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February 1, 2022

Kenya High Court rules that sale of copyrighted material is not a royalty and does not attract withholding tax

Executive summary

The Kenya High Court (High Court) held, in a judgment delivered on 10 December 2021, that the distribution and sale of copyrighted material is not subject to withholding tax.

The appellant, Seven Seas Technologies Ltd, had appealed to the High Court pursuant to a decision by the Tax Appeals Tribunal which held that the Appellant acquired rights to a copyright in software which it commercially exploited and should be subject to withholding tax.

The High Court found that a distinction should be made between the sale of copyrighted material and the use or exploitation of a copyright.

Detailed discussion

Overview of the case

The Kenya Revenue Authority (KRA or Respondent) conducted an in-depth audit in 2014 under the Income Tax Act (ITA) and the Value Added Tax Act. Among the findings arising from the audit is that the Appellant failed to deduct and remit withholding tax (WHT) on the payment to nonresident persons with respect to software licenses. Part of the WHT demanded resulted from the resale of software purchased by the Appellant for its own use.

Payment for the software was considered as a payment of royalty as it is consideration for the use and right to use copyright of the literary work of another person in accordance with Section 2 of the ITA.

The Respondent maintained that whether the software was purchased for resale or for own use, WHT would be due and payable. They further asserted that the Appellant would not legally sell the software without authorization from the trademark owner. The authorization would only come upon payment for the right to use the trademark and hence qualified as royalties under Section 2 of the ITA.

Appellant’s position

The Appellant asserted that royalties as a term can only be used to describe payments made with respect to either licenses or assignments. Royalties is a tax term under Section 2 of the ITA and an intellectual property term that connotes fees due to a copyright owner by assignee of licensee.

They asserted that they acquired a physical medium in which copyrighted software is embedded and did not acquire software through license or assignment.

The Appellant also highlighted the need to distinguish a mere sale of an item, an absolute acquisition of an item (assignment) and limited acquisition of a right (license). They asserted that an assignment is in exchange of payment of royalty. In contrast, a license grants permission to carry out certain acts that fall within exclusive rights of the owner.

In conclusion, they also asserted that payments in respect of licenses and assignments are considered royalties and are payable under Section 34(2) of ITA. A clear distinction should be made between a copyright and copyright-embodying article. A copyright itself attracts royalty taxes but the sale of copyright articles would only attract business income tax.

Respondent’s position

The Respondent submitted that the vendor was a nonresident person who received consideration for software procured by the Appellant, hence the monies received were deemed to be royalties as provided under Section 35(1)(b) of the ITA as read with Section 2 of the ITA. The consideration paid was for the use of or right to use the copyright of a literary work, in this case the software.

The Respondent further submitted that the Appellant exploited the intellectual property in the software when it resold the software to its customers and therefore, the proceeds from the same are also royalties as envisaged under the aforesaid sections of the ITA. Without entering into a license agreement, the Appellant was not permitted or allowed to use the software, which exclusively belongs to the vendor.

Tribunal’s decision

In arriving at its decision, the Tribunal relied on, among other sources, the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital. Paragraphs 13.1 and 14.4 of Article 12 provide that payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) represent a royalty where the consideration is for granting of rights to use the program in a manner that would, without such license, constitute an infringement of copyright.

However, arrangements between a software copyright holder and a distribution intermediary grants to the distribution intermediary the right to transactions, and the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, in a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be considered as business profits. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customization for the purposes of its installation.


This judgment provides clarity to taxpayers in terms of which payments qualify as royalties and are thus subject to withholding tax in accordance with Section 35 of the ITA.

It is important to differentiate if a payment relates to the purchase of copyrighted material or the use or exploitation of a copyright in which case only the latter is subject to withholding tax.


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

Ernst & Young (Kenya), Nairobi

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

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

Ernst & Young LLP (United States), Pan African Tax Desk, New York


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