Del Monte Wins Sh. 270.7 Million Tax Battle Against KRA

Del Monte Kenya Limited has secured a major legal victory after the Court of Appeal dismissed a Kenya Revenue Authority (KRA) appeal in a tax dispute worth Sh. 270.7 million, affirming the company's right to claim tax deductions on foreign exchange losses arising from a debt-to-equity conversion.

This ruling upheld an earlier High Court decision delivered in 2019 and provides important guidance on how foreign exchange (forex) losses should be treated for tax purposes in Kenya.

The case revolved around Del Monte's claim for a tax deduction of Sh. 401.3 million in realised foreign exchange losses incurred when it settled approximately Sh. 3.9 billion worth of shareholder loans through a debt-to-equity conversion in 2009.

The loans had been advanced from Del Monte International Incorporated, a related company incorporated in Panama, beginning in 2001. According to court records, the loans were interest-free, unsecured and were used to support Del Monte Kenya's day-to-day business operations, including payment of suppliers, purchase of raw materials and employee salaries.

Over the years, fluctuations in the exchange rates of the US dollar and British pound significantly increased the value of the loans when converted into Kenyan shillings, creating substantial foreign exchange losses.

When the company eventually converted the debt into equity by issuing shares to the lender, the losses became realised and Del Monte subsequently claimed them as deductible expenses under Section 4A of the Income Tax Act.

Following an audit of Del Monte's tax returns for the period between 2009 and 2011, KRA rejected the deduction, arguing that the losses arose from a capital transaction linked to the issuance of shares and were therefore not tax-deductible.

The tax authority subsequently issued additional tax assessments against the company, setting off a legal battle that would span several years.

While the Tax Appeals Tribunal (TAT) partially sided with KRA in 2016, both the High Court and later the Court of Appeal ruled in favour of Del Monte.

In its judgment, the Court of Appeal found that foreign exchange losses can be realised in several ways and are not limited to situations where a loan is repaid in cash.

The judges held that the extinguishing of debt through methods such as debt-to-equity conversions, offsets or payment in kind also constitutes realisation of foreign exchange gains or losses under Kenyan tax law.

The court further ruled that the nature of the loans remained tied to Del Monte's operational business activities and did not become capital expenditure simply because the debt was later settled through the issuance of shares.

The judges emphasised that tax laws must be interpreted strictly and that tax obligations cannot be imposed through assumptions or broad interpretations not expressly provided for in law.

In effect, the court determined that the method used to settle the debt did not alter the company's entitlement to deduct the foreign exchange losses.

The ruling sets an important precedent for companies operating in Kenya, particularly multinational firms that finance local operations through foreign-currency loans from parent or affiliated companies.

The decision provides greater certainty that foreign exchange losses arising from such loans may qualify for tax deductions even when the debts are settled through corporate restructuring mechanisms such as debt-to-equity swaps.

For businesses facing volatile exchange rates, the ruling could influence future financing and restructuring decisions by providing clarity on the tax treatment of forex-related losses.

The Court of Appeal decision relates specifically to the treatment of foreign exchange losses and is separate from Del Monte's other ongoing tax disputes with KRA.

In a separate matter earlier this year, the Tax Appeals Tribunal upheld a significantly larger tax assessment of approximately Sh. 6.7 billion against the company over transfer pricing concerns involving transactions with related entities, including a Swiss-based affiliate.

Despite that setback, the latest Court of Appeal ruling marks a significant win for Del Monte and other taxpayers seeking clarity on the deductibility of foreign exchange losses arising from cross-border financing arrangements.

The judgment is expected to serve as an important reference point in future tax disputes involving foreign-currency loans and corporate restructuring transactions in Kenya.