During a recent webinar hosted by The Kenyan WallStreet in collaboration with Tarra Agility Africa, a boutique international tax and legal advisory firm, we delved into the business tax landscape in Kenya, exploring its various aspects.
Kenya applies a source-based income tax system, where income tax is charged for each year of income, upon all the income of a person whether resident or non-resident, which is accrued in or was derived from Kenya.
There are “specified sources of income” in Kenya for taxation purposes where income and expenditure cannot be mixed and aggregated together.
Losses from one source can only be carried forward to offset gains from the same source.
The sources include business income from any trade or profession, employment income, rent income, dividend and Interest, pension income, income from a Digital Marketplace and natural resource income.
In this article
Debunking Common Business Taxes
Income tax
Income tax is a tax charged for each year of income, upon all the income of a person whether resident or non-resident, which is accrued in or was derived from Kenya.
Types of income tax:
- Corporate tax
They come automatically when incorporating a company and are levied on corporate bodies with the PIN linked to the KRA Pin on their annual income.
- Pay As You Earn (PAYE)
A taxation system where employers deduct income tax from their employees’ earnings and remit it to the Kenya Revenue Authority (KRA) and remit the same to KRA on or before the 9th of the following month.
- Value Added Tax
Value Added Tax is charged on two accounts:
- If the services you offer are subject to VAT.
- If your annual revenue exceeds KES 5,000, 000.
“VAT has filling obligations every month subject to penalties and can be avoided by registering only when you meet the threshold.” noted the panelists.
- Withholding Tax (WTH)
This is a tax that is deductible from certain classes of income at the point of making a payment, to non-employees. This includes interest, dividends, royalties, professional fees,commissions, pensions, rent received by non-residents and other payments specified.
Other common business taxes include: digital service tax, capital gains tax, excise duty, stamp duty, import customs, railway development and import declaration fee.
Business structures
Limited Liability Company (LLC)
According to Finance Act 2023, 30% corporate tax is imposed on resident companies and 30% corporate tax on non-resident companies.
Distribution of dividends from a Kenyan company to its shareholders is subject to WTH 5% for resident shareholders and 15% for non-resident shareholders.
“It is a matter of tax residence, where the shareholder or entity is tax resident” noted the panelists.
Where a Kenyan company owns 12.5% or more of the shareholding of another Kenyan company, any payment of dividends by the subsidiary to the shareholder is exempt from withholding tax.
Limited Liability Partnerships (LLP)
Partners are taxed as individuals in proportion to their stake in the LLP.
The gains or profits of a partner from a partnership shall be the sum of:
- Remuneration payable to him by the partnership, together with interest on capital payable
- his share of the total income of the partnership.
Double Tax Treaties (DTTs)
DTTs are agreements between Kenya and other countries designed to avoid double taxation of the same income, offering significant benefits for businesses operating in multiple jurisdictions.
Relevant to profit extraction methods, DTTs can:
- Reduce Withholding Tax (WHT) Rates.
- Provide Certainty: DTTs offer predictability regarding tax treatment, reducing the risk of unexpected tax liabilities.
To qualify for DTT benefits, the owner may need to demonstrate:
- Substance: has a legitimate business presence in the treaty country and is not merely a shell company
- Activity: actively engaged in generating the income, not simply acting as a conduit to channel income to a low-tax jurisdiction.
Special Economic Zones ( SEZ)
“A city within a city,”
SEZ enterprises are not required to register for VAT. The supply of goods or taxable services to an SEZ is subject to VAT at 0% (zero rated).
“SEZs are set up to stimulate economic growth within a country with sustainable tax incentives” Sarah Mungai from Tarra Agility Africa said.
Recent Business Tax Developments
- 5% WHT introduced on sales advertising and marketing.
- Tax Amnesty – tax payers voluntarily disclose and pay taxes owing to avoid penalties.
- e-TIMS – an electronic tax invoice management system.
- Thin Capitalisation – 30% EBITDA excludes local debt.
- Withholding tax due in 5 days.
- 5 year rule- rebased value is clawed back.
- 2 year rule- internal group restructuring requires the group to be 24 months old.
- Tripling of CGT from 5- 15%.
- Non-cash donations are tax deductible
- Transfer Pricing being introduced for dealings with preferential tax regimes
- Reverse charge on imported digital services removed
- Tax losses can be carried forward indefinitely
“While penalties and interests can be waived, principal tax should be paid but can be paid in installments.” Sarah Mungai from Tarra Agility Africa said during the session.
