costs incurred.

Legal Notice 91 made on 22nd May 2015.

Instruments In Respect Of Loans From Foreign Sources For Investing In Energy, Water And Infrastructure, Exempted From Stamp Duty

In exercise of powers conferred by section 106 of the Stamp Duty Act, the Cabinet Secretary for the National Treasury directed that instruments executed in respect to the transactions relating to loans from foreign sources received by investors in the infrastructure (energy sector, roads, ports, water sector, railways and aerodromes) development sector, shall be exempted from the provisions of the Act.

Comment: This Notice essentially exempts from stamp duty all instruments that relate to foreign sourced loans obtained for the purposes of infrastructure development. One issue that needs to be clarified is the treatment for syndicated loans where one of the lenders is local. A syndicated loan is one which is offered by a group of lenders (called a syndicate) who contribute to provide funds to a single borrower. It is unclear whether stamp duty would need to be computed on the part of the loan advanced by a local lender or whether the entire loan would qualify for the exemption.

Legal Notice 106 made on 11 June 2015.

Non-Resident Services Rendered Under A PPA  Exempted From Tax

In exercise of powers conferred by section 13 of the Income Tax Act, the Cabinet Secretary for the National Treasury directed that payments that shall be made to a non-resident for services rendered under a Power Purchase Agreement (PPA) shall be exempted from tax.

Comment: The typical services rendered under a PPA include the design, construction, installation, testing, commissioning, operating, and maintenance of a power plant and if rendered by a non-resident would be subject to withholding tax of 20% (where not reduced by a Double Tax Treaty).

A significant portion of the services rendered under a PPA are performed through the Permanent Establishment of a non-resident or local contractors and sub-contractors who are resident in Kenya for tax purposes and may not therefore be covered by this exemption thereby reducing the impact of this exemption. It could also lead to a trend where services that could otherwise have been provided on-shore, are henceforth provided offshore as it allows the contractor to make savings in relation to onshore taxes.

Legal Notice 165 made on 17 August 2015.