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18 November 2020

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Portugal Ratifies Pending Tax Treaty with Kenya

On 11 November 2020, Portugal's President, Marcelo Rebelo de Sousa, signed the law for the ratification of the pending income tax treaty with Kenya. The treaty, signed 10 July 2018, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Kenyan taxes on income chargeable under the Income Tax Act and covers Portuguese personal income tax, corporate income tax, and surtaxes on corporate income tax.

Withholding Tax Rates

  • Dividends - 7.5% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for a period of at least 365 days including the date of payment (excludes changes in ownership directly resulting from a corporate reorganization); otherwise, 10%
  • Interest – 10%
  • Royalties – 10%
  • Technical fees for managerial, technical, or consultancy services – 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in the other State.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Entitlement to Benefits

Article 30 (Entitlement to Benefits) includes the provision that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty. It is also provided that the benefits of the treaty shall not be granted to a resident of a Contracting State who is not the beneficial owner of the income derived from the other Contracting State.

Limited Force of Attraction Provision

The final protocol signed with the treaty includes a limited force of attraction provision, which provides that if an enterprise of a Contracting State sells goods or merchandise of the same or similar kind as those sold by its permanent establishment, the profits of such sales may be attributed to the permanent establishment if it is demonstrated that these profits are related to the activities of the permanent establishment.

Transparent Entities

The final protocol signed with the treaty provides that income derived by or through an entity or arrangement that is established and operated in either Contracting State and that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

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