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February 16, 2023
Kenya gazettes Income Tax (Financial Derivatives) Regulations, 2023
Kenya’s Cabinet Secretary for the National Treasury and Economic Planning recently gazetted the Income Tax (Financial Derivatives Regulations), 2023. This is following an introduction of a new provision by the Finance Act, 2022 subjecting gains from financial derivatives that are earned by nonresident persons to withholding tax at the rate of 15%.
The regulations seek to provide clarity on the scope of the withholding tax, provide definitions of several terms incidental to financial derivatives and to elaborate on the tax treatment of the income or loss arising therefrom.
The Finance Act, 2022 amended the Income Tax Act by introducing the definition of financial derivatives as a financial instrument the value of which is linked to the value of another instrument underlying the transaction which is to be settled at a future date. More importantly the Act, established a requirement to tax gains from financial derivatives, excluding those traded on the Nairobi Securities Exchange. It requires that gains from financial derivatives accrued to a nonresident person are subjected to 15% withholding tax.
Consequently, the Cabinet Secretary for the National Treasury and Economic Planning has published the Income Tax (Financial Derivatives Regulations), 2023. The regulations provide guidance on the interpretation of various critical terms incidental to financial derivatives including call option, currency swap, forward contract, put option, option contract and futures contract.
A gain or loss from a financial derivative is deemed to have been realized at the earlier of:
a) The underlying asset changing hands
b) The settlement of the contract
c) The expiry of the contract
Provided that payment of an option premium shall also constitute a tax point for an options contract.
Additionally, resident persons engaged in financial derivatives are required to characterize income or losses from a financial derivative as other income (financial losses/gains) in the respective period’s tax returns.
A resident person who incurs losses attributable to financial derivatives is allowed to claim them against gains accruing from similar activities.
Finally, the regulations require taxpayers to remit the taxes by the 20th day of the following month after the loss from the transaction with the nonresident person is realized.
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