To most multinational enterprises (MNEs), an offshore disposal of shares between two foreign entities has traditionally been considered just that—offshore. If neither the buyer nor seller is registered in Kenya, and the company being sold is incorporated outside Kenya, it was long assumed that Kenya had no taxing rights over such a transaction. However, this assumption is no longer safe. 

In Tax Appeal No. 934 of 2022, Kenya’s Tax Appeals Tribunal (TAT) affirmed the Kenya Revenue Authority’s (KRA) right to tax the gains arising from foreign-to-foreign share disposals where a sufficient Kenyan nexus exists. These are not routine cross-border transactions rather they involve foreign entities with significant ties to Kenya through management, control, or underlying economic activity.

This marks a broader shift in policy and approach, with Kenya placing less emphasis on formal legal structures and instead focusing on the substance of transactions to determine who is making the decisions, where value is being generated, and the extent of the Kenyan entity’s involvement.

The shift raises a fundamental question: how can Kenya assert taxing rights over a transaction that appears, to be entirely offshore? More specifically, on what legal basis does the revenue authority attribute gains to Kenya when the disposing entity is incorporated abroad? The answer lies in how tax residency is determined under Kenya’s Income Tax Act. A company does not need to be incorporated in Kenya to fall within Kenya’s tax net. If the company’s real control and decision-making, commonly referred to as "central management and control", take place in Kenya, it would be deemed a Kenyan tax resident.

The foregoing naturally prompts a deeper inquiry on whether a company can be incorporated in one country but effectively managed from another. While it may seem counterintuitive, such arrangements are not only legally possible but increasingly common in today’s interconnected global economy.

Modern MNEs operate through networks of subsidiaries across various jurisdictions. These structures help businesses grow, access new markets, and streamline operations. For Kenya, this often translates into job creation, increased investment, and improved access to goods and services. But the same structures can also be used to exploit mismatches between legal form and economic reality, heightening risks of base erosion and profit shifting (BEPS).

To mitigate this, KRA is taking a more substance-over-form approach, scrutinizing the operational realities behind cross-border transactions. This is the essence of the “management and control” test.

Tax Appeal No. 934 of 2022 offers a compelling illustration of Kenya's evolving approach. The analysis below is based solely on the facts as detailed in the TAT’s judgment.

The case concerned a foreign company that disposed off shares in another offshore entity, which in turn indirectly owned a major retail business operating in Kenya. Although the selling company was incorporated offshore, the Tribunal found it to be effectively managed and controlled from Kenya. Its directors were Kenyan tax residents, and it had no meaningful business presence such as staff, infrastructure, and local operations in the country of incorporation. Strategic and financial decisions were made in Kenya, while the foreign directors were nominal and uninvolved. Accordingly, the Tribunal concluded that the entity was a Kenyan tax resident, and the gains from the transaction were subject to Kenyan tax.

So, what happens when the country of incorporation also claims taxing rights over the company solely on the basis of its registration? In such instances, both jurisdictions may assert taxing authority over the same income resulting in residence–residence double taxation. This occurs when two countries apply different tax residency criteria and each treats the same entity as resident for tax purposes.

This is where Double Taxation Agreements (DTAs) become critical. DTAs are designed to prevent the same income from being taxed twice and often include a tie-breaker rule based on the Place of Effective Management (POEM). The test examines where key management decisions are actually made. If those decisions are made in Kenya, then Kenya’s tax residency claim prevails even if the company is legally incorporated elsewhere.

Globally, tax authorities are moving away from reliance on legal formalities and are increasingly focusing on economic substance. They examine where board meetings are held, who signs contracts, and where financial control is exercised. For multinational enterprises, this shift underscores the importance of aligning governance frameworks, board activities, and decision-making processes with operational realities. In Kenya’s case, as enforcement intensifies and alignment with international standards continues, relying on distance, legal form, or documentation alone is no longer sufficient, substance is what matters. 
 

Caveat

This publication has been prepared by RSM (Eastern Africa) Consulting Ltd, and the views are those of the firm, independent of its directors, employees and associates. This publication is for general guidance, and does not constitute professional advice. Accordingly, RSM (Eastern Africa) Consulting Ltd, its directors, employees, associates and its agents accept no liability for the consequences of anyone acting, or refraining from acting, in reliance on the information contained herein or for any decision based on it. No part of the newsletter may be reproduced or published without prior written consent. RSM (Eastern Africa) Consulting Ltd is a member firm of RSM, a worldwide network of accounting and consulting firms. RSM does not offer professional services in its own name and each member firm of RSM is a legally separate and independent national firm.