Two recent court cases in Kenya have brought renewed scrutiny to the funds industry—particularly regarding the pricing of sub-advisory agreements. One case, in particular, has highlighted the importance of substance over form in determining transfer pricing outcomes. It underscores that the actual conduct of parties, rather than the roles outlined in legal agreements, is what truly matters. This article explores the transfer pricing implications of the case and how fund managers can mitigate similar risks.

Background: the ECP Kenya Ltd case

ECP Kenya Ltd entered into a sub-advisory agreement with ECP Manager LP, a US-based investment advisor registered with the SEC. Under this agreement, ECP Kenya Ltd was tasked with collecting and analysing data from portfolio companies and responding to requests from ECP Manager LP. In return, it received a cost-plus fee with a 7% mark-up.

ECP Manager LP, one of three fund managers for various funds, including ECP Africa Fund III PCC, was responsible for:

• sourcing investment opportunities;
• executing due diligence and technical analysis;
• recommending investments to the fund’s investment committee;
• monitoring and reporting on investee performance; and
• advising investee companies.

ECP Kenya Ltd claimed its role was limited to routine administrative support, with no involvement in investment decisions or fundraising.

The KRA’s position

The Kenya Revenue Authority (KRA) challenged this characterisation arguing that ECP Kenya Ltd performed significant functions that were integral to the investment advisory process. Central to the KRA’s case was Bryce Louise Fort, Managing Director of ECP Kenya Ltd, who was also a shareholder in ECP Manager LP and other related entities. Bryce’s involvement in investment decisions and his board positions in investee companies suggested a level of influence inconsistent with a routine service provider.

The KRA concluded that:

• ECP Kenya Ltd and ECP Manager LP were highly integrated.
• Bryce’s role constituted a key value-adding function.
• ECP Kenya Ltd contributed to investment advisory decisions.
• A permanent establishment (PE) was created in Kenya.
• The Transactional Profit Split Method (TPSM) was more appropriate than the cost-plus method.

Key issues and implications

1. Substance over form

The case illustrates that tax authorities may disregard legal agreements if the actual conduct of the parties suggests a different functional profile. Despite the agreement describing ECP Kenya Ltd as a low-value service provider, the KRA found that it played a central role in investment decisions.

2. Importance of key personnel

The KRA identified investment personnel as the key assets in the advisory business. Bryce’s dual role across Kenya and the US entities blurred the lines between administrative support and strategic decision-making.

3. Documentation consistency

The KRA relied not only on legal agreements and transfer pricing documentation but also on SEC filings and job descriptions. Discrepancies between these documents weakened ECP Kenya Ltd’s position. This highlights the importance of consistency across all public and internal documentation.

4. Transfer pricing methodology

The case questions whether a cost-plus method is always appropriate for administrative entities. When personnel perform high-value functions, a profit split method may better reflect the economic reality—especially in early-stage funds where cost structures are high and revenues are low.

Lessons for the funds industry

• Align conduct with contracts: Ensure that the actual activities of personnel match the roles described in legal agreements.
• Document thoroughly and consistently: Align job descriptions, public filings, and transfer pricing policies.
• Reassess transfer pricing methods: Consider whether TPSM may be more appropriate in cases of integrated operations or shared decision-making.
• Monitor key personnel: Evaluate the influence of individuals who may bridge multiple entities or jurisdictions.

While the case is under appeal, it has already sparked significant debate in the funds industry. It serves as a cautionary tale about the risks of misalignment between legal form and economic substance. Fund managers should take proactive steps to ensure their transfer pricing arrangements reflect the true nature of their operations—before tax authorities do it for them.

Written by Karen Miller, Consultant at Webber Wentzel