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A company is tax resident in Kenya if:

• It is incorporated under Kenyan law
• The management and control of its affairs are exercised in Kenya for any given year of income; or
• If the Cabinet Secretary in charge of the National Treasury declares the company to be tax resident for a particular year of income in a notice published in the Kenya Gazette.

Note: A different residency test exists under the double tax treaties entered into with Kenya.

Subject to certain restrictions, all expenditure which is wholly and exclusively incurred in the production of that income shall be deducted in arriving at the taxable income including capital and investment allowances. Besides the normal revenue expenses, the following expenses have been specifically allowed against business profits:

• Specific bad debts written off but subject to meeting some set criteria;
• Provision for bad debts but subject to some set criteria;
• Capital allowances (as investment incentives);
• Pre-operating expenses;
• Legal fees incurred on leases for premises used for business;
• Capital expenditure on farmlands;
• Capital allowances (as investment incentives);
• Structural alterations to premises incurred by the landlord where such expenditure is necessary to maintain the existing rent;
• Expenditure on scientific research;
• Interest paid to generate investment income;
• Capital allowances (as investment incentives);
• Sums contributed national retirement benefit schemes;
• Expenditure, which the commissioner considers just and reasonable, incurred on advertising and promoting goods and services provided by that business;
• Operating and finance lease payments paid by the lessee under a lease contract where the title of the asset leased always remains with the lessor;
• Donations made subject to certain conditions; and
• Realised foreign exchange gains or losses.
• Effective 01July 2016 expenditure incurred to sponsor sports, with prior approval of the sports cabinet secretary, is allowable
• Effective 3rd April 2017 Expenditure incurred in that year of income on donations to the Kenya Red Cross, county governments or any other institution responsible for the management of national disasters to alleviate the effects of a national disaster declared by the President.

The following expenses are specifically disallowed:

• Non-business and personal expenses (expenses not wholly and exclusively incurred in the production of income);
• Expenditure or loss which is recoverable under an insurance contract;
• All donations with the exception of those specified above;
• School fees;
• All legal fees with the exception of those specified above;
• Legal and other professional fees of a capital nature e.g. in relation to borrowings, stamp duty, valuation e.t.c);
• General and other provisions for bad debts;
• Other general provisions;
• Capital expenditure, or any loss, diminution or exhaustion of capital;
• Capital repairs and maintenance of buildings;
• Taxes paid;
• Employer pensions contributions exceeding prescribed limits;
• Unrealised foreign exchange losses;
• Realised foreign exchange losses arising from related party loans in case of thinly capitalized companies.
• Interest expenses for thinly capitalized companies;
• Depreciation and amortisation.

There are seven specified sources of income (“specified sources”).Profits derived from one of the seven sources shall be computed separately from profits derived from any of the other specified sources and losses incurred in any specified source can only be offset against income from the same source. The seven sources are:

• Business income;
• Rent;
• Employment and self employment professional income;
• Income from agricultural activities;
• Surplus funds from pension schemes;
• Investment income - dividends and interest; and
• Capital gains tax

Branches of non-resident companies are taxable on all their incomes derived from or accrued in Kenya. In determining the profits of a branch, interest, royalties or management or professional fees paid to the head office are not tax deductible, unless in cases where Double Tax Treaty (DTA) specifically allows.

However withholding tax does not apply to the above payments and after tax profit remittances likewise does not attract withholding tax. in cases where DTA allows the above expenses deductibility withholding tax will apply.

This is computed on buildings, machinery, motor vehicles and other equipment as explained below:

• Buildings used for/as: hotel, manufacture, hospital, and petroleum or gas storage facilities: 50% in the first year of use and residual at 25% per year on reducing balance
• Educational buildings (including hostels) and commercial buildings: 10% per year on reducing balance.
• Machinery used for manufacture, hospital equipment, ships and aircrafts, operations and prospecting rights, exploration operations under mining rights and farm works: 50% in the first year of use and residual at 25% per year on reducing balance.
• Other machinery not described above and fibre optics cable for use by a telecommunication operator: 10% per year on reducing balance.
• Construction of bulk storage and handling facilities of at least KES 5 billion for supporting the Standard Gauge Railway operations: 150% one-off in the first year of use up to 31 December 2021.

