The 31.5 percent stake that Naivas shareholders sold in 2020 was held specifically for trading, prompting the Kenya Revenue Authority (KRA) to demand corporation income tax from the Sh5.2 billion transaction.
Disposal of unquoted shares would ordinarily have attracted the five percent capital gains tax— which has since been tripled to 15 percent.
But in a ruling by the Tax Appeals Tribunal, the KRA was allowed to collect a corporate income tax amounting to Sh1.79 billion after the heirs of the retail store’s founder Peter Mukuha Kago sold the stake in the supermarket’s holding company Naivas International Limited (NIL).
NIL, which is incorporated in Mauritius, is controlled by the family’s investment vehicle Gakiwawa Family Investments (GFI), which is also registered in the island nation.
KRA reckoned that the minority stake that Gakiwa sold to Amethis Retail had all along been held for trade rather than a long-term investment.
When shares are held for trade or speculation, the taxman treats the sale of shares as a business profit rather than capital gains.
Business profits are subjected to a 30 percent Corporation Income Tax. “That the [31.5] percent stake in NIL was held for trade and not for long-term investment,” said KRA, accusing the directors of Gakiwawa of adventure trade.
According to the taxman, GFI has no employees, premises, functions performed and risks undertaken in Mauritius and there is no real economic activity in Mauritius.
“It was created for the purpose of owning shares in NIL which does not produce goods or services,” said KRA.
The period of acquisition, ownership and disposal, KRA noted, were clear indicators of whether shares are for trade or investment.
GIF, formerly Naivas Holdings Limited, was incorporated in Mauritius, on November 21, 2017.
Before the sale, GIF fully owned Naivas International Limited (NIL), which was registered in the island nation earlier on October 16, 2016.
It is NIL that owns Naivas Kenya Limited –the operating business with stores across the country.
“That the acquisition and disposal of NIL shares, therefore, was an adventure and concern in the nature of trade and the realized gains from disposal taxable at 30 percent.”
Generally, a taxpayer who carries out a trade or profession consistently for the purpose of earning profit is considered to earn business income. Business income attracts a corporate income tax of 30 percent.
However, there are instances when the KRA might subject a specific type of transaction such as the sale of shares to corporate income tax instead of capital gains tax, should the taxman consider it an adventure.
Should the taxman notice a profit-seeking motive on the part of the taxpayer, it shall subject the transaction to the corporate income tax.
