Kenya Revenue Authority’s Tax Claim on ECP Kenya Stands Firm
The Kenya Revenue Authority (KRA) has made a decisive move against Emerging Capital Partners Kenya (ECP Kenya), a private equity fund, with a substantial tax claim. This action stems from the 2017 sale of Java House, a well-known restaurant chain in the region. The tax back amount in question is a hefty Sh773.8 million, which the KRA insists is due following the lucrative transaction.
The Tax Appeals Tribunal (TAT), on October 6, 2023, dismissed ECP Kenya’s petition against the tax claim. Initially, the KRA had assessed the corporate income tax at Sh3.21 billion in September 2021, but this figure was later revised down to Sh773.8 million. ECP Kenya’s argument that the income from the Java House sale was an offshore disposal and should not be taxed as corporate income in Kenya did not hold water with the TAT.
The crux of the matter, according to the TAT’s judgment, is the role of ECP Manager in controlling the fund. The tribunal found that management and control were exercised from within Kenya, thereby establishing a permanent establishment for the fund in the country and subjecting it to local tax laws.
The breakdown of the KRA’s tax assessment includes Sh529.9 million in corporate tax, Sh217.3 million as interest, and Sh26.5 million as a penalty. ECP Kenya contested these figures, suggesting a much lower tax obligation of Sh15.47 million, based on their calculations of profit attributable to their business.
ECP Kenya also brought to the tribunal’s attention the global practice of treating private equity fund income as investment income, which typically falls under capital gains tax rather than corporate income tax. However, the tribunal emphasized that tax laws are country-specific and that it is up to Parliament to legislate any exemptions for private equity funds—a step which has not been taken.
The tribunal also highlighted ECP Kenya’s inability to counteract KRA’s evidence that suggested an intention to profit from share sales. This evidence included promotional materials and interviews that portrayed ECP Kenya Ltd’s trading intentions.
Meanwhile, Java House continues to expand its footprint in the East African market, with two new outlets in Nairobi, bringing its total branch count to 87 across Kenya, Uganda, and Rwanda. This expansion reflects the growing restaurant industry in Kenya, driven by a young population with increasing disposable income and an appetite for dining out.
