Kenya Individual Tax Guide

Worldwide Personal Tax and Immigration Guide 2021–22

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Kenya ey.com/globaltaxguides

Nairobi EY Mail address: P.O. Box 44286-00100 Nairobi Kenya

GMT +3 Street address: Kenya Re Towers Off Ragati Road Nairobi Kenya

Executive and immigration contact Christopher Kirathe

+254 (20) 288-6000 Fax: +254 (20) 271-6271 Email: christopher.kirathe@ke.ey.com

This chapter refers to changes brought about by the enactment of the Finance Act, 2021, which was assented on 29 June 2021.

A. Income tax Who is liable. Individuals are subject to income tax on employ-

ment earnings if they meet either of the following conditions: • They are resident during the time of employment, regardless of whether their duties are performed within or outside Kenya.

• For nonresidents, their employer is resident or has a permanent establishment in Kenya.

An individual is considered resident in Kenya if he or she has no permanent home in Kenya and is present in Kenya for 183 days or more during a fiscal year or for an average of more than 122 days in that year and in the two preceding years. If an individual has a permanent home in Kenya and spends any time in Kenya, he or she is considered resident.

It is irrelevant for tax purposes where an employment contract is signed or remuneration is paid.

Income subject to tax

Employment income. Employment income includes directors’ fees and almost all cash and noncash remuneration, allowances and benefits arising from employment. Taxable benefits arising from employment include the following: • Housing. The taxable benefit from employer-provided housing equals the higher of rent paid by the employer or 15% of employment income excluding the value of housing premises. If the premises are provided under an agreement with a third party that is not at arm’s length, the benefit is valued at the higher of the fair market rental value of the premises or the rent paid by the employer. If the employer owns the premises, the benefit is taxed at the fair market rental value of the premises.

• Education. Education fees paid by employers for their local or expatriate employees’ relatives are taxable for income tax purposes if the employer has claimed the fees as a tax deduction.

• Motor vehicles. The value of the benefit of an employer-­ provided motor vehicle is the higher of 2% per month of the initial capital expenditure by the employer on the car or

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prescribed rates provided by the Commissioner of Income Tax, depending on the engine capacity. If an employee is provided with a leased or hired car, the taxable benefit is the cost of lease or hire of the vehicle. For employees who have restricted use of motor vehicles, the Commissioner determines a lower rate of the benefit depending on the usage of the motor vehicle if the Commissioner is satisfied based on proof provided by the employer that use of the motor vehicle is restricted.

• Furniture. The taxable value of a furniture benefit provided by an employer equals 1% of the cost to the employer.

• Loans. The benefit from employer loans is taxable to the employer as fringe benefit tax for loans granted after 11 June 1998 and for loans granted before that date if the terms or conditions of the loan have been changed since 11 June 1998. The tax is imposed on the benefit at the resident corporate tax rate of 25% (from 25 April 2020) and 30% (for subsequent years) and is payable by the 10th day of the month following the imposition of the tax by the employer. For loans granted on or before 11 June 1998, the benefit is taxable to the employee as a low interest rate benefit. The benefit is valued at the difference between the interest rate on the employer’s loan and the rate prescribed by the Commissioner of Income Tax. • Employer-provided stock options. The value of the benefit from employer-provided stock options under a scheme that is registered with the Commissioner of Income Tax as a collectiveinvestment scheme, as defined by the Capital Markets Authority Act, is the difference between the market value per share and the offer price per share on the date on which the option is granted by the employer. The benefit is deemed to accrue to the employee at the end of the vesting period. If the equity scheme is not registered, the taxable benefit is the higher of the cost to the employer or the fair market value.

Specific exemptions include the following: • The cost of medical services or medical insurance borne by the employer on behalf of full-time employees or their beneficiaries. Medical insurance should be provided through an insurance company that is approved by the Commissioner of Insurance in Kenya.

• Employer contributions to accredited pension or provident fund schemes if the employer is subject to tax in Kenya.

• Withdrawal benefits from a pension or provident fund. The limit is KES60,000 for each year worked, up to a maximum of KES600,000.

• The first KES300,000 of annual pension income.

• Refunds from National Social Security Fund contributions plus interest. The limit is KES60,000 for each year worked, up to a maximum of KES600,000.

• For non-citizens recruited outside Kenya and their families, the cost of passage on joining the company, for annual leave and for departure.

• The first KES2,000 paid to an employee per day as an allowance while on official duty. This amount is deemed to be a reimbursement and, consequently, not taxable.

