Investors in the Talanta Sports City Stadium infrastructure bond will not pay tax on the Sh57.6 billion interest that they will earn over 15 years with the bond enjoying income tax exemption.
The Sh44.79 billion bond has been exempted from income tax to give it an allure to investors after listing on the Nairobi Securities Exchange.
The tax exemption puts the inaugural asset backed bond at par with government-issued infrastructure bonds and positions it more preferably to Treasury bills and bonds that are charged a withholding tax.
Treasury bonds are subject to a withholding tax of 15 percent for papers maturing within five years and 10 percent for those with a tenure of more than five years.
Treasury bills are charged a 15 percent withholding tax.
Issuers of the bond estimate the total payout to investors will be Sh102.42 billion, with a rate of return of 15.04 percent, putting the interest pay at Sh57.6 billion.
“Interest income accruing to noteholders from the notes issued under this programme shall be exempt from withholding tax pursuant to Paragraph 51 of the First Part of the First Schedule to the Income Tax Act,” reads the offering memorandum.
Paragraph 51 exempts income accruing from all listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services from tax so long as they have a tenure longer than three years.
Holders of the Talanta Stadium bond will also be exempt from paying tax on capital gains arising from their trading.
In bond trading, capital gains occur when an investor sells a bond for a higher price than they initially purchased it for, or when a bond is redeemed at maturity for more than its purchase price.
The tax exemption means the government will forego an estimated Sh5 billion from the bond with high-end, savvy investors being the main beneficiaries of the issue.
The bond had a minimum subscription of Sh1 million to ensure it attracted knowledgeable and deep-pocketed investors who were well aware of the risks they were taking in investing in the bond.
The bonds will trade in minimum multiples of Sh100,000 on the stock exchange. The bond was fully subscribed with Investors offering Linzi Finco, the issuer of the bond, Sh44.875 billion against a target of Sh44.791 billion being a subscription of 100.2 percent.
Though the bond is backed by the Talanta Stadium, payments to investors come from the Sports, Arts and Development Fund, which receives allocations from the Treasury.
The government had last year sought to introduce a tax on interest earned on infrastructure bonds with tenure of at least three years. The infrastructure bonds have been tax free since they were first issued in February 2009.
The proposal was, however, shelved alongside making the infrastructure bonds the best performing asset class in the last two years.
Their issues have always been oversubscribed underlining their appeal to investors.
Last year, the government issued a Sh70 billion infrastructure bond, which attracted bids totalling Sh288.7 billion, resulting in an oversubscription of 412.4 percent.
