Corporate tax in Kenya

Summary

Corporate Income Tax Rate (%) 30
Turnover Tax Rate (%) 3 (a)
Capital Gains Tax Rate (%) 5 (b)
Branch Tax Rate (%) 37.5
Withholding Tax (%)
Dividends 10 (c)
Interest 15 (d)
Royalties 20 (e)
Commissions 20 (f)
Management, Professional and Training Fees 20 (g)
Sports and Entertainment Fees 20 (h)
Telecommunication Service Fees 5
Rent
Real Estate (Immovable Property) 30 (.i)
Equipment 15 (j)
Winnings Payable by Bookmakers to Punters 7.5 (k)
Sales of Immovable Property or
Shares of Stock by Companies
in the Oil and Mining Sector
0 (l)
Natural Resource Income 20 (m)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 9 (n)

a) This tax applies to taxpayers with annual gross turnover not exceeding KES5 million.

b) A gain on the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority is exempt from capital gains tax.

c) This rate applies to dividends paid to nonresidents. A 5% rate applies to dividends paid to residents or citizens of other states in the East African Community.

d) This rate applies to payments to residents and nonresidents. However, a 25% withholding tax rate applies to interest arising from bearer instruments.

e) This rate applies to payments to nonresidents. A 5% withholding tax is im – posed on royalties paid to residents.

f) This rate applies to payments to nonresidents. For insurance commissions paid to residents, a 5% withholding tax rate applies to payments to brokers and a 10% rate applies to payments to others. The following commissions are exempt from withholding tax:

  • Commissions paid to nonresident agents with respect to flower, fruit or vegetable auctions
  • Commissions paid by resident air transport operators to nonresident agents to secure tickets for international travel

g) This rate applies to management, professional and training fees paid to non­residents. However, for consultancy fees, payments to citizens of other East African Community countries are subject to a reduced withholding tax rate of 15%. For residents, management, professional and training fees are subject to a withholding tax rate of 5%. The resident withholding tax rate for contrac­tual fee payments is 3%.

h) Payments made by film agents and film producers approved by the Kenya Film Commission to approved actors and crew members are exempt from withholding tax.

i) This withholding tax applies only to payments to nonresidents. The withhold­ing tax rate applicable to payments made to resident persons as rent, premium or similar consideration for the use or occupation of immovable property is 12%.

j) This rate applies to rent paid to nonresidents under leases of machinery and equipment. Rent paid to residents under leases of machinery and equipment is exempt from withholding tax. In addition, leasing of aircrafts, aircraft engines, locomotives or rolling stock is exempt from withholding tax.

k) This rate applies to payments to residents and nonresidents.

l) Effective from 1 January 2016, the net gain derived on the disposal of an interest in a person is taxable if the interest derives 20% or more of its value directly or indirectly from immovable property in Kenya.

m) This rate applies to payments to nonresidents. A 5% withholding tax is impos­ed on natural resource royalties paid to residents.

n) See Section C.

Taxes on corporate income and gains

Corporate income tax. Kenya income tax is payable by companies and by unincorporated organizations and associations (excluding partnerships). Taxable trading income consists of income arising or deemed to arise in Kenya.

Rates of corporate tax. The corporate tax rate is 30% for resident companies and 37.5% for nonresident companies. The corporate tax rate for companies newly listed on a securities exchange ap­proved under the Capital Markets Act is reduced to 20% for a five-year period beginning with the tax year following the year of the listing if the company’s listed capital is at least 40% of its paid-up share capital. A company introducing its shares through listing on any securities exchange enjoys a reduced tax rate of 25% for five years beginning immediately with the year of in­come following the date of such listing.

Turnover tax. Turnover tax is imposed on taxpayers with annual gross turnover not exceeding KES5 million. The tax rate is 3% of annual gross turnover. The tax is a final tax. Turnover tax does not apply to rental income, management or professional or training fees, income of incorporated companies or income that is subject to a final withholding tax.

Administration. A company’s year of assessment (tax year) coin­cides with its financial accounting year. A change in a financial accounting year must be approved by the Commissioner of Income Tax.

A company must make payments, each equal to 25% of its esti­mated tax for the year, by the 20th day of the 4th, 6th, 9th and 12th months of its financial accounting year. The estimated tax must equal either 110% of the previous year’s tax or 100% of the tax estimated to be due for the current year.

A company must file a self-assessment return within six months after the end of its financial year. It must also file financial statements within six months after the end of its financial year. Late filing of a return is subject to a penalty of 5% of the tax balance. The minimum penalty is KES10,000. The tax on the self-assessment, reduced by installment tax paid, is due within four months after a company’s financial year-end. Late payments are subject to a penalty of 20% plus 2% per month (or part of a month) of the tax balance.

Capital gains. Capital gains tax applies to gains realized by com­panies and individuals on the transfer of property located in Kenya. The general tax rate is 5%. The gain equals the amount by which the transfer value exceeds the adjusted cost of the property. The adjusted cost is the sum of the cost of acquisition of the prop­erty and other costs incurred subsequently to enhance or preserve the property, provided that such costs had not been previously allow ed for tax purposes. A gain on the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority is exempt from capital gains tax.

Dividends. Dividends paid to resident companies are exempt if the recipient controls at least 12.5% of the distributing company’s voting power. Taxable dividend income is subject to a final with­holding tax of 10% for nonresidents and 5% for residents.

Compensating tax at the regular corporate rate is levied on divi­dends paid out of untaxed profits.

Foreign tax relief. Relief for foreign taxes paid is granted in accor­dance with tax treaties with other countries. Foreign tax paid to a country that does not have a tax treaty with Kenya does not qualify as a tax-deductible expense in Kenya.

