Capital gains taxation in Kenya was suspended in 1985, in order to encourage investment in the stock exchange and in the real estate and mining sectors. The reintroduction of the capital gains tax regime would broaden the tax base and increase tax revenue collection, and also would align Kenya with neighboring countries that impose tax on capital gains.
In addition, the reintroduction of a capital gains tax system would consolidate “piece-meal amendments” to the rules imposed on the extractive sector over the last two years.
Even though the Finance Bill is still being discussed and debated by members of the National Assembly, tax professionals believe it appears to be very likely that beginning 1 January 2015, taxpayers in Kenya would begin paying tax on capital gains.
The reintroduction of the capital gains tax regime is being attributed to robust growth in the stock market, real estate sector, and extractive industries in Kenya. In 2013, the Nairobi Securities Exchange was ranked as the second best performing stock exchange in Africa; in Nairobi, property values have increased and are attracting international investors; and mineral and oil and gas deposit have been discovered over the past five years.
Overview of legislative proposal
The amendment proposes to reintroduce a capital gains tax, to be imposed at a rate of 5% on the amount of gain realized on the sale of property. The legislation would provide for this change by amending the Eighth Schedule to the Income Tax Act of Kenya.
The proposed effective date for the capital gain tax would be 1 January 2015, and the tax would apply with respect to property acquired before 1 January 2015.
- The 5% capital gains tax would be a “final tax.”
- The amendment proposes that a firm acquiring more than a 50% stake in a “mineral block” would pay the capital gains tax on the net gain of the transaction after deducting certain attendant costs.
- The amount of tax payable by firms acquiring less than a 50% stake would be determined by a formula to be prescribed in the Finance Bill once it is passed by the National Assembly.
- Property acquired by the government by means of a “compulsory acquisition” would be exempt from the capital gains tax.
Although the bill has not yet been enacted, potentially affected taxpayers need to be aware that under the proposal, beginning 1 January 2015, the transfer of property could be subject to capital gains tax at a rate of 5%.
For more information, contact a tax professional with KPMG in Kenya:
+254 20 2806 000
+254 20 2806 000