Intercompany Services Agreement

An Intercompany Services Agreement in Kenya defines the scope of work, fees and deliverables governing the provider's services to the client.

The agreement must specify the nature of each service category, the methodology used to calculate charges, the payment schedule, and the treatment of out-of-pocket expenses. Under section 18 of the Income Tax Act Cap. 470, payments made between associated persons are only deductible where they are consistent with what independent parties would agree in comparable circumstances. The Transfer Pricing Rules 2006, gazetted as Legal Notice No. 8 of 2006, require taxpayers to maintain contemporaneous documentation supporting the arm's-length standard for all intra-group transactions. The High Court of Kenya in Unilever Kenya Ltd v Commissioner of Domestic Taxes [2013] eKLR affirmed that the burden of demonstrating arm's-length pricing rests with the taxpayer.

Beyond taxation, the Intercompany Services Agreement in Kenya performs several corporate governance functions. It confirms that the parent company or the designated shared-services centre can legally recover costs from subsidiaries, preventing the economic distortion that arises when one entity bears the full overhead of group-wide functions. The Companies Act No. 17 of 2015 obliges directors to act in the best interests of their individual company, meaning directors of a subsidiary must be satisfied that fees paid under the agreement represent fair value for services received. The agreement therefore protects directors from claims of breach of fiduciary duty.

Forms-legal.com provides a Kenya-specific Intercompany Services Agreement template that incorporates the Kenya Revenue Authority's preferred methodologies — the Comparable Uncontrolled Price method, Cost-Plus method, and Profit Split method — so your corporate group can document its transfer pricing position confidently. The template is aligned with the OECD Transfer Pricing Guidelines, which Kenya's Transfer Pricing Rules 2006 expressly adopt by reference, and it includes clauses addressing the annual review of service fee rates, the treatment of exceptional expenses, and the governing law clause designating Kenyan courts as the forum for dispute resolution. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 2 of the Law of Contract Act (Cap 23) govern the core requirements for this type of document.

The legal framework governing the Intercompany Services Agreement in Kenya draws on several key statutes and regulatory bodies. Under the Companies Act No. 17 of 2015, the Registrar of Companies at the Office of the Attorney General maintains the register of Kenyan companies. Section 3 of the Law of Contract Act (Cap. 23) governs contractual obligations. The Competition Authority of Kenya (CAK) enforces the Competition Act No. 12 of 2010. The Kenya Revenue Authority (KRA) administers corporate tax under the Income Tax Act (Cap. 470). The High Court of Kenya has unlimited original jurisdiction under Article 165 of the Constitution of Kenya 2010. Parties executing a Intercompany Services Agreement in Kenya should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Income Tax Act Cap. 470 sets the foundational requirements.

A Kenya Intercompany Services Agreement becomes necessary in several common corporate situations. First, when a parent company or regional headquarters based in Nairobi or abroad provides shared services — such as IT support, human resources administration, treasury management, or legal and compliance oversight — to its Kenyan subsidiary, the Companies Act No. 17 of 2015 and the Kenya Revenue Authority's Transfer Pricing Rules 2006 both require a written agreement to support any intercompany cost recovery.

Second, when a Kenyan operating company renders services to its foreign affiliates — for example a business process outsourcing centre or a regional treasury hub — the agreement documents the service relationship and supports the tax treatment of income received. Under section 7 of the Income Tax Act Cap. 470, income from services rendered in Kenya is taxable in Kenya, and a written agreement evidences the taxable source.

Third, the agreement is essential when preparing for an audit by the Kenya Revenue Authority's Large Taxpayer Office. Transfer pricing documentation, including the Intercompany Services Agreement, forms part of the Master File and Local File disclosure framework adopted in Kenya following the Base Erosion and Profit Shifting Action Plans endorsed by the OECD, to which Kenya is an associate member through the Inclusive Framework.

Fourth, multinational enterprises restructuring their operations — merging shared-services centres, relocating functions, or introducing a new principal model — need to execute fresh intercompany agreements before the restructured arrangement takes effect. The absence of a contemporaneous agreement can result in the Kenya Revenue Authority disallowing deductions claimed by the Kenyan entity under section 18 of the Income Tax Act Cap. 470.

