Limitation of Benefits (LOB)

By Moses Mutethia - Associate, Tax

1. Background

Nairobi Bottlers Limited applied for a tax refund on 22 May 2019 under Section 90(1) of the Income Tax Act, claiming to have erroneously paid withholding tax in December 2018 on technical fees and computer charges, to Coca-Cola Sabco (Pty) Limited (herein referred to as “the appellant”), a South African resident company.

The Kenya Revenue Authority (herein after referred to as “KRA” or “the respondent”), rejected the refund application and later the objection as being out of time. 

The taxpayer appealed to the Tax Appeals Tribunal (“TAT”), which allowed a late objection but eventually upheld KRA’s rejection. Dissatisfied, the taxpayer escalated the matter to the High Court.

2. KRA’s Assertions

KRA’s position was that:

• The withholding taxes were correctly withheld in accordance with Kenyan law.
• Coca-Cola Sabco (Pty) Limited did not qualify for benefits under the Kenya–South Africa Double Taxation Agreement (“DTA”) because it failed the ownership test under Section 41(5) & (6) of the Income Tax Act (ITA). 
• Specifically, the company:
  • Was not listed on the South African stock exchange, and
  • More than 50% of its ownership was held by non-resident individuals (Coca-Cola Company USA holding 67.5%).
     
• Hence, the exclusion under the DTA could not apply.
• KRA also argued that the burden of proof under Section 56(1) of the Tax Procedures Act lies with the taxpayer to demonstrate that the tax decision was incorrect.

3. Taxpayer’s Assertions

Nairobi Bottlers Limited argued that:

• Coca-Cola Sabco (Pty) Limited was entitled to DTA relief as a South African tax resident.
• The Tribunal misinterpreted Section 41(5) and (6) of the ITA by applying the ownership test incorrectly.
• The term “individual” in Section 41(5) refers to a natural person, and since Coca-Cola Company USA is a corporate entity, the ownership test should not have disqualified Coca-Cola Sabco (Pty) Limited. 
• The Tribunal failed to uphold the supremacy of the DTA, which should override conflicting provisions in domestic legislation. 
• The Tribunal’s finding that a refund would lead to unjust enrichment was erroneous, given that the taxes were paid in error.
• The taxpayer sought to have both the refund decision and the objection decision set aside.

4. High Court and TAT Ruling

Justice B.K. Njoroge of the High Court held that:

• The ownership test under Section 41(5) & (6) of the ITA was correctly applied;
• The Ninth Schedule defines “underlying ownership” and “person” to include both individuals and legal persons, thereby nullifying the taxpayer’s argument that only natural persons were intended;
• Since Coca-Cola Sabco (Pty) Limited;
  • Is not listed on the South African Stock Exchange, and
  • Is 67.5% owned by Coca-Cola Company USA, a non-resident, it fails the ownership test and cannot benefit from the Kenya–South Africa DTA.
• The Court reaffirmed that treaties must not conflict with the Constitution or statutory law; therefore, the DTA does not override clear domestic provisions such as Section 41(5);
• The appeal lacked merit and was dismissed; and
• Each party was ordered to bear its own costs.

5. Conclusion

The High Court upheld the Tribunal’s decision, finding that:

• The taxpayer was not entitled to a refund of the withholding taxes paid on technical and computer service fees.
• Coca-Cola Sabco (Pty) Limited did not meet the ownership test, hence DTA benefits could not apply.
• The Commissioner’s decision was lawful and justified.
   

6. Impact on Taxpayers

This ruling has significant implications for multinational groups and Kenyan entities engaging in cross-border payments:

• Ownership test scrutiny: Taxpayers must ensure that foreign counterparties claiming DTA benefits satisfy the 50% ownership and listing criteria under Section 41(5) and (6) ITA.
• Corporate structures matter: Even where a foreign company is tax resident in a treaty country, ultimate ownership by non-residents (e.g., US-based parent companies) can disqualify DTA relief.
• No automatic treaty protection: The decision affirms that domestic anti-avoidance and limitation-on-benefit provisions can override treaty relief where conditions are not met.
• Refunds on erroneous tax payments: Taxpayers must carefully evaluate eligibility for refunds under DTAs before remitting withholding tax to avoid future denials.
• Precedent-setting effect: The ruling clarifies the interpretation of “underlying ownership” and may guide future disputes on treaty eligibility and beneficial ownership tests under Kenya’s DTAs.

7. My Thoughts: Navigating Treaty Benefits beyond Tax Residency

• When assessing the applicability of DTAs, tax residency alone no longer guarantees treaty protection. Modern tax practice demands a deeper evaluation of the Limitation of Benefits (LOB) provisions to confirm genuine eligibility for treaty relief.
• In the earlier case of McKinsey & Company Inc. Africa Proprietary Ltd v Commissioner of Legal Services and Board Coordination, the Court held that withholding tax does not apply to management and professional fees under the Kenya – South Africa DTA, provided the foreign entity does not have a permanent establishment in Kenya. That decision reinforced the view that residency and business structure were sufficient bases for claiming treaty benefits.
• However, the recent Nairobi Bottlers Limited v Commissioner of Domestic Taxes ruling marks a shift in judicial emphasis. The Court placed significant weight on Section 41(5) and (6) of the ITA, which operationalizes Kenya’s LOB clause.
• This development signals a tightening of treaty access, particularly for multinational group structures. Taxpayers must now go beyond confirming residency; they must also trace and substantiate ultimate ownership, listing status, and beneficial control to establish eligibility for DTA relief.
• For Kenyan taxpayers engaging cross-border service providers or group entities, this underscores the need for:
  • Comprehensive ownership documentation before applying DTA rates;
  • Due diligence on group structures to ensure compliance with LOB thresholds; and
  • Early consultation with tax advisors to pre-empt disputes on eligibility or refund claims.
• In essence, the Nairobi Bottlers case transforms how treaty benefits are evaluated in Kenya shifting focus from where an entity resides to who truly owns and controls it.