• Noncash benefits, up to a maximum of KES36,000 per year.

• Meals served in canteens and cafeterias operated by an employer or provided by a third party that is a registered taxpayer (regardless of whether the meals are in the employer’s or the

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third party’s premises) if the value of the meals does not exceed KES48,000 per employee per year.

Income earned by an individual who is registered under the Ajira Digital Program for three years, beginning 1 January 2020, is exempt from tax on payment by such individual of a registration fee of KES10,000 per year.

An amount withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time homeowner is exempt from tax.

The first KES150,000 per month for persons with disabilities is not taxable. In addition, up to KES50,000 per month of costs relating to health care services and facilities for persons with disabilities are allowable deductions for tax purposes.

Self-employment and business income. All income accrued in or derived from Kenya is subject to income tax. For a resident, this includes profits from a business carried on both inside and outside Kenya.

Business income includes income derived from any trade, profession or vocation, as well as from manufacturing or other related operations. A partnership is transparent for tax purposes, with the individual partners taxed on their shares of partnership profits.

Business profits and losses are determined using normal commercial methods, matching expenses with income from similar activities and using the accrual method of accounting.

Initially, a business may select any accounting period, but generally must continue using the same accounting date thereafter.

The Domestic Taxes Department must be notified of a change in the accounting date. All individuals and unincorporated businesses must have a 31 December year-end.

Effective from 1 January 2021, digital service tax (DST) is applicable on income accruing from business carried on over the internet or an electronic network, including through a digital marketplace, at a rate of 1.5% of the gross transactional value.

Tax agents for the collection of DST will be appointed by the Commissioner-General. Effective from 1 July 2021, income from business carried out over the internet by a resident is excluded from DST because this is taxed as business income. A person subject to DST is required to submit a return and pay the tax due to the Commissioner on or before the 20th day of the month following the end of the month in which the digital service is offered.

Investment income. Dividends and interest income from investments in Kenya are subject to a withholding tax in the year received. For residents, the tax rates are 5% on dividends and 15% on interest.

The Tax Laws (Amendment) Act, 2020 expands the definition of interest to include all interest received by a resident individual.

The principal sources of exempt investment income are the following: • Interest derived from savings accounts held with the Post Office Savings Bank

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• For each resident individual, up to KES300,000 of gross interest derived from investments in housing bonds, except for a 10% withholding tax deducted at source • Interest and dividend income accruing to a resident from investments outside Kenya • Interest income from Infrastructure Bonds with a maturity of at least three years Residential rental income tax. Effective from January 2016, land-

lords earning annual gross residential rental income of more than KES144,000 per year (KES12,000 per month) and not exceeding KES10 million per year (KES833,333 per month) must pay residential rental income tax at a rate of 10% of gross receipts. (Also, see the last paragraph of this section.) However, a person may make an application in writing to the Commissioner of Domestic Taxes to be excluded from this tax, at least three months before the end of the year of income. If the exclusion is granted, the net rental income is taxable at the graduated tax rates (see Rates).

The exclusion from residential rental income tax takes effect in the subsequent year of income. Effective from 1 January 2021, the thresholds for income qualifying for residential rental income tax increase to between KES288,000 (KES24,000 per month) and KES15 million per year (KES1,250,000 per month).

Capital gains. Effective from 1 January 2015, 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 equals the sum of the acquisition cost of the property and other costs incurred subsequently to enhance or preserve the property, if such costs had not been previously allowed for tax purposes. Effective from 1 January 2016, gains on transfers of securities traded on a securities exchange are not taxable.

Also, see Stamp duties in Section B. Deductions and reliefs. An individual not resident in Kenya for tax

purposes is not ­en­titled to any tax relief. Expatriate employees of accred­ited regional offices of foreign corporations who spend at least 120 days during the fiscal year working outside Kenya may deduct one-third of their total income.

Deductible expenses. Individuals may deduct the following expenses in computing taxable income: • Contributions to a registered pension or provident fund, up to a maximum of KES240,000 per year • Interest, up to a maximum of KES300,000 per year, on borrowings to finance the purchase of owner-occupied residential property

Reliefs. Resident taxpayers are granted the following reliefs against tax payable: • Personal relief in the amount of KES28,800 per year.

• Insurance relief (including education and health insurance) in the amount of 15% of premiums paid, up to a maximum relief of KES60,000 per year. Effective from 1 January 2022, National Hospital Insurance Fund (NHIF) contributions will also qualify for insurance relief.

