On July 28, 2019, the Finance Bill 2019 was introduced, proposing amendments to the Income Tax Act that could significantly benefit the Real Estate Investment Trusts (REITs) industry in Kenya.
REITs were introduced in 2015 as a game-changer in the property market, but they have failed to gain traction, with only one REIT, Stanlib Fahari I-REIT, listed at the Nairobi Securities Exchange (NSE).
The proposed amendments aim to exempt REITs' investee companies from income tax, making it easier for REITs to hold real estate investments.
Currently, Section 20 of the Income Tax Act only exempts REITs from income tax, but not their subsidiaries and investee companies. This has led to a 30% corporation tax on the net profit of investee companies before distribution to the REIT, negating the tax exemption.
The proposed amendment will remove this hurdle by making investee companies tax-transparent vehicles, allowing income to pass through without being taxed at the entity level.
However, the Kenya Revenue Authority's (KRA) interpretation of Section 20 can be disputed, as the distribution of profits to unit holders is not considered interest income or dividends.
With the proposed amendment, the entire income chain of a REIT could be exempt from income tax, making it a more attractive investment option.
The amendment will also encourage REITs to acquire properties for development by acquiring all the shares of companies holding properties, rather than the properties themselves.
Acquiring shares is a faster and more cost-effective process, with lower stamp duty compared to transferring property into a REIT.
The writer, a senior tax associate at KN Law LLP, believes that the amendment will make REITs one of the most tax-efficient vehicles in Kenya, attracting more entrants into the REITs market.
