Supreme Court upholds tax exemption for Japanese companies operating in Kenya
Supreme Court upholds tax exemption for Japanese companies operating in Kenya
Japanese companies, consultants and employees working on selected development projects in Kenya will continue benefiting from tax exemptions after the Supreme Court dismissed an appeal challenging the reliefs.
A five-judge bench ruled that the legal process behind the implementation of the exemptions complied with the law applicable when the Kenya-Japan financing agreements were signed.
“Emoluments payable from foreign sources in respect of duties performed in Kenya under a technical assistance or other development services agreement are a tax that can be exempted; the appellant, on this issue, did not prove his case on the balance of probabilities,” the judges ruled.
The judges noted that the agreements were concluded between 2007 and 2020 under the former Constitution, which did not require parliamentary approval of the official legal notice.
In addition, the court found that executive authority at the time permitted the President to enter into such agreements, with Parliament’s role being to enact laws giving effect to treaties.
The appeal stemmed from a petition that challenged the legality of the tax exemptions introduced through the 2021 legal notice.
The petitioner argued that the waivers violated Article 210 of the Constitution, which provides that taxes can only be imposed, varied or waived through legislation.
He also claimed the National Assembly acted outside the Constitution, the Statutory Instruments Act and the Income Tax Act by approving the exemptions through a legal notice instead of legislation.
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The exemptions are part of Japan’s standard policy, which requires tax relief for Japanese firms and personnel involved in projects it finances worldwide and have been included in all agreements signed with Kenya.
They apply to income earned in Kenya by Japanese companies, consultants and employees involved in projects including the Dongo Kundu Special Economic Zone, the Olkaria I Unit 4 Geothermal Power Project, the Mwea Irrigation Development Project and electricity distribution upgrades in Nakuru and Mombasa.
The Supreme Court further declined to invalidate the legal notice on claims that the exemptions unfairly favoured Japanese investors over others, as the petitioner had failed to prove his case on the required legal standard.
When concerns over Legal Notice No. 15 of 2021 were raised in Parliament, MPs had questioned whether the exemption unfairly favoured Japanese nationals because Kenyan companies remain subject to taxes, adding that Kenyan firms operating in Japan do not receive similar tax benefits.
The Cabinet Secretary had argued that the economic benefits of the projects would outweigh the tax revenue forgone, citing job creation, stimulated spending, and the generation of more revenue than the taxes were exempt from.
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