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The Income Tax (Financial Derivatives) Regulations

Legal Notice 4 of 2023

The Income Tax (Financial Derivatives) Regulations
Citation
Legal Notice 4 of 2023
Primary work
Income Tax Act
Date
Language
English
Type
Legal Notice
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LAWS OF KENYA

INCOME TAX ACT

THE INCOME TAX (FINANCIAL DERIVATIVES) REGULATIONS

LEGAL NOTICE 4 OF 2023

  • Published in Kenya Gazette Vol. CXXV—No. 36 on 17 February 2023
  • Commenced on 27 January 2023
  1. [Amended by 24th Annual Supplement (Legal Notice 221 of 2023) on 31 December 2022]

Part I – PRELIMINARY

1. Citation

These Regulations may be cited as the Income Tax (Financial Derivatives) Regulations, 2023.

2. Interpretation

In these Regulations, unless the context otherwise requires—"call option" means an option that gives the holder of a financial derivative the right to buy the underlying assets at a stipulated price on or before a specified future date;"currency swap" means a contract between two parties to exchange two currencies at a future date at a predetermined exchange rate;"forward contract" means a customised over-the-counter traded financial derivative contract that provides for the purchase or sale of an underlying asset whose delivery or settlement is to be made at a future date at a price agreed upon on the date when the contract is entered into;"futures contract" means a standardised agreement traded in a recognised exchange market for the acquisition or disposal of an underlying asset whose delivery is to be made at a future date at a price agreed upon on the date when the contract is entered into including a reference to a date and price determined in accordance with the terms of the contract;"gain" means any profit earned by a person from a financial derivative contract including any premium or fee paid in respect of an option contract;"interest rate swap" is an agreement between two parties to exchange one stream of interest payments for another over a specified period;"option contract" means a financial derivative which offers the holder the right, but not the obligation, to buy or sell the underlying assets or security at a specified price on or before the expiry date of the option contract;"option premium" is the price the holder of an option contract pays to buy or sell the option contract;"put option" means an option contract that gives the holder the right to sell the underlying asset within a specified period at a specified price;"swap" means an option contract to purchase or sell the underlying asset at a specified price at a specified time and may involve several settlements before maturity; and"underlying assets" include bonds, commodities, currencies, interest rates, securities, stock indices, price indices, credit ratings or similar assets.

3. Scope of gains from financial derivatives

(1)Any realized gain to a non-resident person, being a realized loss to the resident person who is a party to the financial derivative contract, shall be chargeable to tax in accordance with the Act.
(2)For the purposes of subregulation (1), a financial derivatives contract, unless exempted under the Act, includes —
(a)a futures contract including interest rate futures, stock index futures, volatility futures, weather futures or a similar futures contract whether cash settled or not;
(b)a forward contract, whether cash settled or not;
(c)a swap contract including a contract for interest rate swap, currency swap, credit default swap and hybrid swap;
(d)an options contract including put options, call options and option spreads; or
(e)any other financial derivative instrument.

4. Realisation of gain or loss

(1)Subject to these Regulations, a gain or loss from a financial derivative shall be deemed to have been realized at the earlier of—
(a)the underlying asset changing hands;
(b)the settlement of the contract; or
(c)the expiry of the contract:
Provided that in the case of an options contract, the gain or loss shall be deemed to have been realised at the time of payment of the option premium and at the time the option is exercised.
(2)A realised loss by a resident person from a financial derivative shall be allowed as a deduction against any gain accruing from similar activities to the extent that it has not been claimed.

5. Record and characterisation of income from financial derivatives

(1)A person involved in a financial derivatives transaction shall keep a record of all contracts and financial activities resulting from such a contract.
(2)Any income from a financial derivative transaction shall —
(a)clearly be characterised as other income (financial derivative gains/losses) in the tax returns for the period; and
(b)be treated as a separate source in accordance with section 15(7) of the Act for a resident person or a permanent establishment in Kenya.

6. Payment of taxes

The tax payable under these Regulations shall be due and payable by the 20th day of the month after which the loss from the transaction with the non-resident person is realised.
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History of this document

17 February 2023 this version
27 January 2023
Commenced