Taxing Payments for Transactions Involving Intellectual Property Rights: An Analysis of the Kenyan High Court’s Recent Decision Commentary
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Taxing Payments for Transactions Involving Intellectual Property Rights: An Analysis of the Kenyan High Court’s Recent Decision

On 10th December, 2021, the High Court of Kenya in the Commercial and Tax Division gave a landmark decision on the question of withholding payment of tax on software licenses in the case pitting Seven Seas Technologies Limited (the appellant) against the Commissioner for Domestic Taxes (the respondent).

The appellant is an ICT company that provides IT infrastructure, technical personnel, ICT equipment, software and consultancy. It purchased Callidus Software from Callidus Inc. (a US-based) through a contract dated 30th September, 2009 for its own use and for distribution through a license. The dispute arose after the taxman conducted an in-depth audit into the books of the appellant and unearthed transactions relating to payment to non-resident persons in respect of software licenses.

Rival Submission of the Parties

Under the laws of Kenya, a person is required to deduct and remit withholding tax on consideration for the use or right to use any copyright of a literary work since it amounts to a royalty according to sections 2 and 35 of the Income Tax Act, Chapter 470 Laws of Kenya. However, the appellant was of the view that copyright and copyrighted material are different and that payment for the former is a royalty subject to withholding tax, while trading in the latter is a normal sale of goods transaction subject to business tax.  The appellant relied on section 2(1) of the Copyright Act, 2001 which defines literary work to include computer programs.

Further, the computer programs are defined under the Copyright Act as a set of instructions expressed in words, codes, schemes or in any other form, which is capable of causing the computer to perform or achieve a particular task when incorporated in a medium that the computer can read. Therefore, the appellant submitted that what was capable of being copyrighted was the set of instructions rather than the medium through which the software was incorporated (the material which could be copyrighted).

This position was buttressed by Copinger and Skone James’ book on Copyright which echoed the line of distinction between title to copyright and the physical material embodying the subject of copyright, thus specifying: ‘The ownership of copyright in a work is separate and distinct from the ownership of the physical material in which the copyright work is embodied. The transfer of the title to the physical material does not necessarily confer the ownership rights to the copyright. Just like the purchase of a book does not make the buyer become the owner, the purchase of a software license does not make the purchaser to become the owner.’

Additionally, the appellant adduced expert evidence to clarify the distinction between a mere sale, an assignment that refers to a transfer of ownership rights and a license that refers to a transfer of limited rights of the owner.

On the other hand, the respondent was of the view that the appellant had purchased the copyrighted material for its own use and for resale and as such, exploited the rights to use the software, hence meeting the definition of royalty according to section 2 of the Income Tax Act. It was of the view that separating the copyright from the copyrighted material would lead to absurdity since the software is intangible and its enjoyment requires that it be embedded in physical material.

The Determination of the Court

In its judgment, the High Court agreed with the appellant and echoed the difference between a vendor of copyrighted material and a user of copyright. In the instant case, the appellant had engaged in a sale of goods of transaction which did not transfer any rights of the copyright. Consequently, the Court held that the appellant was not liable to pay withholding tax since the payment was not royalty.

Implications of the Court’s Finding

Following this judgment, a number of issues arose which are worth the consideration of practitioners and scholars alike. Foremost among these is the extent of rights conferred in a person in the case of an assignment as compared to when it is a license agreement.  In the case of Commissioner of Income Tax V Synopsis International Old Limited, the Supreme Court of India explained a license to mean the grant of permission to do a particular thing.

The effect of a license is to enable a person to do a thing that would otherwise be unlawful. However, a license does not confer any right other than that which is actually authorized under the license. It is only a consent given by the lawful owner of the copyright to another person to enjoy a limited extent of rights.  Therefore, the licensee does not acquire proprietary interests but merely obtains permission to do certain acts which would be considered an infringement of copyright if the license was not granted, for example reproducing the articles of copyright or even distributing them to other users of the copyright.

On the contrary, an assignment is a transfer of ownership which may be a part transfer of ownership or absolute transfer of ownership. In the partial assignment, the owner transfers only some of his exclusive rights or all of his rights for a limited period of time and not the whole term of the copyright. It is only in the event of a transfer of rights through an assignment that the payment of royalty is considered. In such a case, the assignee acquires rights to commercially exploit the copyright, to reproduce the original work of copyright, to perform any translation, to adapt or customize the copyrighted article and to engage in any distribution by way of sale, lease, rental, hire, loan, importation or similar arrangement as stipulated under section 26 of the Copyright Act.

It is also important to note that a mere sale of copyrighted articles only attracts business income tax because when software is put in a medium, they are considered to be goods. The exchange of goods is a sale transaction and not an assignment of copyright.

In addition, the case highlighted the importance of the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital in providing clarity of issues and entrenching uniformity of tax practice globally. Under article 12 paragraph 14.4, the OECD guidelines state that arrangements between a software copyright holder and a distribution intermediary grant only such limited rights as are necessary for the distribution of copies of the copyrighted software. The payments made in such cases are only meant to be for the acquisition of the copies and not the copyrights. Such payments are dealt with only when computing business profits. It does not matter whether the copies of the copyrighted material are delivered in a physical form or through an electronic platform.


This decision sets an important precedent on how to deal with the taxation of payments for transactions involving intellectual property rights. Taxpayers, as well as the taxman, are now able to clearly distinguish copyright from copyrighted material and also treat a mere sale differently from a license or a transfer.


Brian Odiwuor Otieno is a Certified Public Accountant (Kenya), a holder of a degree in Bachelor of Laws, LLB and a Tax Analyst at PKF Kenya LLP.


Suggested citation: Brian Odiwuor Otieno, Taxing Payments for Transactions Involving Intellectual Property Rights: An Analysis of the Kenyan High Court’s Recent Decision, JURIST- Professional Commentary, February 24, 2022,

This article was prepared for publication by Giri Aravind, a JURIST staff editor. Please direct any questions or comments to him at

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