19 August 2026
The Court of Appeal has delivered a significant decision for taxpayers dealing with foreign currency-denominated financing arrangements, holding that realised foreign exchange (FX) losses arising from the conversion of debt into equity are deductible for income tax purposes under section 4A of the Income Tax Act.
In Commissioner of Domestic Taxes v Del Monte Kenya Limited (Civil Appeal No. E174 of 2022), the Court dismissed the Kenya Revenue Authority’s (KRA) appeal and upheld the High Court’s finding that the manner in which a foreign currency liability is settled does not affect the deductibility of a realised FX loss.
Background
The dispute stemmed from KRA’s audit of Del Monte Kenya Limited for the 2009–2011 years of income. Del Monte had obtained foreign currency-denominated loans from a related party, which were used to fund its ordinary business operations, including the payment of suppliers, purchase of raw materials and staff costs.
As exchange rates fluctuated over the years, unrealised FX losses accumulated on the outstanding loans. In 2009, the loans were settled through a combination of offsets against intercompany receivables and the issuance of shares under a debt-to-equity conversion. This extinguishment of the foreign currency obligations crystallised the previously unrealised FX losses.
Del Monte claimed the realised FX losses as deductible expenses under section 4A of the Income Tax Act. KRA disallowed the deduction on the basis that the portion of the debt settled through the issuance of shares was capital in nature and therefore not deductible.
The matter progressed through the judicial hierarchy as follows:
• The Tax Appeals Tribunal (2016) held that the FX losses had been realised but disallowed the portion attributable to the debt-toequity conversion;
• The High Court (2019) overturned that finding and held that the realised FX losses were deductible under section 4A; and
• The Court of Appeal (2026) affirmed the High Court’s decision and dismissed KRA’s appeal.
The Court’s Determination
The central issue before the Court of Appeal was whether realised FX losses arising from the settlement of foreign currency debt through conversion into equity qualify as allowable deductions under section 4A.
The Court answered this question in the affirmative. First, it held that the realisation of a foreign currency gain or loss is not confined to cash repayment. A foreign currency obligation may be extinguished through various means, including payment in kind, set-off against receivables or conversion of debt into equity. Once the liability ceases to exist, the corresponding FX gain or loss is realised.
Secondly, the Court found that section 4A does not distinguish between losses realised through transactions perceived to be revenue in nature and those arising where settlement occurs through equity conversion. The statutory provision simply requires that a foreign exchange loss be realised in the course of business.
Importantly, the Court declined KRA’s invitation to import additional conditions into section 4A through reference to the capital expenditure restrictions under sections 15 and 16 of the Income Tax Act. Reiterating the principle of strict interpretation of tax statutes, the Court emphasised that tax obligations and restrictions must be expressly provided for in legislation and cannot be created by implication.
Why This Matters
The decision provides welcome certainty for businesses with foreign currency liabilities, particularly multinational groups that frequently restructure intercompany debt through debt-to-equity conversions.
The Court has clarified that the focus under section 4A is the realisation of the foreign exchange loss, rather than the mechanism used to settle the underlying liability. Consequently, a realised FX loss will not lose its deductibility merely because the debt is extinguished through the issuance of shares.
While the judgment is favourable to taxpayers, businesses should ensure that they maintain adequate documentation demonstrating that the foreign currency borrowings relate to business activities and that the losses claimed have in fact been realised.
Key Takeaway
The Court of Appeal’s decision confirms that, under the current wording of section 4A of the Income Tax Act, realised foreign exchange losses arising on the conversion of debt to equity are allowable for tax purposes. Unless Parliament legislates otherwise, the mode of settlement of a foreign currency obligation does not, by itself, alter the deductibility of the resulting realised FX loss