Residency of a lender for deemed interest purposes in Kenya.

Case Study: Enasoit Ranch Limited Vs KRA

 Enasoit Ranch Limited (ERL) filed an appeal against the decision of the local committee dated 5th June 2015. By that decision the local committee dismissed the appeal of the Ranch against the commissioner’s assessment on withholding Tax (WHT) on deemed interest on loan(s) advanced by Mr. Halvor Nicolai (deceased) (Halvor) who financed the Ranch through his two companies both registered in the British Virgin Islands. 

The years of income that was under consideration before the local committee were 2007, 2008, 2010 and 2011.

The local Committee had relied upon the Double Taxation agreement between Kenya and Norway, of which by interpretation, Mr. Halvor was a resident of Norway 

ERL submitted that deemed interest is only applicable to loans advanced by non-residents. The ERL produced pictures of Mr. Halvor’s House to prove that he had a permanent home in Kenya and therefore a resident.

KRA argued that the Ranch invoiced Halvor for his stay at the Ranch indicating he was a paying guest. That this therefore proved that he had no permanent house within the Ranch. Further that Halvor’s passport revealed he was in Kenya for 102,79 and 89 days for the years 2009, 2010 and 2011 respectively. That those days did not meet the threshold of residence in section 2 of Cap 470.

ERL further replied that MR. Halvor’s would at times stay in a cottage due to the scenic nature of the ranch. He would also pay for his guests to spend in the ranch.

KRA did not contradict the argument by ERL that Mr. Halvor at times paid accommodation for his friends as an explanation why some bills were in his name.

The Court also allowed the photos of the house to be used as evidence in the court. The court was of the view that one did not require a family to be considered to have a permanent home.

In its ruling the High Court relied on the definition of a ‘’ resident’’ as contained in the Income Tax Act

resident”, when applied in relation—

(a) to an individual, means—

(i) that he has a permanent home in Kenya and was present in Kenya for any period in any particular year of income under consideration;

The Court ruled that he determination of the residence or otherwise of Halvor ought to have been as provided in Cap 470. Under that legislation the term residence is defined and there was no need to go beyond that legislation. Meaning, Mr. Halvol was a Kenyan resident and therefore deemed interest was not applicable

As such the the Ruling of the local committee (Nyeri) dated 5th June 2015 was set aside on 05/08/2020