Business Law Articles
Njoroge Regeru & Co. Advocates
Capital gains tax, which is a tax levied on profit made from the sale of property or an investment, is set to make a comeback in Kenya after nearly three decades of absence. This comes in the wake of the signing into law of the Finance Act 2014. The Act intends to re-introduce the tax at a rate of 5% in January 2015, which is half the rate that was in effect at the time the tax was scrapped.
The re-introduction of capital gains tax in the country will widen the country’s tax base and is seen as one of the ways in which the Kenyan government is seeking to raise money to finance its ambitious infrastructure development projects as well as meet the country’s budget shortfall in the current fiscal year, of approximately USD 2 Billion.
There are mixed feelings from analysts and investors on whether or not the re-introduction of the tax will be good for the investment climate in the country. Whereas some believe that it will only serve to stifle economic growth in the country, there are those who are of the view that it will actually boost the same. Investors will be allowed, however, to deduct the cost of acquiring, developing and maintaining the assets before the capital gains tax is assessed.
Capital gains tax in Kenya was suspended in 1985 by the government in a bid to attract investment to its capital markets, the mining sector as well as real estate. It can be said that significant achievements have been realised in that regard, when one takes into account the exponential growth that has been witnessed in capital markets and real estate in Kenya since the scrapping of the tax. Indeed, Kenya is currently touted as being one of the most lucrative markets in the world for investment in real estate.
The Nairobi Securities Exchange has also grown in leaps and bounds since capital gains tax was repealed in Kenya. It has experienced a marked increase in interest from investors, evidenced by the huge increase in number of Central Depository System (CDS) accounts as well as the rise in number of companies that want to be enlisted to enable them trade their securities at the bourse. Both local and foreign investors have lately been keen on acquiring various securities trading at the Nairobi Securities Exchange. The growth is thanks in part to the commendable efforts of the Capital Markets Authority, which has been at the vanguard of promoting capital markets in Kenya whilst ensuring that high standards of corporate governance, financial probity and transparency are maintained. It is worth noting that the Nairobi Securities Exchange was ranked as the second best performing stock exchange in Africa in 2013.
When the Finance Act 2014 comes into operation in January 2015, any firm which acquires more than a 50% stake in a “mineral block” will be required to pay capital gains tax on the net gain of the transaction after deducting certain attendant costs. This will be of great concern to investors considering the recent discoveries in Kenya of significant deposits of oil, gas and other minerals. The Kenyan government therefore stands to benefit immensely by levying capital gains tax on such transactions. Under the new law, however, any property acquired by the government through compulsory acquisition will not be subject to capital gains tax.
Sources from the government have indicated that the government expects to raise up to USD 85 million every year when its begins to levy capital gains tax. The government expects that the development projects it intends to carry out will help to spur economic growth and create job opportunities for many Kenyans.
All in all, the stage is now set for the re-introduction of capital gains tax in Kenya and we now await the January 1st 2015 commencement date to see what impact the tax will have on Kenya’s economy once it takes effect.
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