TAX SYSTEM
- Kenya has a source-based tax system, in terms of which both residents and non-residents are subject to tax on income earned from a source in Kenya.
- What entails corporate resident?
A company is tax resident in Kenya if:
- it is incorporated under Kenyan law;
- the management and control of the affairs of the company are exercised in Kenya in a particular year of assessment; or
- It has been declared by the Cabinet Secretary of the National Secretary by a notice published in the Kenya Gazette, to be a tax resident for any year of income.
Corporate tax rate
- This is payable on the taxable profits earned by a company in a year. Resident companies are subject to corporate income tax at the rate of 30%, whereas branches/permanent establishments of foreign companies are taxed at the rate of 37.5%. The tax is paid through on an instalment tax basis over the course of the tax/financial year. The instalment tax payable is based on the lower of tax that was paid in the preceding year assessment multiplied by 110% and on a current year basis, which is an estimate of the taxes that will be payable for that year. The tax is paid in 4 equal instalments that are due on the 4th, 6th, 9th and 12th month of the company’s financial year.
- Newly listed companies, companies operating in export processing zones and special economic zones, companies engaged in business under a special operating framework arrangement with the government, companies operating a plastic recycling plant, companies constructing at least 400 residential units annually and companies engaged in the local assembly of motor vehicles qualify for reduced tax rates during specified periods.
Personal income tax
Pay As You Earn (PAYE)
- The income tax rates applicable to resident individuals are:
chargeable income (KES) tax rate:
Monthly Pay Bands (Ksh.) Annual Pay Bands (Ksh.) Rate of Tax (%)
On the first Shs. 24,000 On the first Shs. 288,000 10
On the next Shs. 8,333 On the next Shs.100,000 25
On the next Shs. 467,667 On the next Shs. 5,612,000 30
On the next Shs.300,000 On the next Shs. 3,600,00 32.5
Capital Gains tax (“CGT”)
- Net capital gains accruing on the transfer of property situated in Kenya are generally subject to CGT at the rate of 15%.
- The definition of property includes land, buildings and marketable securities.
WITHHOLDING TAX (“WHT”) RATES
Dividends
Taxed at 5% for residents.
Under the Income Tax Act, a resident, when referring to an individual, is defined as a person who:
- possessed a permanent home is in Kenya for a period in the particular year of income under consideration; or
- has no permanent home in Kenya but was present for an aggregate of 183 days or more in the particular year of income under consideration; or
- has no permanent home in Kenya but was present for an aggregate of 122 days for the income year under consideration and each year for the previous two years.
When referring to a body of persons, a resident is where such a body is:
- incorporated in the Republic of Kenya;
- the management and affairs of the body are run from Kenya; or
- declared as a resident by the Cabinet Secretary in the Kenya Gazette.
Taxed at 15% for non-residents.
Exemption for resident companies holding more than 12.5% shareholding in a resident company.
Foreign sourced dividends are not taxed in Kenya.
Interest
Withholding tax is chargeable on interest earned as follows:
- interest received from a financial institution – 15%;
- interest earned on bearer certificates: - 25%;
- interest earned on bearer bonds: - 10%.
Royalties
Withholding tax is charged on royalties as follows:
- Residents: - 5%
- Non-Residents: 20%
Management or Professional Fees
- Residents - 5% (if the aggregate value is at least KES24 000 in a month)
- Non-residents - 20%
*The withholding tax rate for non-residents may be reduced in terms of a relevant double tax agreement.
Double Taxation Treaties
Kenya has double taxation treaties with:
- Canada, Denmark, France, Germany, India, Iran, Norway, Qatar, Republic of Korea, Seychelles, South Africa, Sweden, the United Arab Emirates, the United Kingdom and Zambia
STAMP DUTY
Stamp duty is levied under the Stamp Duty Act, Chapter 480 laws of Kenya on a number of instruments, including conveyances or transfers on the sale of any property, sale of any stock or marketable security, sale of any immovable property, mortgages, bonds, debenture or covenants, and instruments of partnership.
Stamp duty at the rate of 1% is payable on the transfer of shares on the value of the sale. Shares listed on the Nairobi Stock Exchange are exempt from stamp duty.
Stamp duty on the transfer of immovable property is levied at the rate of 4% for property within municipalities and 2% for property outside municipalities.
VALUE ADDED TAX (“VAT”)
Taxable Supplies
- VAT is levied on the supply of goods and services in Kenya and on the importation of taxable goods and services.
VAT Rate
The standard rate is 16% in the supply and import of taxable goods and services, other than electrical energy and fuel oils.
However, VAT is chargeable at a zero rate on the export of goods and taxable services. A list of all zero-rated goods and taxable services are set out under the Second Schedule of the Value Added Tax Act No. 35 of 2013.
