The High Court of Kenya, on 13 March 2018, quashed an administrative action requiring commercial banks to pay capital gains tax (CGT) on all land sold to recover bad loans. The case was brought by the Kenya Bankers Association (the Applicant) against the Kenya Revenue Authority (KRA).

The Applicant contended that;

• CGT should be paid by the owner(s) of the property since the bank was acting as a nominee for the owner(s) pursuant to the security or the charge.
• Under the Eighth Schedule to the Income Tax Act, it would be difficult to ascertain the taxable gain on the banks.
• Under the i-Tax portal, it is not possible for banks to pay stamp duty without having to pay CGT.

The KRA argued that the banks, as the transferors, should pay the CGT.

The High Court ruled that;

• It was unfair and unreasonable for the KRA to demand CGT from the banks on the sale of the land without first ascertaining whether there was, in fact, a capital gain.
• The administrative action by the KRA requiring simultaneous payment of stamp duty and CGT by the banks was unreasonable and unfair.
• Upon the sale of the land by the banks, the CGT would be payable at the time of registration of the transfer by the chargor (owner of the property) unless the bank realizes a surplus over and above the loan borrowed. In such a case, the bank would be required to account for CGT on the surplus.

Next steps

Based on the High Court's ruling and subject to any future appeal and decision to the contrary:

• Banks should not pay CGT upon the sale of land held as security to recover bad loans, unless a surplus is realized from such sale.
• The KRA must allow the payment of stamp duty without requiring payment of CGT through a reconfiguration of its tax payments platform.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

• Francis Kamau
  francis.kamau@ke.ey.com
• Simon Njoroge
  simon.njoroge@ke.ey.com
• Lena Kimencu
  lena.kimencu@ke.ey.com

Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg

• Marius Leivestad
  marius.leivestad@za.ey.com

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Rendani Neluvhalani
  rendani.mabel.neluvhalani@uk.ey.com
• Byron Thomas
  bthomas4@uk.ey.com

Ernst & Young LLP, Pan African Tax Desk, New York

• Silke Mattern
  silke.mattern@ey.com
• Dele A. Olaogun
  dele.olaogun@ey.com
• Jacob Shipalane
  jacob.shipalane1@ey.com

Ernst & Young LLP, Pan African Tax Desk, Houston

• Elvis Ngwa
  elvis.ngwa@ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert