The Kenya Revenue Authority (KRA) has slapped private equity fund, Emerging Capital Partners Kenya (ECP Kenya) with a Sh773.8 million tax claim for the 2017 sale of the popular restaurant chain, Java House.
The Business Daily has established that on October 6, 2023, the Tax Appeals Tribunal (TAT) threw out a petition by ECP Kenya challenging the Sh773,796,052 claim by the KRA following a tax assessment in February 2022.
A tax assessment is a review of an asset’s value to determine how much tax is owed by the asset owner.
The Sh773.8 million was a downgrade from an earlier corporate income tax assessment of Sh3.21 billion issued by the KRA in September 2021--a valuation that prompted an objection from ECP Kenya.
The tax bill was slapped on ECP Kenya after the company failed to satisfy the TAT that the income earned from the sale of Java House was an offshore disposal for which the proceeds should not be subjected to corporate income tax in Kenya.
“A review of the evidence adduced before the Tribunal indicates that ECP Manager plays a key role in the management and control of the Fund. The information adduced before the tribunal seems to indicate that discretionary control was exercised through ECP Kenya Ltd,” the Tax Appeals Tribunal says in its judgment made public recently.
“The tribunal is inclined to find that since management was being exercised from Kenya by ECP Kenya Ltd, it formed a permanent establishment for the Fund in the country.”
The KRA’s Sh773.8 million tax assessment comprises Sh529.9 million as corporate tax (being 30.0 percent of Sh1.8 billion profit from the sale attributable to ECP Kenya), Sh217.3 million as interest and Sh26.5 million as penalty.
In its submissions before the tribunal, ECP Kenya countered the KRA’s computation, arguing that the profit from the sale attributable to its business was just Sh35.33 million and therefore the corporate tax should be Sh10.59 million, the interest Sh4.35 million and the penalty Sh529,997.30.
This means that, according to ECP Kenya, the total tax obligation should have stood at Sh15,475,921 and not Sh773,796,052 as computed by the KRA.
ECP Kenya also argued global practice requires income generated by private equity funds is not deemed trading income but as investment income.
Investment income is passive and as such would ordinarily be considered under capital gains tax and not corporate income tax like trading income. This argument was shot down by the tribunal.
“Whereas this may be and the treatment of such private equity fund income as an investment is accepted in different countries, a note must be taken that tax law is country-specific. Thus, if Parliament intended to exempt private equity funds from taxation, nothing would have been easier than stating so," the tribunal said in its judgment.
"The manner in which tax is defined, administered, and collected is a matter for Parliament to define. In this case, since Parliament has remained silent on the matter, the law as it is will be applied and private equity firms remain subject to tax on their gains,” the judgment stated.
The Tax Appeals Tribunal further took issue with what it termed ECP Kenya’s failure to substantively rebut evidence tabled by the KRA, indicating that the company was actively engaged in an exercise seeking to rake in profit from the sale of shares.
“In attempting to show that the Fund was in fact trading, KRA adduced evidence of ECP Kenya Ltd’s intentions to trade as evidenced through brochures and interviews. This, KRA argued, indicated that its intention was to make a profit from the sale of shares of various entities. ECP Kenya Ltd did not provide evidence to rebut this,” the tribunal said.
ECP Africa Fund III acquired a majority stake in Java House in 2012 and sold it to Dubai-based private equity fund, Abraaj, in 2017. Disclosures made before the Tax Appeal Tribunal indicate that ECP Africa Fund III’s share of the proceeds from the sale of Java House to Abraaj stood at Sh9.48 billion.
The restaurant industry in Kenya has witnessed significant growth in recent years, buoyed by rising disposable income among a relatively young population that values an eating-out culture. Java recently opened two more outlets in Nairobi, seeking to grow its stake in a market that is becoming increasingly competitive with the growth and entry of more fast-food brands.
The coffee house has opened two branches in Loresho and Ojijo Road in partnership with oil marketing firm Rubis. The opening of the new outlets raises Java’s total branch count to 87 across the East Africa region. Java now has 77 branches in Kenya, four in Uganda, and three in Rwanda.
