Kenya Corpoprate Tax Guide

Worldwide Corporate Tax Guide 2022

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Kenya ey.com/GlobalTaxGuides

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A. At a glance Corporate Income Tax Rate (%) Capital Gains Tax Rate (%) Branch Tax Rate (%) Withholding Tax (%) Dividends Interest Royalties Commissions Management, Professional and Training Fees Sports and Entertainment Fees Telecommunication Service Fees Rent Real Estate (Immovable Property) Equipment

30 5 (a) 37.5 15 15 20 20

(b) (c) (d) (e)

20 (f) 20 (g) 5 30 (h) 15 (i)

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Sales of Immovable Property or Shares of Stock by Companies in the Oil and Mining Sector 0 Natural Resource Income 20 Winnings 20 Insurance Premiums and Reinsurance Premiums 5 Sales Promotion, Marketing, Advertising Services and Transportation of Goods 20 Branch Remittance Tax 0 Net Operating Losses (Years) Carryback 0 Carryforward Unlimited

(j) (k) (l) (m) (o)

(n)

(a) A gain on the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority is exempt from capital gains tax. Gains derived from the transfer of property by an insurance company other than property connected to life insurance business is subject to capital gains tax. (b) 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. (c) This rate applies to payments to residents and nonresidents. However, a 25% withholding tax rate applies to interest arising from bearer instruments. In addition, a 5% withholding tax applies to interest paid by any Special Economic Zone enterprise, developer or operator to a nonresident person. (d) This rate applies to payments to nonresidents. A 5% withholding tax is imposed on royalties paid to residents. (e) 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 • Commissions or fees paid or credited by insurance companies to other insurance companies (f) 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%. For management, training or professional fees paid by contractors in the petroleum industry to nonresident persons, the rate is 12.5%. (g) 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. (h) 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 10%. (i) 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. (j) The net gain derived on the disposal of an interest in a person is taxable as business income if the interest derives 20% or more of its value directly or indirectly from immovable property in Kenya. (k) This rate applies to payments to nonresidents. A 5% withholding tax is imposed on natural resource royalties paid to residents. (l) This rate applies to payments to nonresidents. A 20% withholding tax is imposed on winnings paid to residents. (m) This rate applies to payments to nonresidents. Insurance or reinsurance premiums paid for insurance for aircraft are exempt from withholding tax. (n) See Section C. (o) This withholding tax applies to payments to nonresidents. East African Community citizens are exempted from withholding tax on transportation of goods. Air and shipping transport services are exempt from withholding tax.

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B. 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.

For a company that constructs at least 100 residential units in the tax year, the tax rate is 15% for that tax year, subject to the approval of the cabinet secretary responsible for housing.

Lower corporate income tax rates apply to companies licensed under the Special Economic Zones. The rate for the first 10 years is 10%; the rate for the next 10 years is 15%; and thereafter, normal rates apply.

For a company that is engaged in a business under a special operating framework arrangement with the government, the corporate tax rate as specified in the agreement continues to apply for the unexpired period as provided in the agreement.

Minimum tax. Minimum tax is payable at the rate of 1% of the gross turnover of an entity. The tax is payable by persons whose income is not specifically exempt and whose income does not include employment income, rental income from residential property, capital gains, income from the extractive sector and income subject to turnover tax. In addition, the tax applies to persons whose installment tax is lower than the minimum tax payable for the specific year of income. Minimum tax is payable in four installments by the 20th day of the 4th, 6th, 9th and 12th months of the financial year.

In September 2021, the High Court of Kenya declared minimum tax provisions to be unconstitutional and barred the Kenya Revenue Authority (KRA) from implementing the provisions.

Administration. A company’s year of assessment (tax year) coin-

cides 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 payable for the year. The minimum penalty is KES20,000. 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 5% plus 1% per month (or part of a month) of the tax balance.

Capital gains. Capital gains tax applies to gains realized by com-

panies and individuals on the transfer of property located in

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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 allowed 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. In addition, an exemption from capital gains tax applies if a transfer of property is necessitated by a transaction involving the restructuring of a corporate entity or a legal or regulatory requirement, subject to specific conditions.

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 15% for nonresidents and 5% for residents.

Compensating tax arises when a company pays dividends from untaxed gains or profits. The company is charged compensating tax at the corporate tax rate of 30% on the gains or profits from which such dividends are distributed. However, compensating tax does not apply to income that is exempt under the domestic tax law.

