Commissioner of Legal Services & Board Coordination v M-kopa Llc (c/o M-kopa Kenya Limited)

decision on 6th December 2022, confirming the assessments, reiterating that the Respondent was tax resident in Kenya in 2017 and liable for the assessed taxes. 4. Dissatisfied with the objection decision, the Respondent, on 5th January 2023, appealed to the Tax Appeals Tribunal (the Tribunal). The primary issue before the Tribunal was whether the Respondent was managed and controlled in Kenya, thereby establishing tax residency under the Income Tax Act for the 2017 year of income. 5. The Tribunal, after considering pleadings, submissions, and evidence, delivered its decision on 23rd February 2024, holding that the Respondent was not tax resident in Kenya for the year of income 2017 and allowed the appeal. Furthermore, the Tribunal held that even if the Respondent were resident, the individual assessments for income tax, withholding tax, and PAYE were not justified. 6. Aggrieved by the Tribunal's judgment, the Appellant filed the present appeal on 19th April 2024, seeking to set aside the Tribunal's judgment specifically on the issue of the Respondent’s tax residency for the year of income 2017. The Appellant’s Memorandum of Appeal raised four principal grounds: i. That the Tribunal erred in law by misapplying Section 2 of the Income Tax Act in determining the Respondent’s tax residency; ii. That the Tribunal erred in law by failing to consider the provisions of Article 4(3) of the OECD Model Tax Convention (MTC) in its entirety; iii. That the Tribunal failed to apply the requirements and standards in determining the place of effective management (POEM); and iv. That the Tribunal erred by failing to consider the evidence, authorities, and submissions tendered by the Appellant. 7. The Respondent opposed the appeal and filed a Statement of Facts dated 17th May 2024, opposing the appeal and seeking its dismissal. 8. Pursuant to the directions of this Court, the Appeal was canvassed by way of written submissions. The Appellant, through its Counsel Fridah Mwongera & Maren Masai, Advocates, filed submissions dated 16th February 2025, whilst the Respondent, through Coulson Harney LLP Advocates, filed its submissions dated 16th May 2025. Appellant’s Submissions 9. The Appellant, represented by Fridah Mwongera & Maren Masai Advocates, submitted that the Tribunal erred in its conclusion regarding the Respondent's tax residency status for 2017. While acknowledging that the Tribunal correctly quoted Section 2 of the Income Tax Act, which defines "resident" for a body of persons to include where "management and control of the affairs of the body was exercised in Kenya", the Appellant argues that the Tribunal did not fully appreciate the import of Article 4(3) of the 2014 OECD Model Tax Convention. 10. The Appellant maintained that under Section 2 of the Income Tax Act, a company is tax resident in Kenya if its management and control are exercised in Kenya. It relied on Article 4(3) of the OECD Model Tax Convention (2014), which defines the place of effective management as “the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made.” https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 2

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11. According to the Appellant, the Tribunal unduly emphasized the venue of board meetings rather than the substance of control. It contended that M-KOPA’s executive management and specialized committees based in Nairobi made the real strategic and operational decisions. 12. The Appellant pointed to evidence showing that: a. The Respondent’s 2017 U.S. SEC (Securities and Exchange Commission) filing (Form D) listed its principal place of business as Nairobi, Kenya. b. Thirteen of fourteen senior managers were resident in Kenya. c. Minutes of meetings described Nairobi as the company’s headquarters. d. Most key commercial agreements were signed and executed by Kenyan-resident executives. 13. It maintained that these facts demonstrated that M-KOPA LLC’s effective management and control were in Kenya, even if the formal board met abroad. According to the Appellant, the specialized committees made the actual decisions and usurped the Board's authority, and the Board of Managers merely "rubber-stamped” its decisions. 14. The Appellant relied on De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198, Wensleydale’s Settlement Trustees v IRC [1996] STC 241, and Bywater Investments Ltd v Commissioner of Taxation [2016] HCA 45, to support the position that residency depends on where the “directing mind and will” of the company is actually exercised. 15. In the premises, the Appellant urged the Court to allow the appeal and set aside the judgment by the Tribunal. Respondent’s Submissions 16. The Respondent, represented by Coulson Harney LLP, supported the Tribunal’s findings and maintained that the Tribunal correctly applied Section 2 of the Income Tax Act and the OECD Guidelines in concluding that it was not a tax resident in Kenya in the year of income 2017. 17. The Respondent acknowledges that Section 2 of the Income Tax Act defines residency, and since it is incorporated in Delaware, USA, the key contention is whether the "management and control of the affairs" was exercised in Kenya. it asserted that since the Income Tax Act (for 2017) did not define "management or control," the Tribunal correctly relied on case law and international guidelines, specifically the OECD Guidelines. 18. The Respondent emphasizes that the OECD Guidelines define "place of effective management" as "the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made". They further clarify that this refers to strategic decisions that impact the entity as a whole, distinguishing them from mundane day-to-day operational decisions. 19. Regarding the decision-making body, the Respondent referred to Articles 8.1 and 8.2 of its Operating Agreement, which states that ‘the business, properties and affairs of the company shall be managed and all powers of the Company shall be exercised by a Board of Managers'. The Operating Agreement also sets out specific decisions requiring Board approval, reinforcing that the Board is the highest decisionmaking body for strategic matters. 20. It was further the Respondent’s submissions that out of the four (4) board meetings held in 2017, three (3) were held in London, outside Kenya. The Respondent argued that this, on a balance of https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 3

