Kenyan court rules in Del Monte’s favour in US$2.09M tax dispute

KENYA – The Court of Appeal has upheld a High Court ruling that foreign exchange losses arising from debt-to-equity conversions are tax-deductible, marking a significant legal victory for Del Monte Kenya in its dispute with the Kenya Revenue Authority.

The case concerned a disputed tax deduction of KES 270 million (US$2.09 million) arising from Del Monte Kenya’s use of unsecured, interest-free offshore loans from related entities to finance its operations in Thika.

The loans totalled more than US$28.2 million and £1.4 million. As the Kenyan shilling depreciated against the US dollar and the pound sterling, the company recorded foreign exchange losses when translating the debt into local currency for financial reporting.

Del Monte later converted the outstanding debt into equity by issuing ordinary shares. The company subsequently claimed the resulting foreign exchange losses as a deductible expense.

However, following an audit of the 2009 to 2011 tax years, the KRA rejected the deduction and issued an additional tax assessment of KES 270 million (US$2.09 million).

The Court of Appeal held that once the debt was extinguished and converted into equity, the foreign exchange losses became realized rather than unrealized.

Accordingly, the Court concluded that the KES 270 million (US$2.09 million) constituted a deductible business expense incurred in the production of income. This ruling clarifies how offshore financing and subsequent equity conversions should be treated under Kenyan income tax law.

Consequently, this decision establishes a crucial legal precedent for multinational companies operating in Kenya that use foreign-currency financing. The court’s stance confirms that foreign-exchange losses arising from the conversion of debt into equity are recognized expenses and therefore tax-deductible under Section 4A of Kenya’s Income Tax Act.

However, Del Monte continues to contest a separate KES 6.7 billion (US$51.8 million) transfer pricing assessment before the Tax Appeals Tribunal. In that case, the KRA alleges that the company understated taxable income by pricing pineapple exports to related entities, including DMI GmbH.

The original financing structure comprised offshore loans totalling US$28 million and £1.4 million, while the disputed tax assessment centred on realized foreign exchange losses of KES 270 million (US$2.09 million).

The ruling guides the tax treatment of foreign exchange losses arising from corporate restructuring transactions and may be relevant to multinationals facing similar disputes.

Finally, the broader implications for tax planning and cross-border financing structures remain significant as companies await the outcome of the wider transfer pricing dispute.

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