This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
In binding comments issued on 27 December 2023, the French tax authorities (FTA) announced that a reduced withholding tax rate on dividends applies under the tax treaty between France and Kenya due to the activation of the treaty’s most favored nation (MFN) clause. The rate is reduced from 10% to 8%, provided certain conditions are met.
As a reminder, a tax treaty may contain an MFN clause whereby each contracting state agrees to extend the benefit of a lower rate or restricted scope with respect to certain income (such as dividends, interest, or royalties) if, after the signing or entry into force of the treaty, one of the contracting states enters into a treaty with a third state which provides for such a lower rate or restricted scope.
The tax treaty between France and Kenya, which entered into force on 1 November 2010, contains such an MFN clause. Article 28 of the treaty provides that, if any agreement between Kenya and an OECD country entering into force after the date of entry into force of the treaty between Kenya and France provides more favorable terms regarding dividends, interest, or royalties arising in Kenya than those provided for in the treaty with France, such more favorable terms will automatically apply to dividends, interest, or royalties arising in Kenya and beneficially owned by a resident of France and vice-versa.
The FTA’s announcement stated that the MFN clause had been activated following the entry into force of the tax treaty between Kenya and Korea (ROK) on 3 April 2017.
As a result, the 10% withholding tax rate on dividends provided for in the treaty between France and Kenya is reduced to 8% if the beneficial owner of the dividends is a company (other than a partnership) that holds directly at least 25% of the capital of the company paying the dividends. The rate remains 10% in all other cases.
The lower withholding tax rate applies retroactively as from 3 April 2017, the date of entry into force of the treaty between Kenya and Korea (ROK).