The Commissioner is empowered to adjust profits accruing to a Kenyan resident where such a person enters into transactions with non-resident related parties and the transactions are such that they produce either no profits or less than the ordinary profits which might be expected to accrue to the resident person if the transactions had been conducted by independent persons dealing at arm’s-length. The Act also gives powers to the Minister for Finance to issue guidelines for the determination of the arm’s-length value of a transaction.

The Income Tax Transfer Pricing Rules of 2006 came into operation on 1 July 2006 and requires related parties to develop an appropriate transfer pricing policy. Branches of foreign companies are also affected by this rule with effect from July 2014. Previously they were exempted.

The current corporate tax rate applicable in Kenya is 30% in the case of resident corporations (i.e. limited liability companies). A non-resident company with a permanent establishment in Kenya is taxed at 37.5%. The tax is computed on the taxable income of a company, having deducted expenses which are wholly and exclusively incurred in the production of income.

Other applicable taxes are:

• Turnover tax (TOT) at 1% for micro, small and medium enterprises whose annual turnover does not exceed KES 50,000 per annum
• 1% minimum tax for all businesses whether making profits or not. Those whose tax from profits exceed the computed minimum tax will not be liable for this tax
• Capital gains tax- 5% of net gain

For any other businesses owned by individuals directly or through transparent entities e.g. partnerships, the individuals are taxed on individual tax rates. The individual tax rates are based on a graduated scale ranging from 10% to 30%(see under individual taxation). Monthly income in excess of Kshs. 57,333 earned by an individual would be subject to tax at the highest bracket on the graduated scale (i.e. 30%).

All the non Resident entities are taxed through withholding tax regime.

Thin Capitalisation arises where a company incorporated in Kenya is controlled by a non-resident person(s) and the highest amount of all interest bearing loans to that company at any time during the year are more than three times the sum of the revenue reserves (including accumulated losses) and the issued and paid up capital.

Where a company is thinly capitalised, the interest expense is restricted (disallowed). In addition, any foreign exchange loss on such loans is also deferred for tax purposes until the thin capitalization conditions reverse. However, branches, banks or financial institutions licensed under the Banking Act are exempt from this provision.

Where a Kenyan resident company receives an interest free loan from a foreign source the loan will be deemed to be interest bearing at rates specified by the Commissioner.

The effect of this is to charge withholding tax at 15% on the computed deemed interest on a monthly basis.

Business losses can be carried forward up to a maximum of ten succeeding years, but an extension may be granted where an application is made to the Minister for Finance giving reasons and evidence as to why the losses could not be extinguished.

For companies in the mining, oil and gas industries, any losses incurred in a year of income can be carried forward indefinitely. These companies are also allowed to carry back tax losses for a period of three years, from the year of income in which the loss arose and operations ceased. There is a requirement for the licensee or contractor to apply to the Commissioner to be allowed the tax loss carry back.

It is therefore important that one plans to utilize the losses to attain maximum tax benefits.

The financial period end needs to be agreed at that time of application for tax registration. The Income Tax Act permits incorporated businesses to choose any period end.

However, certain laws e.g. the Banking Act and the Insurance Act require banks and insurance companies to have an accounting period ending on 31 December of each year.

Unincorporated businesses (partnerships and sole proprietors and individuals) are also required to have accounting periods ending on 31 December. Unless required by law e.g. for financial institutions, the first period end for the preparation of audited financial statements can be 18 months from the date of commencement of business.

Each corporate entity is required to file a self assessment tax return (SAR) together with a set of audited financial statements within 6 months after the end of the accounting period. The final tax for a year is payable not later than four months after the end of accounting period while advance instalment taxes for profit making businesses are due per the table below:

• First instalment: 4th month - 25%
• Second instalment: 6th month - 25%
• Third instalment: 9th month - 25%
• Fourth instalment: 12th month - 25%

For agricultural companies, instalment tax is paid in two instalments: 9th month - 75% and 12th month - 25%.

The basis of assessing instalment tax is the lower of the preceding year’s tax liability multiplied by 110% and the current year’s estimate.

Turnover tax targets business whose annual turnover is between KES 1 million and KES 50 million. The rate of tax is 1% payable monthly on the gross receipts but it does not apply to the following business.

Turnover tax is the final tax.

EPZ’s are exempt from corporate tax during the first 10 years. Licensing of an EPZ shall not include activities that are commercial in nature but manufacturing.

