Taxation of ‘Business Profits’ under Article 7 | Tax Firm
Taxation of ‘Business Profits’ under Article 7 of the DTAA


Kenya has signed DTA with several countries across the globe to avoid double taxation and promote international trade.

Withholding Tax on Management Fees

There arise situations where some DTAs do not have a management fee Article, such as the DTAs between Kenya and France/South Africa/UAE/Qatar. In such a situation, the question that arises is how to treat the management fees. The bone of contention has been whether to treat management fees as ‘other income’ Article or do you tax the management fees under the ‘business profits’ Article in the DTA.

This question is important because, on the one hand, where you resort to the ‘business profits’ Article 7, an enterprise’s income is taxable in the country where the enterprise is resident unless it has a permanent establishment in Kenya. On the other hand, where you resort to the ‘other income’ Article 21, Kenya is granted the taxing right over the management fees.

Recently, there was a case between Total Kenya PLC (“The Appellant”) is a Kenyan Company whose core activities is the marketing and distribution of petroleum products in Kenya and neighboring countries. The Appellant entered into a General Assistance Agreement with Total Outré Mer, (“TOM”), which is in France. Total Kenya received general assistance services such as management and professional services, including technical services.

The Commissioner in his assessment viewed technical services offered by Total Outré Mer, (“TOM”), as “other income” as stated in Article 21 (4) of the DTA hence it was supposed to be charged to withholding tax in Kenya. Total Kenya PLC on the other side argued that this was “business profit” to TOM as stated in Article 7 of the DTA hence Kenya had no taxing right since TOM is domiciled in France.


The Tribunal, determined that there is supremacy of article 7 of the DTA in relation to business profits where income is not expressly provided for. As per the first paragraph, the definition of business profits extends to and covers income from professional services, hence Total Kenya Ltd was not supposed to charge withholding tax on the technical services provided by TOM in France.

Reference is also drawn to the McKinsey & Co. Case last year, where a landmark ruling was made with regards to professional fees on the DTAA between Kenya and South Africa. Under Article 7 (1), the taxing rights of the business profits are granted to the contracting state where the service originated from, except for the case that the company has a Permanent Establishment in Kenya.

The implication to Companies.

We understand that the Commissioner will lodge appeal to these rulings which in the meantime remain in favor of the taxpayers. This ruling implies that in case the Companies receive any technical services or management services from the parent company in France then it should not charge any withholding tax on the same, since Kenya has no taxing right on business profit earned by companies incorporated and domiciled in France. However, this will only be applicable where the company does not have a Permanent Establishment in Kenya.

For any assistance feel free to contact us or leave a comment below.

Related: Redefinition of Preferential Tax Regime

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