Del Monte appeal brings clarity to tax treatment of foreign exchange losses in Kenya

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Analysis of Kenya’s evolving approach to foreign currency financing and tax deductibility

Foreign exchange losses can significantly impact businesses operations, particularly those engaged in cross-border transactions or financing. The question of whether such losses are deductible for tax purposes has been a subject of legal and accounting scrutiny. The June 2026 Court of Appeal judgement in Commissioner of Domestic Taxes vs Del Monte Kenya Limited, has provided much-needed clarity on how these losses should be treated under Kenyan tax law.

Del Monte Kenya Limited, a subsidiary of Del Monte International Inc. based in Panama, had over several years since 2001 received substantial unsecured and interest-free loans denominated in US dollars and British pounds from its parent company. Unlike typical loans intended for capital investment or expansion, these funds were allocated to support the company’s day-to-day operations including payment of suppliers, procurement, and salary obligations. This operational use of foreign currency loans placed Del Monte in a unique position regarding the subsequent accounting and tax treatment of exchange gains and losses.

Del Monte managed its accounts in Kenyan shillings, so foreign currency loans were regularly converted to local terms. Annual fluctuations in exchange rates, ment that the value of the loans would shift, causing unrealised gains or losses, which stayed notional until the loans were settled or a financial event occurred.

By the close of 2008, Del Monte had amassed significant outstanding balances in both US dollars and British pounds. In 2009, a major restructuring took place: the debt was assigned to another related entity and ultimately extinguished through a combination of offsetting receivables and the issuance of shares to the creditor. This conversion of debt into equity marked the point at which previously unrealised foreign exchange losses totaling over KSh 400 million were finally realised.

Del Monte subsequently claimed these losses as deductible expenses under Section 4A of the Income Tax Act, arguing that they were incurred in the ordinary course of its revenue-generating activities. However, following an audit covering the years 2009 to 2011, the Kenya Revenue Authority (KRA) disagreed, disallowing the deduction and issuing additional tax assessments. The dispute set the stage for a series of legal proceedings, each bringing a different perspective to the matter.

Diverging Decisions in Lower Courts

The Tax Appeals Tribunal initially decided that foreign exchange losses on receivables were deductible, but losses from debt converted to equity were not, as they were considered capital in nature. Del Monte appealed, and the High Court overturned the ruling, stating all such losses were revenue and deductible under Section 4A since they arose from business loans. The conversion of debt to equity was deemed a realisation event, broadening companies’ ability to claim deductions for exchange losses.

Unhappy with the High Court’s broad ruling, the Commissioner of Domestic Taxes appealed to the Court of Appeal. The key issue was whether the losses were capital or revenue, and if converting debt to equity constituted a valid realisation event for tax claims.

Court of Appeal’s Landmark Clarification

The Court of Appeal examined the facts and legal arguments with careful attention to both the nature of the loans and their use in the business. The court noted that Del Monte’s loans were not designated for capital expenditure or expansion but were instead deployed for everyday business operations. This operational focus was critical in determining the tax treatment of the associated foreign exchange losses.

After reviewing the relevant provisions of the Income Tax Act and the precedents set in prior tax cases, the Court of Appeal concluded that foreign exchange losses realised upon the conversion of foreign-denominated loans into equity could be classified as revenue in nature, so long as the loans had been used in the ordinary course of business. The court affirmed that the conversion of debt into equity constituted a legitimate realisation event, thereby allowing the losses to be claimed as deductions under Section 4A.

The judgment has brought clarity to an area of tax law that was previously unsettled, guiding both businesses and tax authorities on how to approach similar cases in the future. The court’s reasoning rested on the principle that the substance of the transaction rather than its form should determine the tax treatment. Because Del Monte’s loans were used for revenue-generating activities, the losses were considered revenue losses and thus eligible for deduction.

The Del Monte ruling by the Court of Appeal marks a turning point in Kenya’s tax jurisprudence regarding foreign exchange losses. By affirming the revenue nature of such losses when realised through conversion of debt into equity for operational loans, the court has provided much-needed certainty for businesses and the tax administration alike. The precedent set will guide future disputes and inform business strategies involving foreign currency financing, making Kenya’s tax landscape more predictable and business-friendly. 

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