The corporate tax rate is 25% commencing from the 11th year. However employees and directors, other than non-residents, of an EPZ enterprise are liable to personal income tax.

There is no difference between taxation of Kenyan citizens and expatriates.

Who and what is taxable?

Any amount payable to:

• Any person who is, or was at the time of employment or when the services were rendered a resident person.
• A non-resident person in respect of any employment with or services rendered to any employer who is resident in Kenya.

Taxable employment income includes: all cash payments however described, including the value of non-cash benefits (exceeding Ksh 3,000 per month).

Cash pay includes; wages, salary, sick pay, leave pay, fees, commissions, bonuses, service gratuity, allowances, director’s fees, overtime, pension, entertainment and any other payments received in respect of employment. Wages from casual employments are excluded and are defined as ‘any engagement with any one employer which is made for a period of less than one month, the emoluments of which are calculated by reference to the period of engagement or shorter intervals. Regular part time employees and regular casual employment where employees are employed casually but regularly are not considered casual employees’.

Amounts that are mere reimbursement of expenses e.g. subsistence allowance on official duty (per diems) or mileage allowance are not considered taxable pay. Per diems of up to Ksh 2,000 per day are tax free, but round sum expenses are treated as taxable earnings.

Non-cash benefits include housing, cars, utilities, school fees, domestic servants, club subscriptions, telephone expenses, provision of furniture, shares options and other benefits paid for by an employer on behalf of employees. Also included are life insurance premiums and interest free/low interest loans.

Non-cash benefits are required to be taxed at their cost value or at the fair market values whichever is higher. The Commissioner may, from time to time, prescribe the value of the benefit where the cost or the fair market value of a benefit cannot be determined. The prescribed rates currently in force are:

• Furniture – 1% of the cost per month. Full cost if hired
• Water - Ksh 500 per month
• Electricity –Ksh 1,500 per month
• Telephone (mobile and landlines) - 30% of bills.
• ESOP’s – market value less offer price
• A motor-vehicle benefit is valued at the higher of Commissioner’s prescribed values and 2% per month of the capital cost. Where a vehicle is leased, the benefit value is the higher of the prescribed rates and lease hire costs. Restricted use may be allowed by the Commissioner upon application.
• Housing benefit valuation for tax purposes is calculated as follows: For an owner director of a company; the higher of 15% of total income, market rental value or rent paid by employer, For whole time service director; the higher of 15% of employment income, market rental value, or rent paid by employer, For employees; the greater of 15% of employment income and actual rent paid at arms length, Where premises are owned by the employer the rental market value is taken, For agricultural employees; 10% of employment income (required to reside at the farm, Where premises are occupied for part of the year the benefit is apportioned accordingly, Any rent paid by the employee to the employer is deducted from the total housing benefit.

Personal reliefs represents the amount which can be deducted by an eligible person from the tax payable by him/her.

• A uniform personal relief - Effective April 2020 Ksh 28,800 per annum (KES 2,400 per month) claimable by all employees
• Life, health and education insurance relief – 15% of premium subject to a maximum of Ksh 60,000 p.a
• Mortgage interest relief on owner occupied property - maximum of Ksh 300,000 per annum, with effect from January 2017
• Home ownership savings plan – a maximum of shs 96,000 p.a. for a maximum period of 10 years

There are some components of remuneration packages that are specifically not taxable on employees. These are:

• Home travel expenses provided by an employer to expatriates
• Amounts paid by employer as contributions to pensions and provident funds schemes, but excludes employees serving tax exempt employers
• Educational fees paid for employee’s dependants and relatives provided that such amounts are disallowed on the employer’s tax computations and tax is paid thereon
• Medical services and medical insurance for full time employees (subject to a Khs 1. million limit for directors holding more than 5% of company’s shares)
• Benefits whose accumulative value does not exceed Shs 3,000 per month
• Employer canteen meals not exceeding Ksh 4,000 per month (Ksh 48,000 per annum)
• Fringe benefit tax
• Monthly pension withdrawals not exceeding Ksh 15,000
• Full pensions paid to senior citizens (over 65 years)
• First Ksh 150,000 per month for the disabled

Royalties are subject to withholding tax at a rate of 5% and 20% when paid to resident and non-resident persons respectively on the gross royalty payment made.

