EWP Case: Fringe Benefit Tax in the Context of Nominee Shareholding

Case Study: Edge Worth Properties Limited (EWP) v Commissioner of Legal Services and Board Coordination (Tribunal Appeal E993 of 2024) [2025] KETAT 187 (KLR) (28 February 2025) (Judgment)

Background

In a letter dated 7th September 2023, KRA issued EWP with a notice of intent to carry out an audit on its operations for the period 2018 to 2022 and issued a pre-assessment notice on 14th December 2023.

KRA issued additional assessments for the years 2018-2022 on 30th April 2024, which EWP objected to on 30th May 2024.

KRA issued an Objection decision on 25th July 2024 partially allowing EWP’s Objection.

EWP, being dissatisfied with KRA’s Objection decision, filed its Notice of Appeal dated 23rd August 2024.

Among the grounds of appeal were:

• That KRA erred in law and in fact in failing to consider the documentation and explanations provided by EWP. Which demonstrated that EWP issued shareholder loans and paid dividends to its beneficial shareholder, Enke Investments Limited (Enke Investments), a company incorporated in Kenya.
• That KRA erred in fact and in law in demanding Withholding tax on the dividend paid by EWP to its sole beneficial shareholder, Enke Investments.
• That KRA erred in law and in fact in demanding PAYE on fringe benefit. Based on its erroneous finding that EWP issued interest free shareholder loans to its director (Rose Wamaitha Ng’ote) and not its shareholder, Enke Investments.

EWP’s Arguments (Fringe Benefit Tax)

• Loans were advanced to its shareholder (Enke Investments), not its director (Rose Wamaitha), and thus FBT did not apply.
• EWP averred that Fringe Benefit Tax only applies where a loan is advanced to an individual by virtue of their position as a director. That Section 12B(1) of the Income Tax Act provides as follows: –

“Notwithstanding any other provision of this Act, a tax to be known as fringe benefit tax shall be payable commencing on the 12 June, 1998 by every employer in respect of a loan provided at an interest rate lower than the market interest rate, to an individual who is a director or an employee or is a relative of a director or an employee, by virtue of his position as director or his employment or the employment of the person to whom he is related.’

EWP’s Arguments (Withholding Tax)

• That in the year of income 2022, it declared dividends worth Kshs. 1 Billion payable to its sole shareholder, Enke Investments. That through a letter dated 20th December 2022, Enke Investments authorised EWP to utilise the dividends to repay the loans that Enke Investments owed to EWP. Additionally, to hold any remainder of the dividends pending further instructions from Enke Investments.
• EWP averred that Enke Investments has held shares in EWP through nominees who execute declaration of trust. That the nominee shareholders were remunerated on an annual basis for their role as a nominee shareholder
• EWP stated that in this case, Enke Investments, a Kenyan company, indirectly holds more than 12.5% of the voting power of EWP through its nominee shareholder Rose. That accordingly, EWP was not required to deduct WHT on the dividends paid by EWP to Enke Investment.

KRA Arguments (Fringe Benefit Tax)

• The CR12 lodged by EWP at the Company registry revealed that EWP only had one shareholder who is Rose Wamaitha.
• There was no actual movement in cash between Enke Investments and EWP. The ledger provided showed amounts being paid to other entities and later that the dividend declared of Kshs. 1 billion cancelled the debt.
• KRA averred that it could not rely on the trust agreement provided by EWP since the CR12, B0F1, and the Share Certificate are the only public documents that can authenticate ownership.

KRA Arguments (Withholding Tax)

• KRA stated that for the year of income 2022, EWP declared dividends worth Kshs. 1 Billion payable to Enke Investments. That instead Enke Investments requested that part of the Kshs. 1 Billion be utilised to repay the loan owed by it to EWP.
• KRA asserted that the CR12 in this case shows that Rose Wamaitha is the only shareholder and director thus EWP ought to have paid WHT at 5% on Enke Investment’s dividend.
• KRA reiterated that EWP at paragraph 58 of its Statement of Facts avers that Enke Investment holds 12.5% of the shares as a beneficial owner. That however, EWP has failed to submit the BOF1 form lodged at the Company registry as proof of the same in line with Beneficial Ownership Regulations of 2020.

Tribunals Findings (Fringe Benefit Tax)

• Rose Wamaitha’s was a nominee shareholder for shares held on behalf of Enke Investments Limited
• The following conditions must be met for Fringe Benefit Tax to apply:

a. There is a loan provided by an employer;

b. The loan is provided at an interest rate lower than the market interest rate; and

c. The loan is provided to an individual who is:

i. A director

ii. An employee

iii. A relative of a director

iv. A relative of an employee

d. The loan is provided to the individual by virtue of his position as director or his employment or the employment of the person to whom he is related

• Fringe Benefit Tax does not apply to the shareholder loans to Enke Investments Limited. On the basis that Enke Investments Limited is a company and not an individual
• As such Fringe Benefit Tax Was not Applicable

Tribunals Findings (Withholding Tax)

• Enke Investments was the beneficial owner of 100% of its shares as opposed to Rose Wamaitha who EWP claimed to be a nominee shareholder.
• The declarations of trust presented by EWP, in the Tribunal’s view, are legally binding documents. Also, the instruments were duly executed and charged stamp duty by the Government of Kenya. In addition, KRA had not legally challenged validity of the instruments
• The obligations for disclosing nominee shareholdings under the Companies Act only became operative in September/October 2023, which was after the 2022 assessment period.
• Since Enke Investments Limited indirectly controls 100% of the voting power of EWP through its nominee shareholder, Rose Wamaitha; the dividends it received are not income chargeable to tax according to Section 7(2) of the Income Tax Act,
• Dividends paid to Enke Investments (a resident company holding >12.5% shares indirectly) were exempt under Section 7(2) of the Income Tax Act.

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