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• Affordable housing relief of 15% of an employee’s contribution, up to a maximum relief of KES108,000 per year. This applies to individuals who are saving for a purchase under an approved affordable housing scheme, have applied and are awaiting the allocation of a house.

Business deductions. In general, expenses are not de­ductible unless incurred wholly and exclusively to produce taxable income.

Accounting depreciation is not deductible, but capital allowances are available. A first-year investment deduction of 50% of qualifying expenditure on the following is allowed: • Manufacturing premises • Plant • Electric power generating projects with capacity to supply the national grid or to transform and distribute electricity through the national grid • Hotel buildings • Farm works The Finance Act, 2021 revised the investment deduction to 100%, effective from 1 January 2022. The following are the conditions for the revised deduction: • The cumulative investment in the preceding three years for investment outside Nairobi and Mombasa Counties is worth at least KES2 billion. If the cumulative value of the investment for the preceding three years of income was KES2 billion on or before 25 April 2020 and the applicable rate of investment deduction was 150%, that rate shall continue to apply for the investment made on or before the 25 April 2020.

• The investment value outside Nairobi City County and Mombasa County in the year of income is at least KES250 million.

• The person has made an investment in a special-economic zone.

An accelerated investment deduction of 150% also applies on capital expenditure of at least KES5 billion incurred on the construction of bulk storage and handling facilities for supporting Standard Gauge Railway operations. This deduction is extended to individuals who incur the expenditure on or before 31 December 2022.

Capital allowances are available under the straight-line method for other industrial buildings and hotels on the amount remaining after subtracting the investment deductions, at the following rates: • 25% for manufacturing • 10% for commercial buildings, which include buildings used as an office, shop, showroom, godown (warehouse), storehouse or warehouse used for storage of raw materials for the manufacturing of finished or semi-finished goods • 25% for hotel buildings • 10% for hostels and buildings used for educational and training purposes A first-year deduction of 50% applies to capital expenditure on farm works and machinery used for manufacturing and the

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residual value is to be claimed at 25% in equal installments in the subsequent years, effective from 1 January 2022. The rates for plant and machinery are 10% or 25%, according to the type, using the straight-line method, effective from 1 January 2022.

The rate for software is 25%, and the rate for telecommunication equipment is 10%, both using the straight-line method. The rate for the irrevocable right to use fiber optic cable is increased from 5% to 10%. A deduction may be claimed with respect to concessionary arrangements using the straight-line method over the period of the concession.

The rate for motor vehicles and heavy, earth-moving equipment is 25% claimable using the straight-line method. The claimable value is restricted to KES3 million except for commercial vehicles, which have no restrictions. The rate for computers and peripherals, computer hardware and software, calculators, copiers and duplicating machines is 25% using the straight-line method. The rate for furniture and fittings is 10% using the straight-line method. The rate is 10% for other machinery using the straight-line method.

Other deductible capital expenditure includes expenses incurred for scientific research and development, the prevention of soil erosion by a farmer, the development of agricultural land and structural alterations to rental premises. Realized foreign-exchange losses on capital borrowings are also deductible.

Deductions are allowed for employer and employee contributions to registered pension and provident funds, with certain restrictions.

Rates. The following tax rates apply for employment, self-

employment and business income (sole proprietors and partnerships), effective from 1 January 2021.

Taxable income KES

First 288,000 Next 100,000 Above 388,000

Tax rate %

Tax due KES

Cumulative tax due KES

10 25 30

28,800 25,000 —

28,800 53,800 —

Tax is withheld from payments to nonresidents at the following rates.

Income category

Management and professional fees, training fees, sales, promotion, advertising and marketing services Transportation of goods (excluding air and shipping transportation services) Royalties and performance fees Real estate rent Lease of equipment Interest Dividends Pensions and retirement annuities Telecommunication service fees Disposal of interest in a person derived from immovable property Natural resource income Winnings

Rate (%)

20 20 20 30 15 15 15 5 5 20 * 20 20

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Rate (%)

Reinsurance premiums (except for reinsurance premiums with respect to aircraft)

5

* T his ordinarily refers to the sale of equity in companies operating in the extractive (mining or petroleum) industry. The amount of taxable gain is usually based on the value of immovable property held by the company.

Relief for losses. Tax-adjusted profits and losses from the follow-

ing specified sources must be categorized separately: • Agricultural activities • Rental or other use of immovable property • Services rendered (including employment) • A wife’s employment and professional income (including selfemployment, rent, dividend and interest income) • Surplus funds withdrawn or refunded to an employer from a registered pension or provident fund • Other business activities Profits are aggregated. Losses may be carried forward to offset future profits from the same specified source without monetary limits. The Finance Act, 2021 removed the 10-year limit for the tax-losses carryforward for losses incurred from the 2021 year of income.

