NAIROBI, Kenya- M-KOPA, the asset financing startup known for its innovative pay-as-you-go model, has been dealt a major blow after losing an appeal in Kenya’s tax tribunal.
The company, which had contested a $6.8 million tax demand for the years 2017 to 2019, argued that its incorporation in the UK should exempt it from paying taxes in Kenya under the Kenya-United Kingdom Double Taxation Treaty (DTT).
However, the tribunal wasn’t buying it.
M-KOPA’s central defense was based on its claim that it’s controlled and managed from the UK, thus exempting it from Kenyan taxation.
According to the company, its UK incorporation and the fact that most of its board members live outside Kenya should have protected it from the Kenya Revenue Authority’s (KRA) tax demands.
But the tribunal wasn’t convinced. It ruled that the startup’s tax residency is, in fact, in Kenya. The tribunal pointed to the fact that key decisions about the company’s operations are made within the country.
M-KOPA’s CEO, CFO, and CCO all reside in Kenya, making it clear that Kenya is the heart of the company’s management.
The tribunal stated: “The appellant’s failure to provide evidence to support its argument that the board had actually made core decisions affecting the operation of the company in the meetings held outside Kenya meant that it had failed to discharge the burden of proving that it was not a resident in Kenya.”
While the tribunal didn’t specify the exact amount M-KOPA now owes the KRA, it did rule that the company is liable for part of the $6.8 million in back taxes.
This could have significant financial implications for M-KOPA, which has recently been expanding across Africa, including Nigeria, Ghana, and South Africa.
For the startup, which offers asset financing for products like solar power systems, smartphones, and electric bikes, the decision could also set a precedent.
Other Kenyan companies registered abroad may now find themselves under closer scrutiny by tax authorities.
With Kenya being M-KOPA’s largest market, the decision to classify the startup as a tax resident in Kenya makes sense. The tribunal emphasized that the company’s Kenyan leadership played a critical role in making operational decisions, which ultimately made M-KOPA subject to Kenyan income and capital gains taxes.
This verdict could spark similar cases involving other Kenyan startups with foreign incorporations, especially those trying to leverage double taxation treaties.
It also highlights the importance of clear tax strategies for companies looking to expand across borders.
In 2023, M-KOPA secured $250 million in debt and equity funding for its pan-African expansion. While this capital injection will undoubtedly help the company continue its growth, the tax ruling could make future financial planning more complicated.