Fifth, lenders and investors conducting due diligence on a Kenyan company will request evidence of all material intercompany arrangements. An executed Intercompany Services Agreement demonstrates sound corporate governance and reduces the risk of post-acquisition tax adjustments. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 2 of the Law of Contract Act (Cap 23) govern the core requirements for this type of document.

A well-drafted Kenya Intercompany Services Agreement should contain the following essential elements to satisfy both the Kenya Revenue Authority and the Companies Act No. 17 of 2015.

**Parties and Relationship Disclosure.** The agreement must identify each party precisely — including company registration numbers issued by the Registrar of Companies under the Companies Act No. 17 of 2015 — and must state the nature of the relationship, such as parent-subsidiary, fellow subsidiaries, or associates as defined under section 2 of the Income Tax Act Cap. 470. This disclosure is foundational to applying the transfer pricing rules.

**Service Catalogue.** A detailed schedule listing every category of service — management consulting, financial reporting support, IT infrastructure, human resources, legal and regulatory compliance, procurement, and treasury — confirms that the Kenya Revenue Authority can verify that services charged for were actually rendered. Courts including the Tax Appeals Tribunal in cases such as Bamburi Cement Ltd v Commissioner of Domestic Taxes have emphasised the requirement of demonstrating actual benefit to the recipient.

**Pricing Methodology and Arm's-Length Standard.** The agreement must state the transfer pricing method applied — Comparable Uncontrolled Price, Cost-Plus, Transactional Net Margin, or Profit Split — and reference the OECD Transfer Pricing Guidelines as adopted by Kenya's Transfer Pricing Rules 2006 (Legal Notice No. 8 of 2006). The method selection must be documented in the contemporaneous transfer pricing study.

**Fee Calculation and Invoicing.** The agreement should specify whether charges are calculated on a cost-recovery basis, a cost-plus margin, or a fixed fee, and must prescribe the invoicing cycle — monthly, quarterly, or annually. Invoices must comply with section 17 of the Value Added Tax Act No. 35 of 2013 where VAT applies to taxable services supplied in Kenya.

**Payment Terms and Currency.** Given that many intercompany arrangements involve cross-border payments, the agreement must address the currency of payment, the spot rate mechanism for conversion, and compliance with the Foreign Exchange Management regulations administered by the Central Bank of Kenya under the Central Bank of Kenya Act Cap. 491.

**Withholding Tax Obligations.** Payments to non-resident service providers are subject to withholding tax under section 35 of the Income Tax Act Cap. 470 at rates that vary depending on the applicable Double Tax Agreement — Kenya has treaties with the United Kingdom, Germany, Zambia, India, Iran, and Denmark among others. The agreement should allocate responsibility for withholding, remittance to the Kenya Revenue Authority, and the obligation to provide withholding tax certificates.

**Term, Review, and Termination.** Intercompany agreements should be reviewed annually to confirm that pricing remains arm's-length as business circumstances evolve. The agreement should allow either party to terminate on reasonable notice — typically 90 days — and should address the treatment of work in progress at termination.

**Confidentiality and Data Protection.** Where services involve the processing of personal data — payroll administration, customer relationship management, or HR records — the agreement must include data processing obligations consistent with the Data Protection Act No. 24 of 2019 and the Data Protection (Processors and Controllers) Regulations 2021.

**Dispute Resolution.** The agreement should designate the High Court of Kenya at Nairobi as the primary forum, with optional reference to the Nairobi Centre for International Arbitration under the NCIA Arbitration Rules 2015 as an alternative for cross-border disputes. Forms-legal.com includes a balanced dispute resolution clause covering negotiation, mediation, and arbitration escalation steps. Governing law must be the laws of Kenya.

**Record-Keeping.** The Transfer Pricing Rules 2006 require contemporaneous documentation to be maintained for at least five years. The agreement should impose a corresponding obligation on both parties to retain records — contracts, invoices, board approvals, and correspondence — supporting the transfer pricing position. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 2 of the Law of Contract Act (Cap 23) govern the core requirements for this type of document.