05 February 2025

Kenya Tax Appeal Tribunal rules income earned by registered pension scheme is exempt from income tax

  • The Tax Appeals Tribunal (the Tribunal) held that the total income of a registered pension scheme is exempt from income tax under the provisions of the Income Tax Act (ITA).
  • The Tribunal held that the provisions of the ITA did not provide for taxation of investment income attributable to excess pension contributions to the registered pension scheme.
  • On a separate issue, the Tribunal ruled in favor of the Kenya Revenue Authority in deeming gardening, cleaning and maintenance services as technical in nature and thus subject to withholding tax.
 

Executive summary

The Tax Appeals Tribunal (the Tribunal) issued a decision in favor of Banki Kuu Pension Scheme 2012 Registered Trustees (the Appellant), affirming that income earned by a registered pension scheme is exempt from income tax.

The Tribunal ruled that the Appellant's income attributable to excess pension contributions was not subject to corporate income tax, because:

  1. The Kenya Revenue Authority (KRA or the Respondent) had registered the Appellant and issued an income tax-exemption certificate to it.
  2. The income of a registered pension scheme was exempt from income tax under the first schedule to the Income Tax Act (ITA).
  3. The Respondent had previously refunded the Appellant corporate income tax paid in error, which created a legitimate expectation that its income is exempt from income tax.

On a separate issue raised by the KRA in its assessment, the Tribunal deemed gardening, cleaning and maintenance services to be technical in nature and thus subject to withholding tax (WHT). This was premised on the argument that the services require specialized knowledge, skill or expertise.

Detailed discussion

Background

The KRA performed an audit on Banki Kuu Pension Scheme 2012 Registered Trustees to establish whether the pension scheme was complying with the prevailing tax laws. The KRA noted that the scheme declared all its income as exempt from corporate income tax. The KRA proceeded to issue a corporate income tax assessment on investment income attributable to excess pension contributions.

The Appellant filed an appeal at the Tribunal.

Appellant's arguments

The Appellant argued that it was registered with the Respondent and that it had been issued an income tax-exemption certificate that duly exempted it from income tax. Further, the Appellant stated that its income was exempt from income tax in line with ITA Section 13 (1), specifically paragraph 12 of part 1 of the first schedule to the ITA, which provides that the income of a registered pension scheme is exempt from income tax.

The Appellant argued that the assessment amounted to double taxation because the income arising from the investments of the scheme is charged an income tax, to be paid by the members at the point of withdrawal of funds from the pension scheme.

The Appellant argued that there was no legal basis for applying an income tax to investment income attributable to pension contributions in excess of the prescribed tax-allowable limit of 240,000 Kenyan shillings (KES) per annum.

Additionally, the Appellant averred that the Respondent's assessment of WHT on expenses relating to gardening, cleaning and maintenance services was not in line with the ITA. The Appellant argued that the services did not (1) fall within the definition of management and professional services as provided for in Section 2 of the ITA or (2) meet the threshold for management, professional or technical services.

Respondent's arguments

The KRA argued that contributions exceeding the tax-allowable limit are not exempt from income tax and thus the related investment income is not exempt from income tax. The KRA was of the view that exempt income for pension schemes is the income generated from pension contributions within the tax-allowable limits.

Further, the Respondent contended that the services consumed by the Appellant with respect to gardening, cleaning and maintenance services were technical in nature and thus subject to WHT.

Tribunal's determination

The Tribunal relied on the provisions of section 13 and paragraph 12 of part 1 of the First schedule to the ITA, which provides that the income of a registered pension scheme is exempt from income tax. The Tribunal noted that the Appellant was duly registered and had an income tax-exemption certificate issued by the Respondent. Furthermore, the Respondent had refunded the Appellant corporate income tax paid in error based on the income tax-exemption certificate, creating a legitimate expectation that the Appellant's income is exempt from income tax.

The Tribunal ruled that the Appellant's income attributable to excess pension contributions was not subject to corporate income tax.

With respect to WHT on gardening, cleaning and maintenance services, the Tribunal noted that the services fall under management and professional services. In its ruling, the Tribunal relied on paragraphs 63-66 of the United Nations Model Tax Convention Commentaries to Article 12A, which states:

The ordinary meaning of the term "technical" involves the application of specialized knowledge skill or expertise with respect to a particular art, science, profession or occupation.

The Tribunal concluded that the services provided to the Appellant in the form of gardening, cleaning and maintenance were technical in nature and thus subject to WHT.

Implications

Pension schemes should review their treatment of investment income from excess pension contributions and take the necessary measures to align their practice with the judgment.

In addition, organizations should analyze the various services that they receive against the ITA to determine the applicability or otherwise of WHT.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young (Kenya), Nairobi

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2025-0396