A policy shift has left the privately owned, high-end Nova Pioneer Tatu City Primary School engaged in a rare legal battle to retain tax incentives granted by the State for investments in special economic zones (SEZs).
The school is employing every legal argument in its arsenal to save its $4.5 million (Sh582.7 million) investment from substantial taxation by the Kenya Kwanza administration, following a major policy change that exposed it to a potential tax demand.
In January 2023, the government, through the Special Economic Zones Authority (Seza), granted Nova Pioneer Tatu City Primary School Property SEZ Limited an enterprise licence to construct and lease commercial premises, including educational facilities, within the Tatu City Special Economic Zone in Kiambu County.
Court papers show that the organisation invested approximately $4.5 million (Sh582.7 million at the current exchange rate) in the development of the learning premises, which were subsequently leased to Nova Pioneer Tatu City Primary School.
During this time, Seza never raised any legal or procedural concerns, nor did it amend, suspend or revoke the licence.
However, on January 11, 2024, the authority rejected Nova Pioneer’s licence renewal application, citing an amendment to the Special Economic Zones Act, 2015.
Consequently, Nova was denied the tax incentives and other fiscal benefits available to SEZ investors. The organisation, which was seeking to continue with activities relating to the construction and leasing of educational facilities, appealed the decision. When the authority did not budge, the organisation filed a judicial review case at the High Court in Nairobi.
So intriguing is the legal dispute that it could set a precedent for other education investors in special economic zones, potentially affecting Kenya’s push for premium private education options.
The organisation sought four key orders, including the quashing of the authority’s decision and compelling the government to renew the licence.
It also sought an order prohibiting the authority from denying the organisation all the rights, tax incentives and benefits specified in Sections 33, 34 and 35 of the Special Economic Zones Act, and the provisions of various fiscal legislations such as the Income Tax Act, the Value Added Tax Act, the Excise Duty Act, the Stamp Duty Act, the Miscellaneous Fees and Levies Act.
Schools in SEZ?
However, the authority says that activities such as the construction and leasing of educational facilities are not permitted under the SEZ Act and are therefore ineligible for SEZ-related incentives.
Incentives and tax benefits granted to SEZ developers, operators or enterprises are valid for 10 years from the licence issue date.
In its defence in court, Seza claims that policy changes introduced by the Finance Act, 2023, especially Section 100, which amended Section 4(4) of the Special Economic Zones Act, 2015, to redefine the nature and scope of special economic zones, are to blame.
The legal dispute centres on the enforcement of the amended Act and whether leasing educational facilities deviates from the intended commercial and industrial objectives of the designated SEZ area in question.
Having made its investments earlier, Nova Pioneer believes that the Act should not be enforced retrospectively to deny it tax incentives. But the government, through the Seza, says the current legal regime should be applied as it is.
The amendment Act introduced provisions for infrastructure and land use integration at SEZs, while restricting the scope of activities to those eligible for customs duty exemptions under customs law.
Section 4(4) of the Act is titled ‘Declaration of special economic zones’, states: “A special economic zone shall be a designated geographical area which may include both customs controlled area and on-customs controlled area where business enabling policies, integrated land uses and sector-appropriate on-site and off-site infrastructure and utilities shall be provided, or which has the potential to be developed, whether on a public, private or public-private partnership basis, where development of zone infrastructure and goods introduced in customs-controlled area are exempted from customs duties in accordance with customs laws”.
This technical legal definition forms the crux of the dispute over whether schools qualify as ‘sector-appropriate infrastructure’ under the Act.
Interpreting the law
Nova Pioneer was also denied licence renewal on account of Section 6 of the SEZ Act, which delineates customs-controlled and non-customs-controlled areas within the special economic zones.
The section states that an area declared as a special economic zone may be designated as either a single- or multiple-sector.
Such zones may include free trade zones, industrial parks, free ports and information and communication technology parks. They may also include science and technology parks, agricultural zones, tourist and recreational zones, business service parks, livestock zones, and convention and conference facilities.
In its interpretation of the law, Seza contends that while educational facilities may constitute a valid business activity, such undertakings fall outside the intended scope of incentivised SEZ activities.
It argues that such facilities would be more appropriately located in non-customs-controlled zones, as these do not attract the benefits available under the special economic zones framework.
“Construction and leasing of educational premises is not a core activity contemplated under Section 6 of the Act, and to grant or renew a licence for such activities would undermine the integrity of the SEZ regulatory regime and create a dangerous precedent that could dilute the intended sector-specific focus of SEZs,” argues the authority.
Seza argues that each licensing or renewal application must be evaluated on its own merits and under the prevailing legal framework.
“Issuance of a first licence did not confer any perpetual entitlement to renewal, nor did it create a legitimate expectation that similar approval would be granted in the future, particularly in light of the changed legal context,” the authority states.
The authority adds that a compliance audit revealed that the investor’s activities — specifically the construction and leasing of educational facilities — did not fall within the permissible economic activities under the SEZ Act or the redefined scope of SEZ operations under the Finance Act, 2023.
Seza also refutes claims that its decision against Nova Pioneer undermines investor confidence or the constitutional right to education, noting that the entity is free to pursue its activities outside the SEZ framework.
The authority argues that the SEZ licensing scheme is designed to encourage specific, targeted activities, and that including non-aligned enterprises would erode the strategic and economic value of the regime.
“Granting the renewal would set an undesirable precedent, potentially opening the floodgates to non-qualifying businesses seeking SEZ incentives, thereby frustrating the statutory objectives and compromising policy integrity,” it states, maintaining that the decision was lawful, reasonable, procedurally fair, and made within the scope of the statutory mandate under the SEZ Act.
The dispute has since been transferred to the Environment and Lands Court for determination, following a finding by Justice John Chigiti that the judicial review court division has no jurisdiction to handle the issues raised by the investor.
He found that the dispute relates to the environment, as well as to the use, occupation and title of land.
Mr Chigiti said the contention concerns the question of policy shift, around the provision of infrastructure and integration of land use, while restricting the scope of activities to those eligible for customs exemptions under customs laws.
The Environment and Lands Court is expected to determine whether activities previously undertaken by the investor fall within the redefined scope of allowable activities under the SEZ framework.
The outcome could influence how Kenya applies policy changes to existing investments, with implications far beyond the education sector.