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probabilities, indicates that the Respondent was not resident in Kenya, as the location of decisionmaking is important for determining the place of effective management. 21. The Respondent denied the Appellant's claims that specialized committees usurped the Board's authority or that the Board was a mere rubber stamp of the decision of the Committees. It explained that the committees (Credit, HR, Audit, Strategy & R&D) were advisory in nature, designed to enhance efficiency but not to make binding decisions without the Board’s approval. 22. It further argued that the Appellant conflated the operations of M-KOPA Kenya Limited (the subsidiary) with those of M-KOPA LLC (the parent company). The presence of senior managers in Kenya did not equate to managerial control of the holding company. 23. It maintained that the presence of senior managers in Board meetings is to provide operational insights and feedback, not to override the Board's authority. The Respondent further stated that the Appellant provided no concrete evidence to prove the "rubber stamp" allegation. 24. Regarding the Tribunal's consideration of evidence and authorities, the Respondent maintains that the Tribunal duly considered all material evidence and arguments. It emphasized that under Section 56(1) of the Tax Procedures Act, the taxpayer bears the burden to prove an assessment incorrect, and that burden was discharged by producing the company’s Operating Agreement, board minutes, and correspondence confirming that control was exercised outside Kenya. 25. Accordingly, the Respondent prayed that the appeal be dismissed with costs in its favour. Analysis & Determination 26. Having carefully considered the pleadings and submissions, the following issues arise for determination: i. Whether the Tribunal erred in finding that the Respondent was not tax resident in Kenya for the year of income 2017. ii. Whether the Tribunal failed to consider the Appellant's evidence and submissions. Whether the Tribunal erred in ffnding that the Respondent was not tax resident in Kenya for the year of income 2017. 27. It is common ground that the Respondent (M-KOPA LLC) is a Delaware (USA)-incorporated holding company. The dispute is whether the management and control of the Respondent was exercised in Kenya in the year of income 2017. 28. Section 2 of the Income Tax Act is clear that a body of persons is resident in Kenya if: - 29. i. that the body is a company incorporated under a law of Kenya; or ii. that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or iii. that the body has been declared by the Cabinet Secretary, by notice in the Gazette, to be resident in Kenya for any year of income; [emphasis added].” From the above definition, it is evident that the term “resident” in relation to the Income Tax Act, when applied to a body corporate, means the place where the management and control of the affairs of the corporate entity was exercised in that particular year under consideration. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 4

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30. As was correctly observed by the Tribunal, the Income Tax Act does not specifically define what would amount to ‘management and control’ of the affairs of the body. It is for this reason that the Tribunal and the Parties, applying the principles set in Unilever Kenya Limited vs The Commissioner of Income Tax (Income Tax Appeal No. 753 of 2003) [2005] eKLR, resorted to the provisions of the Organization for Economic Cooperation and Development (OECD) Guidelines to fill in the gap. I endorse this approach. 31. The Appellant argued that the Respondent's management and control was during the relevant period (2017) exercised in Kenya since the majority of its executives, including the CEO, CFO, and other directors, resided in Kenya and carried out strategic management therefrom. The Appellant further pointed out the Securities Exchange Commission (SEC) filings in the USA by the Respondent, as well as the minutes of the Strategy & R&D committee meetings held in Nairobi in support of their position.. 32. The Respondent, on the other hand, refuted the Appellant’s arguments, submitting that M-KOPA LLC is a pure holding company whose management and control resided with its Board of Managers, not with the operational managers of its subsidiaries. It relied mainly on Articles 8.1 and 8.2 of its Operating Agreement, which provides that the business, properties, and affairs of the company shall be managed and all powers of the Company shall be exercised by a Board of Managers. Further, the Respondent stated that out of the four (4) Board meetings that were held in 2017, three of them (75%) were held in Kenya. 33. The Tribunal agreed with the Respondent, holding that while committees and senior managers made operational decisions, strategic decisions were made by the Board, which predominantly met outside Kenya. 34. As indicated above, Article 4 of the OECD Model Tax Convention (OECD MTC) and its commentaries are pivotal here. The Convention clarifies that the "place of effective management" is where "key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. This emphasizes a "substance over form" approach. The commentary further outlines factors to consider, including where board meetings are usually held and where senior executives carry on activities. 35. Paragraph 3 of the Commentaries to Article 4 of the OECD MTC provides that: “ 3. Where by reason of the provisions of paragraphs 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.”[emphasis added]. 36. Paragraph 24 of the Commentaries to Article 4 of the OECD MTC defines the place of effective management (POEM) as follows: 37. “The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity‘s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one.” [emphasis added]. 38. From the parties’ submissions, it is clear that they both agree that the “management and control” test under Section 2 of the Income Tax Act is functionally equivalent to the “place of effective management” test under the OECD Model. The question, therefore, is whether during the period in question, M- https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 5

