Is Dividend Income Earned from outside Kenya taxable in Kenya.

Case Study: Heritage Insurance Company Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E386 of 2023) [2024] KETAT 1136 (KLR) (1 August 2024) (Judgment)

KRA conducted a comprehensive audit of Heritage Kenya income and tax returns for the years 2017 to 2019 and issued a notice of assessment dated 28th February 2023. Heritage Kenya objected to the assessment vide Notice of Objection dated 5th April 2023.

KRA having considered the Notice of Objection, issued its Objection Decision dated 31st May 2023.

Heritage Kenya being aggrieved with the decision therefore, appealed to the Tribunal vide a Notice of Appeal dated and filed on 30th day of June 2023.

The case was hinged on three issues. In this article, we will dwell on a single ground; That KRA erred in law and fact by deeming dividend income received by Heritage Kenya from its non-resident subsidiary to be business profits and subjecting the same to corporation income tax.

Heritage Kenya stated that:

• it owns 60% shareholding in Heritage Insurance Tanzania Limited, from which it receives dividend income at the end of the financial year. For the years under consideration, i.e. 2017, 2018 and 2019, Heritage Kenya received dividends of Kshs. 82,849,668.00, Kshs. 62,448,981.00 and Kshs. 62,527,072.00 respectively.
• KRA misapplied Sections 7 (3) and Section 4 of the Income Tax Act in demanding Corporation tax on this dividend. Heritage Kenya maintained that Section 7 (3) of the ITA serves to guide that the dividends received by financial institutions are taxable just like dividends received by other entities. It argued that KRA imagined that Section 7 (3) of the Act distinguishes dividends received by financial institutions from those received by other entities, which is wrong. Further, it argued that by applying Section 4 to demand tax, KRA wrongly treated dividends as ‘gains from business’, yet, ‘business’ is clearly defined in the Act and excludes investment. According to Heritage Kenya, dividend is a return on investment.
• Section 3 (1) of the ITA provides that:

“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

• the dividends had been generated from a Tanzanian subsidiary thus should be determined as Tanzania, not Kenya. It argued that the contract, the business operations, and the distribution of dividends all take place in Tanzania, leading to the averment that the source of this income does not rest in Kenya.

KRA Responded that:

• Heritage TZ Limited is a non-resident company. It contended that the dividend received by Heritage Kenya from Heritage TZ Limited does not qualify as a dividend income taxable under Section 7 of the Income Tax Act. Therefore, it contended that the dividend paid to Heritage Kenya should therefore be treated as any other income that accrued to Heritage Kenya. Further, KRA contended that having not qualified as a dividend income; the same does not qualify for the exemption provided under Section 7 (2) of the Income Tax Act.
• Section 3 (4) of the Income Tax Act provides that,

‘‘For the purposes of section 3(2) (a)(i)—where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya.’’

• Since Heritage Kenya also carries out business in Kenya, any income that was accrued and/or derived by Heritage Kenya such as the Income from Heritage TZ Limited is deemed to have accrued or derived from Kenya.
• even if the dividend paid to Heritage Kenya was to be treated as Dividend income, the same is taxable under Section 7 (3) of the Income Tax Act. Section 7 (3) provides that,

“A dividend received by the financial institutions specified in the Fourth Schedule shall be deemed to be income chargeable to tax in accordance with this section.”

In its ruling on 01/08/2024, the TAT observed that:

• Section 3(1) ?of? the Income ?Tax Act provides as follows:

‘‘3. Charge of tax

1.Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.’’

• From Section 3 (1) ITA, income tax is charged upon resident or non-resident. Secondly, the income must accrue in or must have been derived from Kenya.
• Section 3 (1) is not ambiguous in any way. Under the said section, income which did not accrue in or was not derived from Kenya cannot be charged of tax.
• KRA ventured into Section 7 (1) of the Income Tax Act. Under this Appeal, Heritage Kenya did not pay dividends therefore, Section 7 (1) is not applicable to this appeal. Consequently, all narratives hinged on Section 7 (1) must fail

As such KRA lost this ground.