Market News

Reit-owned firms to seek KRA’s nod for tax exemption

times

The Kenya Revenue Authority head office. FILE PHOTO | NMG

Summary

  • Previously, a Reit was only required to get the Capital Markets Authority (CMA) approval.
  • But the Treasury wants this to involve the KRA to assure investors the exemption is not denied after they have already put in money and also to seal any possible loopholes in tax collection.
  • This follows the lukewarm reception of the Reits as an investment product as well as the Treasury's recent drive to reduce tax exemptions.

A real estate investment trust (Reit) will be required to apply to the taxman for exemption at the time of registration, according to draft rules prepared by the Treasury.

Previously, a Reit was only required to get the Capital Markets Authority (CMA) approval. But the Treasury wants this to involve the KRA to assure investors the exemption is not denied after they have already put in money and also to seal any possible loopholes in tax collection.

This follows the lukewarm reception of the Reits as an investment product as well as the Treasury's recent drive to reduce tax exemptions to close gaps that may have been introduced by numerous exemptions in the past.

"A Reit shall apply to the commissioner for registration of the Reit or a Reit-controlled entity under the Reit," said Cabinet secretary Ukur Yatani in a legal notice titled ‘The Income Tax (Real Estate Investment Trusts) Rules, 2020’.

The target is firms that are controlled by the company registered as a Reit. This could be a special purpose vehicle (also called an investee company) that is formed to run or develop a property in which the Reit company wholly owns and controls.

"The major change in the rules is to add the approval of the KRA as a requirement for tax exemption. This comes after the changes that were made earlier this year on tax exemptions such as on infrastructure bonds. I believe the new published draft Reits rules will not change investors' interest in Reits," said Susan Makena, a research analyst at Nairobi-based Sterling Investment Bank.

She said the amendment would ensure the objectives of Reits are achieved with the exemption of investee companies — that is the companies in which Reits own and have put money for the benefit of investors.

"The amendments to Section 20 of Income Tax Act will ensure that the objectives of Reits are fully achieved as it exempts the income of investee companies," said Ms Makena.

"The application for registration shall be made to the commissioner at any time during the authorisation of the Reit scheme by the authority or during the process of acquiring the Reit controlled entity."