B. Other taxes Property tax. Kenya does not levy property tax.

Stamp duties. Property transfers are subject to stamp duties at a

rate of 4% on urban property and a rate of 2% on rural property.

C. Social security The only social security tax levied in Kenya is the National Social Security Fund (NSSF). The NSSF is a statutory savings scheme to provide for retirement. The rate of contribution is 5% of an employee’s salary, with employers and employees each required to pay up to a maximum monthly amount of KES200.

New NSSF legislation (the NSSF Act 2013) was enacted on 24 December 2013 to replace the NSSF Act Cap 258. The new legislation was scheduled to take effect on 31 May 2014, but the effective date for the legislation was delayed. The employer and the employee will each be required to contribute 6% of the employee’s monthly pensionable earnings, subject to defined limits. Contributions into the scheme are divided into Tier I and Tier II categories. All Tier I contributions will be remitted to NSSF while Tier II contributions will be made to either the NSSF or a registered private pension scheme of which the employee is a valid member. A transitional arrangement will be in place in the lead-up to the full implementation of the Tier 1 contributions.

Before 1 April 2015, individuals earning more than KES1,000 per month were required to contribute to the National Hospital Insurance Fund (NHIF). The monthly contributions depended on the level of income and ranged from KES30 per month to KES320.

Effective from 1 April 2015, individuals are required to contribute NHIF at rates on a graduated scale with the lowest contribution being KES150 and the highest contribution being KES1,700.

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D. Tax filing and payment procedures Employee withholding. For employees, tax is withheld at source

under the Pay-As-You-Earn (PAYE) system.

Installment tax. Individuals who have income other than employ-

ment income must pay estimated tax in four equal installments during the financial year. The payments are due on the 20th day of the fourth, sixth, ninth and twelfth months.

Individuals with no income other than employment income that is taxed at source are not required to pay installment tax.

Individuals whose total annual tax payable does not exceed KES40,000 are also exempt from paying installment tax, but are required to pay the tax balance.

Final returns. Individuals subject to employment tax in Kenya are

required to file a self-assessment return by 30 June following the end of the preceding calendar year.

Assessment. A taxpayer may be assessed further after a self-

assessment return is filed. However, for most taxpayers, the selfassessment is final.

Married couples. Married women have an option to file selfassessment returns with respect to their income from all sources or to aggregate their income with the income of their husbands.

E. Double tax relief and tax treaties Foreign taxes are deductible from taxable income as an expense.

Kenyan citizens working outside Kenya are allowed a tax credit for foreign tax paid on the following types of income earned outside Kenya: • Income from employment • Income earned by artists and sportsmen Kenya has entered into double tax treaties with the following countries.

Canada Denmark France Germany India Iran

Korea (South) Norway Qatar Seychelles South Africa

Sweden United Arab Emirates United Kingdom Zambia

In general, the treaties above provide that foreign income taxes may be offset against equivalent Kenyan taxes payable on the same income.

F. Temporary visas and passes All visitors other than East African citizens must have visas to enter Kenya, unless they are from a country for which visa requirements have been eliminated. These countries include, among others, most of the British Commonwealth countries, Ethiopia, Ghana, Guyana, Namibia and San Marino. Visitors from these countries are issued visitors’ passes at the point of entry. In addition, visas are not required for holders of a re-entry pass to Kenya as well as transit passengers continuing their journey by the same or first connecting aircraft if they hold valid onward or return documentation and do not leave the airport.

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Visas must be obtained by applying online via the e-visa portal before entry into Kenya. Foreign nationals wishing to visit Kenya are advised to confirm the entry requirements before departing from their home countries.

Visas are usually granted without delay. They are issued for a maximum period of three months and may be extended for an additional three months on application. A foreign national wishing to stay in Kenya for longer than six months must have an entry permit (see Section G).

The types of temporary visas and passes issued by the government of Kenya are described below.

Visas. The following types of visas are issued: • Transit visa, which is issued to individuals in transit whose nationalities require visas to enter Kenya. It is valid for a maximum of three days. A fee of USD20 is payable on application.

• Ordinary visa, which is issued for single or multiple entries to persons whose nationalities require visas to enter Kenya for visits or residence. A fee of USD50 is payable for a single journey visa and USD100 for a multiple journey visa.

