Most articles about entering Europe from East Africa begin with the treaty. This one has to begin with its absence, because the single most consequential fact for a Kenyan group choosing a European holding jurisdiction is that the convention signed with the Netherlands in 2015 never came into force, and the Dutch bill that would have approved it was withdrawn.
That is not a technicality to be worked around. It removes a specific Dutch domestic exemption, and the cost of its removal falls on every euro of profit the European business ever sends home. It is better understood at the design stage than discovered at the first distribution.
The treaty that was signed and never took effect
The convention between the Kingdom of the Netherlands and the Republic of Kenya was signed in Nairobi on 22 July 2015, and the Dutch parliamentary record holds the bill approving it under file number 34492. The State Secretary for Finance withdrew that bill by letter of 19 May 2022, recording that Kenya had reported its ratification process had stalled and that the two states would open negotiations on a new convention. The Dutch legislation database still shows the 2015 convention as entering into force on a date yet to be determined.
A signed but unratified treaty has no effect. It does not create obligations, it does not reduce rates, and it cannot be relied on in either country. Advisory material that lists Kenya among the Netherlands treaty partners, or that quotes the rates in the 2015 text, is describing an instrument that never entered into force.
The Kenyan side of the picture is similar in shape. The National Treasury’s table of double taxation agreements lists the Netherlands convention as signed and not in force, alongside other agreements that are signed but not in force, concluded but not signed, or still under negotiation, among other statuses. That is the ordinary situation for Kenya and the reason any European entry point has to be checked against the list of agreements actually in force rather than against a list of agreements concluded.
What the missing treaty removes on the Dutch side
Dutch dividend withholding tax is fifteen per cent under article 5 of the Wet op de dividendbelasting 1965. Article 4 of that Act contains the exemption that most international structures rely on, and its second paragraph sets out who may use it, subject to the exclusions in its third paragraph and the beneficial ownership requirement in its fourth.
The recipient must be a body established, under the tax law of the state concerned, either in another member state of the European Union or a state party to the Agreement on the European Economic Area, or in a state with which the Netherlands has concluded a double taxation convention containing a regime for dividends, or in a public body within the Kingdom for which the Netherlands has made such an arrangement. The explanatory memorandum to the law that introduced the treaty limb states that the convention or arrangement must have entered into force. The recipient must also hold an interest in the withholding agent to which the participation exemption of article 13, or the participation credit of article 13aa, of the Wet op de vennootschapsbelasting 1969 would apply if the recipient were established in the Netherlands.
A Kenyan company satisfies the second condition easily and fails the first one entirely. Kenya is not in the European Union or the European Economic Area, and there is no convention in force. The exemption is therefore unavailable, and a distribution from a Dutch company to a Kenyan parent bears fifteen per cent Dutch dividend tax with nothing to reduce it.
And what it does not remove
Everything else about the Dutch entity works normally, which is why the point is so often missed until the first dividend. Corporate income tax runs at nineteen per cent on the first two hundred thousand euro of taxable profit and twenty five point eight per cent above it under article 22 of the Wet op de vennootschapsbelasting 1969. The participation exemption of article 13 applies from a holding of five per cent of nominal paid up capital, unless the holding is a participation held as an investment that does not qualify under the ninth paragraph, and shelters dividends and gains received by the Dutch company from its own subsidiaries. Access to European directives on payments between member states does not in itself depend on the Kenyan treaty position, but a Dutch dividend paid to a European intermediate of a Kenyan group is tested under the anti abuse rule discussed below, and there the missing treaty counts.
So the structure functions. Where the companies are genuinely managed in Europe, profits earned in Europe are taxed once in Europe, and can be accumulated, reinvested or moved between European subsidiaries, subject to that rule where a Dutch company pays the dividend. The constraint is narrow and it sits mainly at the last step, from the top European company to Kenya, and at any Dutch dividend to a European intermediate that does not pass that anti abuse rule.
That narrowness is the planning opportunity. A structure designed on the assumption that profits will be repatriated annually pays the fifteen per cent annually. A structure designed to deploy European profits in Europe pays it when and if the group decides to bring value home, which may be years later or in a different form. That holds only where any Dutch dividend paid to a European intermediate on the way passes the anti abuse rule discussed below.
Kenya taxes at source, and exempts what comes back
The Kenyan side compounds the problem in a way that is not obvious. Kenya operates a source based system: section 3(1) of the Income Tax Act charges income which accrued in or was derived from Kenya, and the Kenya Revenue Authority describes the exceptions for foreign income as few. Foreign dividends received by a Kenyan resident company are not simply taxed at a lower rate. Section 7(2) deems a dividend received by a resident company not to be income chargeable to tax, unless the company controls, directly or indirectly, less than twelve and one half per cent of the voting power of the company paying it.
Exemption sounds like the better outcome and here it is the worse one. A credit system would allow the Dutch fifteen per cent to be set against Kenyan tax on the same income, but Kenya defines foreign tax in section 2 of the Act by reference to a special arrangement with the other government, and section 42 computes credits only under such an arrangement. Kenya did declare the 2015 convention to have effect by Legal Notice 169 of 2017, but the convention only takes effect once it has entered into force after both states have notified each other, which has not happened, so no credit operates under it; and an exemption leaves no Kenyan liability for a credit to be set against in any case, so the Dutch withholding is not deferred or offset. It is a final, permanent cost of fifteen per cent on every profit distribution that reaches Kenya.
