What are custodial services provided by banks and other financial institutions?
Custodial services provided by financial institutions refer to a service offering where the financial institution holds customers' securities and other assets for safekeeping. These services are designed to minimise the risk of theft or loss and can include a range of tasks that facilitate the management and protection of a client's investments. Most common custodial services in Kenya include safeguarding physical documents such as title and ownership documents.
These services are typically used by a wide range of clients, including individual investors, corporations, investment funds, and government entities. The custodial services help clients to efficiently manage their investment portfolios and reduce administrative burdens, while also providing an additional layer of security and oversight.
What are custodial fees?
Custodial fees are charges that an institution, such as a bank levies for holding securities and providing custodial services. These fees are meant to cover the costs associated with the safekeeping of assets, account administration, transaction settlements, and other related services provided by the custodian.
Custodial fees can be structured in various ways, including:
Flat Fees: a fixed amount charged on a regular basis (e.g., monthly, quarterly, or annually);
Asset-Based Fees: a percentage of the total assets under management (AUM);
Transaction Fees: Charges for each transaction made within the account; and/or
Ancillary Fees: Additional fees for services that are not included in the standard custodial package, such as wire transfers, check writing, or account closure fees.
What are the applicable taxes on custodial services?
Corporate income tax: the financial institution will account for the custodial income when calculating its taxable income.
Excise duty: fees and commissions charged by financial institutions are subject to excise duty, so custodial fees are subject to excise duty.
Value Added Tax (VAT): custodial services are financial services not specifically exempt in the First Schedule of the VAT Act, therefore they are subject to VAT
Applicability of eTIMS to custodial services
According to the Tax Procedures (Electronic Tax Invoice) Regulations, 2024, fees charged by financial institutions are exempt from eTIMS. Since custodial services are fees charged by financial institutions in line with their licensed services, then these fees are exempt from eTIMS requirements
Found this helpful? Here's how DigiTax can support you!
Due to the fact that custodial services fees are not exempt from eTIMS requirements, ensuring compliance with the latest tax regulations is crucial for all financial institutions. DigiTax specializes in providing comprehensive eTIMS compliance solutions, helping you navigate the evolving regulatory landscape with ease.
Whether you need guidance on other aspects of eTIMS or support with tax compliance, our team is ready to assist you in achieving a seamless transition. Contact us today at info@namiri.tech or call/WhatsApp us at 0112685368 for expert assistance tailored to your institution's needs.
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