If you’re a foreign startup planning to operate in Kenya and wondering, “How can I land in a significant tax dispute?” then you’re in for some good news! Two recent cases involving M-Kopa and a little-known company from Mauritius, playfully called HoldingCo, highlight the pitfalls of neglecting your tax duties. So, grab your notepad because this is the guide you didn’t realize you were missing.
Case Study #1: M-Kopa
M-Kopa, a fintech company with the noble goal of providing credit access to the unbanked, is the first case in our tax evasion masterclass. M-Kopa did what many startups dream of — launching operations in Kenya while claiming their tax residency was in the UK. Convenient? Who wouldn’t want to enjoy the lively tech environment in Nairobi while filing taxes in a far-off land where oversight is minimal?
However, the Kenya Revenue Authority (KRA) had other ideas. When M-Kopa’s accountants likely searched for “How to evade taxes in Kenya,” they missed the crucial point about showing where their management actually made decisions. Spoiler alert: it was in Kenya, where senior management was making all the key decisions. Oops!
In a ruling that must have caused some discomfort for M-Kopa’s board, the Tax Appeals Tribunal (TAT) ruled that the company couldn’t just use a UK address on their forms and expect everyone to go along with it. Despite being registered in the UK, M-Kopa’s tax bill skyrocketed to KES 885 million ($6.8 million), which included Pay As You Earn (PAYE) and withholding tax.
M-Kopa’s argument against their CEO, Jesse Moore, being the tax representative in Kenya was dismissed quicker than a drone flying into a no-fly zone. The tribunal highlighted that it’s hard to claim you’re not a Kenyan tax resident when your decision-making occurs in Nairobi boardrooms while enjoying coffee. Could that be a major misstep in pretending to be a global operation?
Case Study #2: HoldingCo — The Mauritius Mirage
If M-Kopa’s situation didn’t make it clear that Kenya’s tax authorities are onto these schemes, let’s introduce you to HoldingCo — a Mauritius-based entity that feels like a twist straight out of a financial thriller. HoldingCo, the family investment company you probably haven’t heard of, recently sold a significant 31.5% stake in one of its subsidiaries for an impressive KES 5.2 billion ($40.3 million).
Naturally, the Kenya Revenue Authority sensed something was off and appointed HoldingCo’s Kenyan subsidiary, referred to in court documents as the Appellant, as its tax representative. In tax jargon, this was akin to saying, “You broke it, now you pay for it.”
HoldingCo was understandably taken aback. They contended that they weren’t residents of Kenya, arguing that just because the individuals making decisions about that lucrative KES 5.2 billion were in Kenya, it didn’t mean they should be taxed there. They claimed that their base in Mauritius was merely a tax-friendly coincidence.
The KRA wasn’t convinced. They asserted that HoldingCo’s decision-makers were enjoying life in Kenya, managing operations from Nairobi while pretending their company was relaxing on a beach in Mauritius. Yes, the directors were in Kenya, and yes, the funds were funneled through Kenyan bank accounts. But according to HoldingCo, the real business was taking place in Mauritius — because they had a mailbox there or something. The TAT, perhaps with a smirk, ruled that HoldingCo was indeed managed from Kenya and thus liable for Kenyan tax.
The tribunal’s message was unmistakable: it doesn’t matter where you’re incorporated if all the key decisions are made in Kenya. As for HoldingCo’s claim that they were simply conducting their affairs in Mauritius? The tribunal’s response, in summary, was, “Nice try.”
Pro Tips for Aspiring Tax Evaders
If you want to take away some lessons from these examples, here’s what you should avoid if you want to keep Kenya’s tax authorities at bay:
- Claim to Be “International” While Running Everything Locally — If your goal is to dodge taxes, you should genuinely manage your business from the location you claim. Just a heads-up: mailing addresses and virtual offices are not sufficient.
- Assume the Tax Authorities Aren’t Watching — The Kenya Revenue Authority looks like it loves confrontations, especially if you think you can outsmart them. Remember, if you’re making important decisions in Kenya and often in the news for churning out dollars, they will most certainly take notice.
- Appoint Local Executives and Still Claim You’re Based Overseas — Nothing screams, “Please tax me” more than having all your senior leaders in Kenya while pretending your operations are in another country. Could it be more confusing spreading senior leaders thin across jurisdictions?
- Forget to Cover Your Tracks — If you want to hide the location of your management, you’ll need to do more than just select a sunny offshore jurisdiction. From these cases, it is obvious the KRA must have achieved some mastery following the trail of signatures and meetings right back to Nairobi.
- When Caught, Drag the Case Through Endless Appeals
If KRA catches on (and they will), the next move is even clearer: just keep appealing! It might cost you a fortune in legal fees, but what’s a few million in court costs when you’re trying to escape a massive tax bill? At least you’ll buy yourself a few more years before KRA comes knocking again.
The Verdict: Don’t Try This at Home (or Abroad)
Both M-Kopa and HoldingCo tried to find a way to avoid paying taxes in Kenya, and both ended up failing dramatically. These rulings act as a warning for any foreign startup that thinks it can outsmart the tax system in Kenya by playing the “we’re not really here” card. The key takeaway? If you’re operating in Kenya, the most effective way seems to be by paying your taxes — because no matter how much you try to make it look like you’re based in the UK or Mauritius, it seems the KRA will be right there, calculator in hand, ready to prove you wrong.
And those, foreign founders, are possibly some lessons in how not to evade tax(es) as a foreign startup in Kenya.