For completeness in the other direction, the Kenyan non resident withholding rate on a dividend is fifteen per cent under paragraph 3(d) of Head B of the Third Schedule, and no convention in force with the Netherlands reduces it. That rate matters where the European company holds a stake in the Kenyan business rather than the other way round, which is a different structure with a different analysis.
Moving the shares is itself the taxable event
Before any of this applies, the group usually has to put an existing Kenyan business under a new European company, or put the European business under an existing Kenyan one. That transfer is a disposal.
Kenyan capital gains tax is charged at fifteen per cent under paragraph 14 of Head B of the Third Schedule, or five per cent where the Nairobi International Financial Centre Authority certifies that a firm has invested at least three billion shillings in at least one entity incorporated or registered in Kenya within a period of two years and that the transfer of the investment is to be made after five years of the date of the investment, and is a final tax, with no further taxation of the gain after payment. Under paragraph 2 of the Eighth Schedule it applies to the transfer of property situated in Kenya, and its reach has been extended, among other things, to gains on shares or comparable interests that at any time in the three hundred and sixty five days before the disposal derived more than twenty per cent of their value, directly or indirectly, from immovable property situated in Kenya, a provision in the text in force from 1 July 2023.
Two reliefs are worth knowing before the reorganization is designed. Under paragraph 6(2)(h) of the Eighth Schedule there is no transfer at all where assets pass to a company in which an individual, spouses, or a spouse and immediate family hold one hundred per cent of the shareholding. And under paragraph 13 no gain is brought into charge on a transfer necessitated by the incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring of a corporate entity, where the transfer is an internal restructuring within a group which has existed for at least twenty four months and which does not involve a transfer of property to a third party.
That twenty four month requirement is the one that catches people. A group formed for the purpose of the reorganization is not a group that has existed for twenty four months. Where the intention is to interpose a holding company and then admit an investor, the transfer to a third party limb may bite as well. The exemption rewards structures created early and used later, which is the opposite of how most reorganizations are timed.
The entity Kenya taxes, and the one Europe does
The general rate of Kenyan corporation tax is thirty per cent for resident companies under paragraph 2 of Head B of the Third Schedule, and since the year of income 2024 the same thirty per cent applies to a non resident company with a permanent establishment in Kenya, which was previously taxed at thirty seven and a half. Under section 2 of the Act a company is resident where it is incorporated under a law of Kenya, where the management and control of its affairs are exercised in Kenya in the year of income, or where the Cabinet Secretary has declared it resident by notice in the Gazette.
The management and control limb deserves attention in this context. A Kenyan group that establishes a European company but continues to take every decision about it in Nairobi has not necessarily created a foreign company for Kenyan purposes, and it has certainly created a Dutch company whose tax residence and substance can be questioned in the Netherlands. The two exposures are mirror images and they arise from the same facts.
The alternative of operating in Europe through a branch rather than a subsidiary avoids the dividend question, since a branch does not distribute. It also puts European profits directly into the Kenyan tax base, because section 4(a) of the Act deems the whole of the profits of a business carried on by a resident partly within and partly outside Kenya to have accrued in Kenya, and it exposes the Kenyan company to European filing and liability. It is the right answer for a small, service based presence and rarely the right answer for anything that will hold assets or employ people.
Substance carries more weight when there is no treaty
Where a treaty exists, a holding company is tested against its limitation provisions and against beneficial ownership. Where none is in force, there is no relief to claim and therefore no relief to be denied, which sounds simpler and is not.
What remains is the Dutch domestic anti abuse rule in the third paragraph of article 4 of the Wet op de dividendbelasting 1965 for any interposed European recipient, which withdraws the exemption where the interest is held with the main purpose, or one of the main purposes, of avoiding tax at the level of another person and the arrangement is artificial, and the general question of where a company is really managed. The explanatory memorandum measures that avoidance against a direct distribution to the parent, and its first example, a parent carrying on an operating business in a state without a Dutch treaty that holds the Dutch company through an intermediate in the United Kingdom, matches this case: the direct payment would have borne Dutch dividend tax, so the anti abuse rule then turns on the objective test of whether the arrangement rests on valid commercial reasons that reflect economic reality. A Kenyan group that routes its European ownership through a member state in order to reach an exemption it cannot use directly is making exactly the kind of claim that provision was written to examine. The intermediate entity has to be doing something, and the something has to be describable.
There is a legitimate version of that structure and an illegitimate one, and the difference is not documentary. It is whether the European entity has people, decisions and a function that would exist even if the withholding rate were the same everywhere.
What to decide before incorporating
Three decisions determine the cost of this structure over its life, and all three are cheaper to make now than to correct.
Whether European profits will be repatriated at all, because the Dutch fifteen per cent applies to what leaves Europe, and to Dutch dividends to a European intermediate that fails the anti abuse rule, and the exemption in Kenya means it will never be recovered. Whether the Kenyan shares move now, before a group exists that could later qualify for the internal restructuring exemption, or move at all. And whether the European entity is going to be a real one, with the management genuinely exercised where the company is established, or a nameplate that both revenue authorities will read the same way.
None of those questions is answered by choosing the Netherlands, and none of them changes if a different member state is chosen instead, though the rate at stake may differ. They are the structure. The jurisdiction is what is left once they have been settled.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.