Interest when paid to both resident and non-resident persons is liable to withholding tax at 15% on the gross interest paid, with the exception of interest from housing bonds to resident persons which is subject to withholding tax at the rate of 10% on the gross interest paid.

Dividends when paid to residents and citizens of the East African Community Partner States are subject to withholding tax at a rate of 5%, while a rate of 10% is applicable to dividends paid to non-residents (other rates as appropriate).

Where a double tax treaty exists, lower withholding tax rates for royalties, interest and dividends may apply.

With effect from January 2018 - Management or professional fees or training fee – paid by Special Economic Zone Enterprise, Developer or Operator to a non-resident persons shall be 5% of the gross amount payable.

With effect from January 2018 - Royalty paid by any Special Economic Zone Enterprise, Developer or Operator to a non-resident person shall be 5% of the gross amount payable.

With effect from January 2018 - Interest paid by any Special Economic Zone Enterprise, Developer or Operator to a nonresident persons, 5% of the gross amount payable.

Payments exempt from withholding tax provisions include the following:

• Dividends received by a company resident in Kenya from a local subsidiary or associated company in which it controls (directly or indirectly) 12.5% or more of the voting power
• Marketing commissions and residue audit fees paid to foreign agents in respect of export of flowers, fruits and vegetables
• Interest payments to banks and insurance companies
• Payments made to tax exempt bodies
• Local management and professional fees whose aggregate is below Ksh 24,000 in a month
• Air travel commissions paid by local air operators to overseas agents

Value Added Tax (VAT) is a consumer tax charged on the supply of taxable goods or services made in Kenya and on the importation of taxable goods or services into Kenya. The rate for VAT is either 0% or 16%. All traders who have a turnover of taxable supplies of KES 5 million per annum and above are required by law to register for VAT, and then collect and remit VAT on their taxable supplies, with an allowance to recover tax paid on their purchase of inputs. Only registered traders are required to charge VAT, though there are provisions for voluntary registration even when a trader is below the KES 5 million threshold.

Any non-resident person who qualifies for VAT registration but does not have a fixed place of business in Kenya must appoint a resident person as his tax representative for VAT compliance purposes. Should he not do this, the Commissioner has authority to appoint the tax representative for the non-resident person.

VAT is charged on the following:

• A taxable supply made by a registered person in Kenya
• Importation of taxable goods and services

VAT registration is mandatory for any person who has made or expects to make taxable supplies the value of which exceeds Ksh 5 million.

Once a taxpayer is registered for VAT obligation monthly returns must be filed irrespective of whether there are transactions or not. A person who is required to apply for registration but who does not have a fixed place of business in Kenya shall appoint tax representative in Kenya, who will be responsible for administration of the recording and accounting of VAT.

There are main categories of supplies in Kenya:

• Zero rated supplies- are taxable supplies but whose rate of tax is zero. This applies mainly to exports
• Exempt supplies – are non-vatable supplies mainly food items, medical and agricultural supplies
• The remainder of supplies taxable at the general rate currently 16%

Supplies are accounted for in a tax period which is a calendar month and the VAT system in Kenya works on the output- input model of sales (output VAT) and purchases (input VAT).

An importer of taxable services in Kenya shall be deemed to have made a taxable supply to himself and VAT shall be charged on such supplies – called reverse VAT. The burden of tax is on the importer. However where a business’s supplies are 100% vatable reverse VAT will not apply.

Kenya has double tax avoidance treaties with the following countries:

• Canada
• France
• Germany
• India
• Iran
• Mauritius (Possibly with effect from 1 January 2017).
• Norway
• Sweden
• United Kingdom
• Zambia
• Denmark
• South Africa

Some of these treaties provide for preferential withholding tax rates. In most cases however, the standard tax rates set out above apply. The treaties will in most cases allow for the set-off of withholding tax against tax liability in the respective countries. Treaties with East African partner states, Kuwait, Iran, Mauritius and UAE have been concluded but not ratified.

Withholding tax paid abroad may be claimed against Kenya income tax only if there is a unilateral or bilateral provision for relief. Kenya has only eleven bi-lateral tax treaties that allow for direct tax offsets (and relief from double taxation).

Where direct tax set-offs are not possible, withholding tax paid abroad (where the income is taxable in Kenya) is deductible as an expense. Unilateral relief of foreign tax in Kenya setting is extended to Kenyan nationals in respect of employment, sports and entertainment income required to be reported and taxed in Kenya.