High Court Justice John Chigiti agreed with the Kenya Bankers Association (KBA) that the regulations are illegal, unreasonable, impractical and unclear and also create uncertainty.

He said the rules require a resident person to assume that their loss on a derivative transaction is equivalent to the non-resident person’s gain and, against that assumed result, to withhold tax on a payment.

“The regulations do not specify at all how winnings will be calculated for non-residents. It is practically impossible for a resident person to calculate the earnings of a non-resident person,” the judge said. They require Kenyan entities transacting with foreigners to protect them from financial market volatility, account for any profits made by foreign parties and remit tax to the Kenya Revenue Authority (KRA). .

Justice Chigiti stated that in the absence of a deeming provision under section 10 of the ITA, the entire premise of the Regulations fails since a non-resident person’s “gains from financial derivatives” do not cannot be considered as accrued or accrued income. originating from Kenya, for tax purposes.

“A prohibitory order is hereby issued against the Kenya Revenue Authority (KBA), whether by itself, its agents or its employees, restraining it from taking any steps, actions or measures to impose or collect taxes from members of the former applicant party engaged in transactions involving financial derivatives and/or the application or implementation of the Tax Regulations 2023 on income (financial derivatives), the judge said.

Banks engage in long-term foreign currency borrowing that requires them to hedge against interest and exchange rate risks, while entities such as Kenya Airways engage in hedging to protect against fuel price volatility.

The law requires that when a non-resident entity in a transaction realizes a gain, the Kenyan entity is required to recognize that gain and pay a 15 percent withholding tax.

The KBA argued that the Regulations are inaccurate because they assume that one party’s gain is equal to another party’s loss and that there is no basis or method for determining the gains made by the non-party. resident.

The KRA opposed the petition arguing that the regulations are intended to facilitate tax collection and that enforcement was detrimental and to the detriment of the government, having included the collections in its tax budget for the current financial year and the following.

The taxman added that the amount of taxes to be collected is in the hundreds of millions and is used to finance government projects.