First, it is important to appreciate the nature of income tax in Kenya. Under the provisions of the Income Tax Act, Cap 470, Laws of Kenya (“the Act”) at section 3 income tax is imposed upon all income of a person, if the same was accrued in or derived from Kenya. Further, the principles of worldwide and source basis apply to individuals. This simply means, Kenyan residents are taxed on their worldwide income while non-residents are taxed on the income from a source within the territory.
Generally, the treatment of tax on income related to intellectual property is dependent on the nature of income and the activity generating the income, who owns the property, and who makes the payment. A transfer or a license of intellectual property depends on whether all the rights to the property have been transferred. Income from a transfer or licensing of intellectual property may subsequently give rise to a capital gain or loss as well as withholding tax. If the income is accrued to or received by an individual in the furtherance of a business, it may then attract ordinary income tax liability with certain tax deductions and rebates while if in the course of employment, depending on the nature of the employment contract, to ordinary income tax.
Amounts received by individuals who create intellectual property may be royalties or compensation, depending whether they own and license the property or create it for an employer. However, the Act seemingly compounds such amounts as royalties for purposes of income tax.
The definitive section of royalty defines Royalty as:
1. Consideration for the use or right to use:
(a) A copyright of a literary, artistic or scientific work; or
(b) A cinematography film, including film or tape for radio or television broadcasting; or
(c) A patent, trade mark, design or model, plan, formula or process; or
(d) Any industrial, commercial or scientific equipment,
2. Consideration for information concerning industrial, commercial or scientific equipment; or
3. Consideration for experience, and gains derived from the sale or exchange of any right or property giving rise to that royalty.
The provisions of Section 10 of the Act deem payments in respect of royalties, among others stated under the said section, from a resident or a person having a permanent establishment in Kenya to any other person, to be income which has accrued in or derived from Kenya.
Two salient features arise from the provisions of section 10:
· That the payment of the amount constituting the income must be from a resident or a person having a permanent establishment in Kenya.
This is in line with the OECD Model Tax Treaty Principles where the source of royalties is based on the tax residence of the party paying the royalties or on royalties having an economic link with a permanent establishment. This removes any focus on the party creating, devising or developing intellectual property and instead focuses on the party making the payment and thus, if the party paying the royalty is a resident or a person having a permanent establishment in Kenya, then source of such income is said to be from within the Republic.
A Permanent Establishment is defined in the Act as a fixed place of business in which that person carries on business. A building site, or a construction or assembly project, which has existed for six months or more is deemed to be a fixed place of business.
· That such payment is made to any person, resident or not;
The main problem arising from this is double taxation. This may come about where a person who has received such payment, not being a resident, is liable to tax in Kenya on source basis while the jurisdiction where he/she is a tax resident imposes tax on a worldwide income.
The taxes are deducted at source as withholding tax and are at the rate of 5% for payments to a resident and 20% for payments to a non-resident. The deductions are carried out by the person making the payment and shall according to section 35 of the Act, be remitted to the Commissioner together with a return in writing of the amount of the payment, the amount of tax deducted, and such other information as the Commissioner may specify. He/she shall also indicate the person to whom the payment is made with a Certificate stating the amount of the payment and the amount of the tax deducted.
The Minister (in charge of Treasury) may, by notice in the Gazette, provide that income or a class of income which accrued in or was derived from Kenya to be exempt from tax to the extent specified in the notice.
Part 1 of the First Schedule to the Act provides at Section 11 that the income of a person from a management or professional fee, royalty or interest may be exempt from tax when the Cabinet Secretary certifies that it is required to be paid free of tax by the terms of an agreement to which the Government is a party either as principal or guarantor and that it is in the public interest that the income be exempt from tax.
*Note that exemptions are not guaranteed and are solely the decision of the minister in charge.
We trust that the above presentation on Income Tax Liability on Intellectual Property at a glance will be useful in your decision making processes. However, should you have any further queries regarding issues arising herein, any other tax matter and intellectual property concerns, please do not hesitate to contact us at firstname.lastname@example.org or on + 254 715 310 677 for clarification.
Prepared for Strategic Legal Solutions Group Limited, by:
Taxlex Consulting, and Intellectual Property East Africa LLP (participating consultancy firms in the SLS Group of consultancies) and Victor KIAMBA