• Diplomatic visa, which is issued free of charge to holders of diplomatic passports on official business.

• Courtesy/Official visa, which is issued free of charge to holders of official or service passports on official visits.

• East Africa Tourist visa, which is a joint tourist visa entitling holders multiple entries to and between Kenya, Rwanda and Uganda for the purpose of tourism. It is valid for 90 days. A fee of USD100 is payable on application.

Passes. The following types of passes are issued: • Visitors’ pass, which is issued to foreign nationals who wish to enter Kenya for the purpose of holiday, visit or other temporary purpose as may be approved by the immigration officer.

• Dependents’ pass, which is issued to accompanying family members of foreign nationals with work/entry permits.

• Students’ pass, which is issued to foreign students who wish to study in Kenya.

• Internship or research pass, which is issued to individuals seeking to enter or remain in Kenya for the purposes of internship or academic research.

• Prohibited immigrants’ pass, which is issued to foreign nationals who do not have valid entry documents or to foreign nationals who have contravened certain immigration rules. These individuals must make an application before arriving at the point of entry.

• Transit pass, which is issued to individuals in transit to a destination outside Kenya.

• Re-entry pass, which is issued to dependent pass holders to allow them multiple entries into the country.

• Special pass, which is issued to foreign nationals wishing to work in Kenya on a short-term assignment. A special pass is valid for three months and may be extended once.

G. Work permits and self-employment Certain classes of entry permits allow foreign nationals to work in Kenya and are generally referred to as work permits. An entry permit that allows a foreign national to work in Kenya is obtained

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by an employer on behalf of a foreign national. Employers are required to justify employment of a foreign national instead of a Kenyan. If the foreign national changes employment, his or her new employer is responsible for obtaining a new work permit.

Individuals requiring entry permits will enter Kenya on visas or visitors’ passes while their applications for the permits are being processed, but they cannot engage in any work-related or incomegenerating activities. Foreign nationals who are over 18 years of age and stay in the country for more than 90 days are required to register as foreigners.

Different classes of entry permits are issued in Kenya including permits for the following categories of expatriates: • Class A, which is issued to a person engaged in prospecting for minerals and mining in Kenya.

• Class B, which is issued to a person who intends to engage, alone or in partnership, in the business of agriculture or animal husbandry in Kenya.

• Class C, which is issued to a member of a prescribed profession who intends to practice that profession in Kenya, alone or in partnership.

• Class D, which is issued to a person who is offered specific employment by a specific employer.

• Class F, which is issued to a person who intends to engage, alone or in partnership, in specific manufacturing in Kenya.

• Class G, which is issued to a person who intends to engage, alone or in partnership, in a specific trade, business or profession (other than a prescribed profession) in Kenya.

• Class I, which is issued to a person who intends to engage, alone or in partnership, in approved religious and charitable activities.

• Class K, which is issued to a person who is not less than 35 years of age; and has in his or her own right and at his or her full and free disposition an assured annual income of not less than USD24,000.

• Class M, which is issued to a refugee recognized by the government of Kenya. The permit is issued gratis, and a recognition letter from the United Nations High Commissioner for Refugees (UNHCR) and the Department of Refugee Affairs is required.

The permits are issued only to persons whose employment, business or presence will benefit the country.

A foreign national wishing to carry out business in Kenya must obtain the necessary licenses and registrations required and must have sufficient capital or resources for investment.

H. Residence permits Foreign nationals wishing to reside permanently in Kenya must apply for permanent residence. To obtain permanent residence, foreign nationals must satisfy the requirements contained in the Kenya Citizenship and Immigration Act. The Permanent Residence section of the Kenya Department of Immigration issues residence permits.

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I. Family and personal considerations Vaccinations. Individuals entering Kenya must have Inter­national

Immunization Certificates. They should also present negative COVID-19 results from tests taken within 96 hours of their travel to Kenya.

Family members. Family members of entry permit holders are entitled to dependents’ passes. Any dependent wishing to take up employment must obtain a separate work or entry permit.

Marital property regime. Kenyan law does not provide for a com-

munity property or a similar marital property regime.

Driver’s permits. Foreign nationals with international driver’s licenses or driver’s licenses issued in a British Commonwealth country may drive in Kenya for a maximum period of 90 days.

Foreign nationals living in Kenya for longer than 90 days must obtain Kenyan driver’s licenses.

Holders of international driver’s licenses or licenses issued in British Commonwealth countries may obtain Kenyan driver’s licenses on application.