Foreign tax relief. Relief for foreign taxes paid is granted in accor-

dance with tax treaties with other jurisdictions. Foreign tax paid to a jurisdiction that does not have a tax treaty with Kenya qualifies as a tax-deductible expense in Kenya if the associated income is deemed to be accrued in Kenya.

C. Determination of trading income General. Taxable income is accounting income adjusted for non-

taxable income, such as dividends and capital gains, and for nondeductible expenses such as depreciation. Expenses are deductible if incurred wholly and exclusively in the production of income.

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 account-

ing income are generally not deductible for tax purposes.

Tax depreciation. Depreciation charged in the financial state-

ments is not deductible for tax purposes. It is replaced by tax depreciation allowances, which are calculated using the straightline method.

The following are the depreciation rates.

Asset class

Buildings used for manufacturing Civil works and structures forming part of the building used for manufacturing purposes Hotel buildings Hospital buildings Petroleum or gas facilities

Rate (%)

50 (a) 50 50 50 50

(a) (a)(b) (a)(b) (a)

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Educational buildings, including student hostels Commercial buildings Machinery used for manufacturing Hospital equipment Ships or aircrafts Motor vehicles and heavy earth-moving equipment Computer and peripheral computer hardware and software, calculators, copiers and duplicating machines Furnitures and fittings Telecommunications equipment Filming equipment for a local film producer Machinery used to undertake operations under a prospecting right Machinery used to undertake exploration operations under a mining right Other machinery Indefeasible right to use fiber-optic cable Farm works

Rate (%)

10 10 50 50 50

(b) (a) (a) (a)

25 25 10 10 25 (b) 50 (a) 50 (a) 10 10 (b) 50 (a)

(a) Fifty percent is claimable in the first year of use; residual value is claimed at 25% per year in equal installments in the subsequent years. (b) Hotel, hospital and educational buildings are required to be licensed by the competent authority. For filming equipment, the local film producer must be licensed by the Cabinet Secretary responsible for filming.

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 succeeding years of income. 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 profitable members of the same group of companies.

D. Other significant taxes The following table summarizes other significant taxes.

Nature of tax

Value-added tax, on the supply of goods and services in Kenya and on imported goods and services

Rate (%)

0/8/16

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Rate (%)

Railway Development Levy; imposed on the import value of all imported goods; import value is the Cost, Insurance and Freight value 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) Employee (maximum contribution of KES200) (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.)

Digital services tax; payable by a nonresident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network, including through a digital marketplace (online or electronic platform that enables users to sell or provide services, goods or other property to other users)

2

5 5

1.5

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

Transfer pricing. The transfer-pricing rules include measures re-

garding 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.

Interest restriction. Interest expense for both locally and foreign controlled entities is restricted to 30% of earnings before interest, tax, depreciation and amortization (EBITDA). Therefore, any interest expense above 30% of the EBITDA is disallowed for corporation tax purposes.

In the determination of EBITDA, exempt income is excluded. In addition, interest consists of interest on all loans, all payments

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equivalent to interest and expenses incurred to raise the financing.

The following local entities are not subject to the 30% EBITDA interest restriction: • Banks or financial institutions licensed under the Banking Act • Micro and small enterprises registered under the Micro and Small Enterprises Act, 2012

F. Treaty withholding tax rates The withholding tax rates under Kenya’s tax treaties are listed below. If the treaty rate is higher than the non-treaty rate, the nontreaty rate applies.

Royalties/

management and professional Payee Dividends Interest fees resident in % % %

Canada Denmark France Germany India Iran Korea (South) Norway Qatar Seychelles South Africa Sweden United Arab Emirates United Kingdom Zambia Non-treaty jurisdictions (a) (b) (c) (d)

15 15 10 15 10 5 10 (f) 15 10 (g) 5 10 15 5 15 0 (c) 15

15 20 (a) 12 15 (a) 10 10 12 15 (a) 10 10 10 15 10 15 (a) 15 15

15 20 20 15 10 20 20 20 20 10 20 20 20 15 20 20

(e) (e) (e) (e) (e) (e) (b) (d)

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

The rate is 12.5% for management and professional fees.

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

The withholding tax rate is 15% for consultancy fees paid to residents of other East African Community countries. (e) A 10% rate applies to royalties. (f) The rate is 8% for beneficial owners with a shareholding of at least 25%. (g) The rate is 5% for beneficial owners with a shareholding of at least 10%.