The High Court recently delivered its judgment in Income Tax Appeal No E108 of 2021: Commissioner of Domestic Taxes v. Liberty Life Assurance Kenya Limited (Civil Appeal E127 of 2020), determining that Tied Insurance Agents are not employees but are instead independent contractors who are not subject to employment taxes in the form of Pay As You Earn (PAYE).

The Kenya Revenue Authority (KRA) conducted an in-depth audit of Liberty Life Assurance Kenya Limited (Liberty), following which it assessed PAYE on Liberty on the basis that Tied Insurance Agents engaged by the insurance company were employees and not independent contractors. This culminated in an appeal by Liberty to the Tax Appeals Tribunal which found in favour of Liberty, holding that Tied Insurance Agents were independent contractors and not employees.

The KRA filed an appeal to the High Court.  The High Court dismissed the appeal, making the following findings:

• The High Court considered the intention underlying the contracts entered into between the agents and the insurance company, finding that it was to engage the Tied Insurance Agents as independent contractors and not employees.
• Even though the Tied Insurance Agents received bonuses and enjoyed benefits similar to those given to employees, this was immaterial in determining whether or not they were employees. The determining factor was the level of control that the insurance company had over the Tied Insurance Agents and the obligations of these agents in executing their obligations.
• The Employment Act, 2007 is the primary legislation that governs and regulates employment matters. The term "employee" ought to be interpreted in accordance with this statute. The Insurance Act expressly bars insurance companies from engaging their agents as employees.
• Withholding tax had already been accounted for on the commissions paid to the Tied Insurance Agents and requiring payment of PAYE on account of the income of the Tied Insurance Agents would amount to double taxation.

What does this decision mean for you?

This decision is consistent with the decision in UAP Life Assurance Company Limited v. Commissioner of Domestic Taxes [2019] Eklr. The decision is relevant to insurance companies since it gives clarity on the nature of their engagement with Tied Insurance Agents and the tax treatment of commissions earned by them. The decision also gives guidance to taxpayers in deciphering employer/employee relationships.

The KRA is likely to appeal this decision to the Court of Appeal.

For more information on this decision or any other tax matters, kindly get in touch with the team listed under Key Contacts.