The Act can be downloaded here.
Registration Threshold
- Any person who, in the course of his/her business, has supplied taxable goods or services to a value of at least KES 5 - million in a 12-month period must register for VAT purposes.
VAT Withholding
- Taxable supplies made by persons designated by the KRA are subject to withholding VAT at the rate of 2% of the taxable value.
Reverse VAT on Imported Services
- Resident companies are required to account for output VAT in respect of taxable imported services rendered by non-resident companies where the registered person would not be entitled to a tax credit for the full amount of input tax in terms of a reverse-charge mechanism.
- Non-residents without a permanent establishment in Kenya rendering services through a digital market to persons in Kenya are required to register for VAT (or appoint a tax representative to account for VAT on their behalf). This requirement exists even if the value of their supplies does not meet the KES 5-million threshold.
TURNOVER TAX
This is an indirect tax that is applicable to small business taxpayers whose total annual amount of revenue/sales (turnover) is between 1.5 million and 5 million Kenyan Shillings, Therefore, small business taxpayers who do not qualify for VAT pay the turnover tax.
The Turnover tax is aimed at bringing businesses in the informal sector into the tax bracket. These include small -scale manufacturing firms and Jua Kali businesses, agricultural enterprises and transport industries. The turnover tax rate is 3 percent. Businesses that make losses are exempt from turnover tax. It should be noted that such businesses do not qualify for any deductions before the calculation of the turnover tax.
LOSSES
Tax losses can be carried forward for 10 years, inclusive of the year in which the loss was incurred. The loss can only be set off against income from the same specific source and is not transferable from one entity to another.
TRANSFER PRICING
In terms of Kenya’s transfer pricing rules, transactions between related enterprises must be entered into on an arm’s length basis.
- Enterprises are related if one of the enterprises participates directly or indirectly in the management, “control” or capital of the other enterprise, or a third person participates directly or indirectly in the management, “control” or capital of both enterprises.
- “Control” is extensively defined to include inter alia a situation where a person directly or indirectly holds at least 20% of the voting rights in a company or a person has the authority to appoint more than half the board of directors or at least one executive director.
INTEREST RESTRICTION REGIME
The Income Tax Act was amended by the Finance Act, 2021 which replaced the thin capitalization regime with an interest restriction regime.
Under the interest restriction regime, gross interest paid or payable to a lender which exceeds thirty per cent (30%) of the earnings (excluding exempt income) before interest, tax, depreciation, and amortization (EBITDA) is not an allowable deduction for corporation tax purposes.
“Interest” for the purposes of this limitation includes payments that are economically equivalent or similar to interest and expenses incurred in raising finance.
The interest restriction regime does not apply to:
(a) Bank or financial institutions licenced under the banking act (including Microfinance institutions licenced and non-deposit taking microfinance business under the Microfinance Act 2006;
(b) Entities under the Hire Purchase Act;
(c) Non-deposit taking institutions involved in the lending and leasing business;
(d) Companies involved in the manufacture of human vaccines;
(e) companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least five billion shillings;
(f) companies engaged in manufacturing whose cumulative investment is at least five billion shillings, provided that the investment shall have been made outside Nairobi City County and Mombasa County;
(g) holding companies that are regulated under the Capital Markets Act.
CAPITAL DEDUCTIONS
Investment deduction for qualifying investments: qualifying investments relate to the purchase and installation of machinery used in manufacturing. This also extends to machinery for electricity generation, waste disposal and clean-up, as well as water supply and disposal machinery.
Industrial building allowance: 10% - 50% for qualifying building. Qualifying buildings include industrial buildings in which manufacturing machinery is installed and hotels.
Plant and machinery (reducing balance): 12.5% - 37.5%
Mining specified minerals:
- Year 1: 40%; and
- Years 2 to 7: 10%.
EXCHANGE CONTROL
There are currently no exchange control restrictions applicable in Kenya. The Exchange Control Act, which imposed exchange controls, was repealed in 1995. However, foreign payments need to be made through commercial banks.Foreign investors are therefore free to repatriate funds out of the country. However, the Central Bank of Kenya (“CBK”) has established foreign exchange guidelines meant to ensure that cross-border payments are not connected with illegal financial transactions such as money laundering or the financing of terrorism.
Every reporting institution has an obligation to report any transactions on all cash transactions equivalent to or exceeding US$ 10,000/- or its equivalent in any other currency to the Financial Reporting Center established by the CBK, whether the transaction appears to be suspicious or not. Further, banks and financial institutions are required by the CBK to retain documents of the underlying transaction pursuant to which foreign exchange payments abroad are made. In our opinion, this directive is meant for security purposes rather than a restriction to the repatriation of funds.