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KOPA LLC had a place of effective management in Kenya (whether the management or control of the company was undertaken in Kenya), to qualify for tax residency status under the Income Tax Act. 39. It is undeniable that the place of effective management (POEM)place of management and control is where key management and commercial decisions of a company are made. This refers to the strategic decision-making powers as opposed to day-to-day operational activities. 40. The distinction between strategic decisions and day-to-day management is well established in both the OECD Guidelines and case law (e.g., Trevor Smallwood Trust v HMRC, Wensleydale’s Settlement Trustees v IRC, Bywater Investments v Commissioner of Taxation). 41. In Trevor Smallwood Trust v HMRC [2010] EWCA Civ 778, the question for determination was whether the trustees (taxpayers) were resident in Mauritius or in the United Kingdom, the Court, after reviewing the factual evidence, found that the real top-level management and the place where key management and commercial decisions were made was in the United Kingdom and not Mauritius. 42. De Beers Consolidated Mines Ltd v Howe [1906] AC 455 (HL), the House of Lords held that: “A company resides, for purposes of income tax, where its real business is carried on… and the real business is carried on where the central management and control actually abides.” The Court was clear that the central management and control” refers to directing minds, not employees executing instructions. It therefore follows that the location of the board of directors’ decision-making is decisive, not the place of incorporation or where routine or day-to-day operations occur. 43. In the present case, the Respondent, at trial, produced in evidence its Operating Agreement, which vested all powers of management and control in the Board of Managers. It demonstrated that the company (M-KOPA LLC) is a pure holding company whose management and control resided with the Board of Managers, not with the operational managers. Further, evidence on record indicates that in 2017, all but one of the meetings of the Board of Managers were held outside Kenya. A clear indication that the Respondent was not a tax resident in Kenya during the period. 44. It is trite that the place where high-level decisions are made determines tax residency, not the location of day-to-day operations or where employees reside. A perusal of the board minutes presented in the record demonstrates that the Board: Reviewed committee reports; Made final approvals on strategic decisions; Exercised discretion over financial matters, litigation, hiring of executives, and corporate strategy. 45. Under Section 56(1) of the Income Tax Act, the burden of proof in tax matters rests on the taxpayer to demonstrate that a tax decision is incorrect. The evidential burden then shifts to the Commissioner to justify the basis of the assessment. See the case of Kenya Revenue Authority v Man Diesel & Turbo SE [2021] eKLR, where the Court stated that: “ The Supreme Court of Canada in Johnston v Minister of National Revenue[18] decided that the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada[19] that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 6

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Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.” 46. In the present case, while the Respondent has provided documentary evidence regarding its corporate structure, the role of its Board, and the locations of its Board meetings, thereby establishing a prima facie case that its effective management and control were not exercised in Kenya during the year 2017. The Appellant, however, has not rebutted this evidence with credible proof showing that the Board acted nominally or that effective management was exercised by the Kenyan executives. 47. The Appellant’s argument that the management structure through committees effectively displaced the Board is not supported by the evidence. No concrete evidence was adduced by the Appellant to show that the Board was a mere rubber stamp or that senior managers overrode the authority of the Board. 48. Likewise, the indication in SEC filings in the (USA) that Nairobi was the principal place of business appears (in view of Articles 8.1 and 8.2 of its Operating Agreement, produced by the Respondent) to reflect operational headquarters, but not necessarily the locus of management control. 49. While the Appellant emphasized the presence of Kenyan tax resident senior managers in Board meetings, the Respondent correctly pointed out that the tax residency of individual directors or managers is not a direct criterion for determining the company's tax residency under the OECD Guidelines. The key factor in the determination of tax residency is the physical location where the relevant decisions are made. 50. In the premises, it is therefore this Court’s view that the Tribunal did not err in its finding that while significant functions were performed in Kenya, the “directing mind and will” of the Respondent, the body that determined overall corporate policy, sat outside Kenya. Whether the Tribunal failed to consider the Appellant's evidence and submissions 51. Regarding the Appellant’s contention that the Tribunal ignored evidence and authorities, I find the same not borne out by the record. 52. It is evident from the Tribunal’s judgment at pages 540-558 of the Record of Appeal that the Tribunal considered: The SEC filings; The Respondent’s Operating Agreement; Minutes of Board and committee meetings; and Case law cited by both parties. Accordingly, this ground of appeal lacks merit and therefore fails. Conclusion: 53. The upshot of the foregoing is that this Court finds that the Tax Appeals Tribunal did not err in its determination. The Appeal therefore fails and is hereby dismissed with costs. 54. The judgment of the Tax Appeals Tribunal delivered on 23rd February 2024 is upheld. 55. The Appellant shall bear the costs of this appeal. 56. It is so ordered. SIGNED, DATED, AND DELIVERED IN VIRTUAL COURT THIS 23RD OCTOBER 2025 ADO MOSES JUDGE In the presence of: - https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 7

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CA – Moses . https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16311/eng@2025-10-23 8

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