Can Kenya Tax Professional Fees Paid to South Africa? High Court Rules

Case reference: Commissioner of Legal Services and Board Coordination v McKinsey and Company Inc. Africa Proprietary Limited (Tax Appeal No. E062 of 2021) [2026] KEHC 8195 (KLR)

The KRA Audit and Initial Assessment

The dispute began when the KRA conducted an audit of McKinsey’s Kenyan branch for the income years 2014 to 2017. During the audit, the revenue authority identified cross-border payments made by McKinsey Kenya to a related South African entity for professional consultancy services.

Under Kenya’s Income Tax Act (Cap 470), payments for management or professional fees to a non-resident person are subject to a 20% withholding tax. Applying this provision, the KRA issued a demand for a staggering KES 455,457,019.

The Objection

McKinsey did not accept the entire assessment. The company filed an objection, making a crucial concession: it agreed to pay withholding tax for the years 2014 and 2015. However, it disputed the principal amount of KES 179,956,998 relating to 2016 and 2017.

Why the distinction? Because in 2016, the Double Taxation Agreement (DTA) between Kenya and South Africa had come into force. McKinsey argued that the DTA fundamentally changed the tax treatment of those payments.

The Core Legal Issue: Article 7 vs Article 22

Under Article 7 of the DTA, “business profits” of an enterprise resident in one contracting state (South Africa) are only taxable in the other state (Kenya) if the enterprise carries on business through a “permanent establishment” (PE) situated in that other state.

McKinsey argued that the South African entity providing the consultancy services was a separate legal person, had no office, no employees, and no PE in Kenya. Therefore, under Article 7, Kenya had no right to tax those profits.

The KRA took a different view. It argued that because the DTA contained no specific article for “management or professional fees”, such income fell under Article 22 (Other Income) – a residual clause that would allow Kenya to tax it.

The Commissioner confirmed the demand for KES 179,956,998 in an Objection Decision dated 6th April 2020. McKinsey appealed to the Tax Appeals Tribunal.

Tax Appeals Tribunal

In a judgment delivered on 1st April 2021 (Tax Appeal No. 199 of 2020), the Tribunal ruled entirely in favour of McKinsey.

The Tribunal held that professional fees for consultancy services constitute “business profits” under Article 7 of the DTA. Since the South African service provider had no permanent establishment in Kenya, the profits were taxable only in South Africa. The KRA’s demand for withholding tax was therefore invalid.

The Commissioner was ordered to set aside the Objection Decision.

The High Court Appeal

Unwilling to accept the Tribunal’s decision, the Commissioner of Legal Services and Board Coordination appealed to the High Court on 28th May 2021 (Tax Appeal No. E062 of 2021). The appeal raised 14 grounds, which were later condensed into three core issues:

1. Whether the Tribunal misconstrued the term “business profit” to mean “income”.
2. Whether the Respondent (McKinsey) had a permanent establishment in Kenya.
3. Whether professional fees paid to a South African related entity fall under “Business Profits” or “Other Income” under the DTA.

The High Court Judgment – 8th May 2026

Justice J.W.W. Mongare delivered the judgment, dismissing the Commissioner’s appeal in its entirety and affirming the Tribunal’s decision. The key holdings were as follows:

1. The Meaning of “Business Profits” is Broad

The Court rejected the Commissioner’s formalistic argument that “profits” means revenue less expenses while “income” means gross receipts. Relying on the OECD Commentaries on Article 7, the Court held that the term “profits” has a broad meaning that includes all income derived from carrying on an enterprise. Professional fees are therefore business profits.

2. Article 22 (Other Income) is a Residual Clause

The Court held that Article 22 only applies to income not dealt with by any other article of the DTA. Since professional fees are clearly business income, they fall under Article 7. To apply Article 22 would render Article 7 meaningless for service businesses.

3. The South African Service Provider Had No PE in Kenya

Critically, the Commissioner had admitted in its pleadings before the Tribunal that the South African entity providing the consultancy services was separate from the Kenyan branch and had no permanent establishment in Kenya. That factual finding was unassailable on appeal. Without a PE, Kenya had no taxing rights under Article 7.

4. Kenya Deliberately Chose Not to Tax Management Fees

The Court noted that Kenya knows how to reserve the right to tax management or technical fees. In other DTAs, Kenya has included specific provisions modelled on UN Article 12A (Fees for Technical Services) or service PE provisions. The absence of such provisions in the Kenya-South Africa DTA was a deliberate treaty choice. The Court cannot rewrite the agreement.

Final Orders

The High Court made the following orders:

• The appeal was dismissed.
• The judgment of the Tax Appeals Tribunal dated 1st April 2021 was affirmed.
• Each party was ordered to bear its own costs, the Court noting that the Commissioner is a public entity funded by taxpayer resources.

Key Takeaways for Tax Professionals and Businesses

This judgment offers several important lessons:

• Double Taxation Agreements override domestic tax laws where they apply. Taxpayers and the KRA must look beyond the Income Tax Act to the relevant DTA.
• Interpretation of DTAs is liberal, not strict. Courts will apply the Vienna Convention on the Law of Treaties and OECD/UN Commentaries, not rigid domestic statutory construction.
• The “Other Income” article is a last resort. If an item of income can reasonably be characterised as business profits, Article 7 applies – even if no specific article mentions “management fees” or “professional fees”.
• Permanent establishment is key. Without a PE in the source country, business profits are taxable only in the residence country.
• Treaty drafting matters. Where Kenya wishes to tax management or technical fees paid to non-residents, it must expressly provide for that right in the DTA.