The Tax Appeals Tribunal has upheld a KSh1.8 billion tax demand by the Kenya Revenue Authority in a landmark dispute involving the ownership structure of Naivas Supermarket, reinforcing the principle that companies are taxed where they are effectively managed and controlled.
The case arose after the family behind Naivas established an offshore holding structure in Mauritius through a company known as Gakiwawa Family Investments, which owned Naivas International. The Mauritian entity, in turn, held ownership of Naivas Kenya Limited.
In 2020, the offshore structure came under scrutiny following the sale of a 30% stake in Naivas International to Amethis Retail for approximately Ksh5.2 billion. The tax authority assessed the transaction and determined that the gains were taxable in Kenya, calculating a liability of about Ksh1.56 billion in corporate tax, which rose to nearly Ksh1.8 billion after penalties and interest.
At the centre of the dispute was the question of tax residency. While the companies were registered in Mauritius, the tax authority argued that their “management and control” was exercised in Kenya by Kenyan-based directors who made key financial and strategic decisions.
The Tribunal agreed with this position, finding that the Mauritian company lacked substantive operations, including offices, employees, or independent decision-making structures. It concluded that the offshore entity functioned largely as a holding vehicle, with actual control resting in Kenya.
In reaching its decision, the Tribunal relied on established legal principles, including the precedent set in the case of De Beers v Howe, which holds that a company is resident for tax purposes where its central management and control is exercised.
The dispute also raised questions about liability, particularly after the tax authority appointed Naivas Kenya Limited as a tax representative for the offshore entity under the Tax Procedures Act. This effectively made the Kenyan company responsible for settling the tax liability.
Naivas Kenya challenged the move, arguing that it was a separate legal entity and was not directly involved in the share transaction. The company cited the principle established in Salomon v Salomon, which affirms the legal separation between a company and its owners.
However, the Tribunal rejected this argument, holding that the structure appeared designed to avoid tax obligations. It ruled that the lack of substance in the offshore entity justified lifting the corporate veil and enforcing the tax claim.
In August 2023, the Tribunal dismissed the appeal and upheld the tax authority’s position, with each party ordered to bear its own costs.
The decision aligns with a similar 2024 ruling involving a Dubai-registered entity linked to the Kenya Tea Development Agency, where the Tribunal again found that management and control exercised in Kenya establishes tax residency regardless of foreign registration.
The ruling is expected to have wide implications for Kenyan businesses using offshore structures, signaling a stricter enforcement approach by tax authorities and a growing emphasis on substance over form in determining tax obligations.
