Kenya now woos Mauritius companies with lower taxes

Kenya has gone on a charm offensive to attract investors from Mauritius by signing a law that will from January see companies from the island enjoy tax concessions locally.

The government has enacted a double taxation avoidance agreement (DTAA) that was first agreed upon in May 2012, in the hope that companies from the tax haven will be attracted to set up shop in Kenya, attracted by more favourable corporate and income taxes.

The DTAA allows firms registered in the two countries to pay taxes in only one country. It also allows Mauritian companies owning at least a tenth of a Kenyan firm to pay withholding tax on dividends of only five per cent instead of the 10 per cent that applies to companies from other countries.

In addition, the withholding tax on interest has been reduced from 15 per cent to 10 per cent for the Mauritian firms. A company registered on the island will only cede 10 per cent of royalties to the Treasury, down from 20 per cent.

Furthermore, Mauritian expatriates, except those in top-level managerial positions, will also be spared double taxation on remuneration earned while working in Kenya since they will only be taxed in their home country.

“The provisions of this agreement shall apply in Mauritius on income for any income year beginning on or after the first day of January 2015,” said Treasury secretary Henry Rotich in a Kenya Gazette notice.

“In Kenya (it shall apply) to taxes withheld at source, on amounts paid or accrued on or after January 2015…(and) to other taxes, on income arising for years of income beginning January 2015.”

The taxation benefits apply to Kenyan companies doing business in Mauritius, but will also benefit a growing number of companies owned by Kenyans that are registered in Mauritius and do most of their business locally.

Mauritius, a tax haven, does not charge withholding tax on dividends earned by companies registered there while the government charges 10 per cent on interest earned and 15 per cent on royalties.

Firms registered on the island also do not pay stamp duty (in Kenya, the rate ranges between one-four per cent) while the country’s corporate tax is pegged at 15 per cent.

In Kenya, local companies pay 30 per cent corporate tax while foreign firms pay 37.5 per cent, with reduced rates applying if the company lists its shares at the Nairobi Securities Exchange or invests in the Export Processing Zone.

“The considerable difference in taxes charged in the two jurisdictions makes this particular treaty look more aggressive than those Kenya has signed in the past since it tries to make the business playing field even,” said Kairo Thuo, a partner of Viva Africa Consulting.

“The net effect is that Kenya now becomes a favourable environment for companies registered in Mauritius who are seeking to invest locally since they will not only avoid double taxation, but enjoy friendlier taxes.”

Courts, the largest consumer electronics and furniture retailer in Mauritius, has previously expressed interest in opening its first mainland Africa store in Kenya.
Courts has a network of 34 stores in Mauritius and Madagascar.

Nikhil Hira, a tax partner at Deloitte, said the new law will also allow Mauritian firms to set up shop in Kenya and use it as a base from which they can penetrate East Africa with minimum tax exposure.

Investors prefer Mauritius as the country of choice to register their companies and then proceed to penetrate other markets.

One of the reasons for this is that Mauritius has signed double taxation avoidance agreements with over 30 African countries, including Egypt, Gabon and Nigeria.

Kenyan companies have registered companies or opened subsidiaries in Mauritius. Centum Investments, for instance, has incorporated six companies in Mauritius, using them as vehicles to execute its geographical diversification strategy.

“When investing in other parts of Africa, Mauritius is a good domicile due to its numerous tax agreements with other countries,” James Mworia, the Centum chief executive, told the Business Daily in a past interview.

Governments normally implement double taxation reliefs in different ways. One option is whereby an individual or company pays taxes in the country of residence and gets an exemption in the foreign country where the income is derived.

Another instance is when taxes are paid in the foreign country and an exemption is granted in the mother country.

Lastly, a company or expatriate can pay levies charged in the foreign country and then declare this payment to the country of residence as withholding tax.

Mr Hira says this avoidance of double taxation could in future see more Kenyan companies invest in Mauritius.

Financial services firms Britam, Jubilee Insurance and I&M Bank are already doing business in Mauritius.

When announcing the agreement two years ago, former Finance minister Robinson Githae said he wanted “Kenyan companies to invest in Mauritius and seek expertise in the fields of sugar, tourism and yacht and ship building.”