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M-KOPA Holding, a leading asset financing startup, has been ordered to pay taxes in Kenya after losing a crucial appeal at the country’s tax tribunal. The company had contested a $6.8 million tax demand covering the period from 2017 to 2019, arguing that it was exempt from Kenyan taxes due to its incorporation in the United Kingdom.

M-KOPA’s defense hinged on the Kenya-United Kingdom Double Taxation Treaty (DTT), which aims to prevent companies from being taxed twice on the same income in both countries. The startup claimed that since its management and control were in the UK, it should not be liable for taxes in Kenya.

The company argued that its headquarters and decision-making processes were primarily based in the UK. Additionally, it stated that many of its directors reside outside of Kenya, further supporting its claim of UK tax residency.

However, the tribunal rejected M-KOPA’s argument, concluding that the company failed to provide sufficient evidence to prove that its core management and operational decisions were being made outside of Kenya. This failure to meet the required burden of proof under the Tax Appeals Tribunal Act meant that M-KOPA could not be considered a non-resident entity for tax purposes.

“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 as enunciated in Section 30 of the TAT Act,” the tribunal said.

While the tribunal ruled that M-KOPA must pay part of the $6.8 million in back taxes, it did not specify the exact amount that the startup owes to the Kenya Revenue Authority (KRA).

A significant factor in the tribunal’s decision was the finding that key management decisions were made within Kenya. The tribunal noted that M-KOPA’s Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Commercial Officer (CCO) are all residents of Kenya. Additionally, the company’s largest market is in Kenya, despite its operations also spanning other African countries such as Nigeria, Ghana, and South Africa.

This ruling emphasizes that tax residency is not merely determined by where a company is incorporated but by where its management and key operational decisions are made. In this case, Kenya’s role as the hub of M-KOPA’s decision-making processes solidified its tax obligations within the country.

The ruling is a significant win for the KRA, setting a precedent that could impact other Kenyan startups that have registered tax residency outside of the country. It underscores the importance of providing clear evidence of foreign management and control when seeking to claim tax exemptions based on treaties like the DTT.

For many startups operating in Kenya, especially those with international incorporations, this decision serves as a warning to closely examine their tax residency status and ensure that their arguments align with both the law and the evidence of where critical decisions are made. Despite this setback, M-KOPA continues to grow as one of Africa’s most prominent asset financing platforms.

 The company offers products such as solar power systems, smartphones, and electric bikes, enabling customers to make payments in small installments. Kenya remains its largest market, but M-KOPA has also expanded its services to Nigeria, Ghana, and South Africa.

In 2023, the startup secured $250 million in debt and equity funding to fuel its pan-African expansion. This substantial investment underscores M-KOPA’s ambition to scale its operations across the continent, despite the ongoing tax dispute in its home market.

As M-KOPA navigates its tax obligations in Kenya, the company’s growth and success in providing financial access to underserved populations in Africa remains a testament to its innovative business model. However, the ruling serves as a reminder that tax compliance in its operational markets must remain a priority.