Kenya does about-turn, abolishes capital gains tax

Kenya has abolished taxes on profit made from the sale of shares and bonds through the Nairobi Securities Exchange (NSE) with effect from January 1, 2016 to restore investor confidence, boost trading and position the country as an attractive investment destination in Africa.

President Uhuru Kenyatta on September 11 signed into law the Finance Bill 2015 abolishing both capital gains tax (CGT) of five per cent and the withholding tax of 0.3 per cent on all securities traded on the NSE.

However, securities traded off the exchange through the Over-The-Counter market will attract a capital gains tax of five per cent.

And in an effort to reinforce its position as an international financial and business hub, Kenya has also scrapped stamp duty on transfers relating to real estate investment trusts (Reits) and lowered corporate tax for companies seeking to list on the stock exchange from 30 per cent to 25 per cent for a period of five years.

The  Finance Act 2015 gives a 7-year window for potential issuers and owners of real estate property to transfer assets such as land or buildings into a Reit  without incurring prohibitive establishment tax costs that would previously have applied when transferring such assets into a Reit.

Key stakeholders in Kenya’s capital markets lauded the move, saying removal of taxes on securities traded on the exchange would rekindle interest among foreign investors  many of whom had fled the bourse in favour of  higher  yielding  markets  in West Africa such as Nigeria.

This led to a 40 per cent drop in the prices of shares on the NSE between January and September compared with the same period last year.

READ: Falling shilling, CGT drive investors from NSE to Nigeria and Egypt

Geoffrey Odundo, NSE chief executive, said the capital gains tax, which had been reintroduced in the Kenyan market on January 1 had rendered the bourse uncompetitive.

“This tax really affected our market in terms of interest from foreign investors. It has been a disincentive. It sent a lot of jitters through the market,” Mr Odundo said.

According to the Act, “A gain on transfer of securities on any securities exchange licensed by the Capital Markets Authority is not chargeable to tax,” while “…in the case of a company introducing its shares through listing or any securities exchange via introduction, [corporate tax] 25 per cent for the period of five years commencing immediately after the year of income following the date of such listing.”

Kenya is seeking to reform its capital markets to stimulate domestic development while at the same time provide a gateway to middle Africa for regional and international flows.

It is hoped that by the year 2023, the country will have transformed itself into a market of choice for domestic, regional and international issuers and investors.

During this period, the proportion of infrastructure investment financed through the capital markets will grow to 80 per cent from 18 per cent of suspension, according to Kenya’s Capital Markets Master Plan.

Kenya restored capital gains tax at the rate of five cent on the sale of stocks, bonds and properties effective on January 1 after 30 years currently.

But its implementation was resisted by market players who argued the tax would hurt the stock market and choke the flourishing property market.

Cabinet Secretary Henry Rotich in his budget speech in June removed the five per cent capital gains tax and replaced it with a 0.3 per cent withholding tax on the transaction values of the shares traded.

But the Kenyan Parliament voted to remove both taxes from listed securities traded on the exchange.

“We are grateful to the National Assembly for the amendments that they made that removed both the 5 per cent CGT, and the 0.3 per cent withholding tax on stock market trading.

“This shall hopefully see the resurgence of the market, and perhaps the strengthening of the Kenyan shilling,” said Willy Njoroge, chief executive of the Kenya Association of Stockbrokers and Investment Banks.

It was feared that the CGT would weaken Kenya’s bid to become an international financial centre, with Mauritius, one of its competitors for the position, having dropped the tax in order to deepen its capital markets .

Rwanda has exempted gains from the sale of listed securities from taxation while Tanzania taxes capital gains at the rate of 30 per cent. Uganda too charges CGT of 30 per cent but the rate varies from 25 per cent to 45 per cent for mining companies based on the profitability of the mine.