Determination of trading income

General. Taxable income is accounting income adjusted for non­taxable income, such as dividends and capital gains, and for non-de ductible expenses such as depreciation. Expenses are deduc tible if incurred wholly and exclusively in the production of income.

To encourage industrial growth and attract foreign investment, certain special deductions are allowed.

Inventories. The normal accounting basis of the lower of cost or net realizable value is generally accepted for tax purposes. In cer­tain circumstances, obsolescence provisions may be challenged.

Provisions. Provisions included in computing financial account­ing income are generally not deductible for tax purposes.

Tax depreciation. Depreciation charged in the financial statements is not deductible for tax purposes. It is replaced by the following tax depreciation allowances.

Asset class Method
Declining balance (%) Straight-line (%)
Heavy machinery such as
tractors and combines
37.5
Other vehicles such as
automobiles, trucks
and airplanes
25
All other machinery
including ships
12.5
Specified office equipment
such as computers
30
Other office equipment 12.5
Petroleum pipeline 12.5
Telecommunication equipment 20
Computer software 20
Irrevocable right to use
fiber optic cable
5
Industrial buildings 10*
Hotel buildings 10*
Hostel, educational and training buildings 50*
Commercial and rental residential buildings 25*
Farming operations 100

* The rate for the buildings is applied to the capital cost, which is generally the lower of the construction cost or the purchase price, unless purchased from the business entity that constructed the building. To qualify for the above deduction, rental residential buildings must be constructed in a planned developed area approved by the Minister responsible for matters relating to housing.

Deduction on capital expenditure incurred under concessionaire arrangements is claimed in equal proportions over the period of the concession.

A 100% investment allowance is granted for capital expenditure on industrial buildings and hotels and on machinery installed on such structures. Licensed local film producers also qualify for a 100% investment allowance with respect to the purchase of film equipment. An investment deduction may be claimed at a rate of 150% if an investment for manufacturing purposes is made out­side the city of Nairobi and the municipalities of Mombasa or Kisumu and if the investment value is KES200 million or more.

Capital allowances are subject to recapture on the sale of an asset to the extent the sales proceeds exceed the tax value after depre­ciation. Amounts recaptured are treated as ordinary income and subject to tax at the regular corporate income tax rate.

Relief for losses. Tax deficits (losses) are allowable deductions in the year in which they arise and in the following nine years of income. However, companies operating in the extractive industry may carry forward losses indefinitely. Profits and losses arising from specified sources (rental income, income from agriculture and similar activities, and other profits from business) are com­puted separately. If a company has a loss in a year from one of the specified sources, the loss may be offset only against subsequent profits derived from the same specified source.

Groups of companies. The income tax law does not permit consoli‑

dated returns combining the profits and losses of affiliated com­panies or the transfer of losses from loss companies to profita ble members of the same group of companies.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, on the supply of goods
and services in Kenya and on imported
goods and services
0 / 16
Railway Development Levy; imposed on
the import value of all imported goods;
import value is the Cost, Insurance and
Freight value
1.5
Contributions to the National Social Security
Fund (NSSF); expatriates who are members
of social security schemes in their home
countries and those expected to be in Kenya
for not more than three years are exempt;
contributions are payable monthly by
Employer (maximum contribution of KES200) 5
Employee (maximum contribution of KES200) 5
(A new NSSF Act was enacted on 24 December
2013. Under the new act, both the employer and
employee are required to contribute 6% of the
employee’s monthly pensionable pay subject to
an upper earnings limit based on the national
average earnings provided by the Kenya Bureau
of Statistics. The contributions are categorized
into Tier I and Tier II contributions. Tier I
contributions must be remitted to the NSSF,
while Tier II contributions may be remitted to
a contracted-out (private) scheme. However,
these contributions are not yet operational
because of an Industrial Court ruling blocking
the implementation of the new act.)

Miscellaneous matters

Foreign-exchange controls. The Central Bank of Kenya imposes certain foreign-exchange regulations.

Transfer pricing. The transfer-pricing rules include measures re­garding the following matters:

  • Entities and transactions to which the rules apply
  • Methods that may be used to determine arm’s-length prices
  • Records regarding transactions that must be maintained

The methods for determining arm’s-length prices are consistent with those approved by the Organisation for Economic Co-operation and Development.

Debt-to-equity rules. The deductibility of interest on loans and foreign-exchange losses is restricted for a foreign-controlled com­pany with a debt-to-equity ratio exceeding 3:1 (except for compa­nies operating in the extractive industry for which the ratio is 2:1). For purposes of the ratio, debt includes any form of indebtedness for which the company is incurring interest, a financial charge, a discount or a premium. Interest-free loans provided or secured by nonresidents are deemed to accrue interest at a rate equal to the average 91-day Treasury Bill rate.

Treaty withholding tax rates

       
  Dividends Interest Royalties/
management and
professional fees
Payee resident in % % %
Canada 15 15 15
Denmark 20 20 (a) 20
France 10 12 20 (f)
Germany 15 15 (a) 15
India 15 15 20 (d)
Norway 15 20 (a) 20
Sweden 15 15 20
United Kingdom 15 15 (a) 15 (b)
Zambia 0 (c) 15 20
Non-treaty countries 10 15 20 (e)

a) Interest paid by the government and the Central Bank of Kenya is tax-exempt.

b) The rate is 12.5% for management and professional fees.

c) No Kenya tax is due if the dividend is subject to tax in Zambia.

d) The rate is 17.5% for management and professional fees.

e) The withholding tax rate is 15% for consultancy fees paid to residents of other East African Community countries.

f) The rate is 10% for royalties.