Income Tax in Kenya

Personal Income Tax

Individuals are subject to income tax on employment 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.

Who is liable. 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 time in Kenya, he or she qualifies as 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 non-cash 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 the actual cost to the employer. 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 of Income Tax 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 30% 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 collective-investment 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 of 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.

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

Up to KES50,000 per month of costs relating to health care services and facilities for persons with disabilities are not taxable benefits. The minimum taxable income for persons with disabilities is KES150,000 per month.

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.

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 principal sources of exempt investment income are the following:

· Interest derived from savings accounts held with the Post Office Savings Bank

· For each 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 that is earned on deposits of up to KES3 million with a registered Home Ownership Savings Plan (HOSP)

Residential rental income tax. Effective from January 2016, landlords 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. 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 scale rates (see Rates). The exclusion from residential rental income tax takes effect in the subsequent year of income.

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.

Property transfers are subject to stamp duties at a rate of 4% on urban property and a rate of 2% on rural property.

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, on borrowings to finance the purchase of owner-occupied residential property

· Contributions to a home ownership savings plan, up to a maximum of KES48,000 per year

Reliefs. Resident taxpayers are granted the following reliefs against tax payable:

· Personal relief in the amount of KES15,360 per year (KES16,896, effective from I January 2018)

· 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

Business deductions. In general, expenses and losses 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 100% 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 investment deduction is increased to a rate of 150% for an investment for manufacturing purposes that is made outside the city of Nairobi or the municipalities of Kisumu or Mombasa and that has an investment value of KES200 million or more. Allowances are available on a straight-line basis for other industrial buildings and hotels, and on the amount remaining after subtracting the investment deductions, at a rate of 10% (manufacturing), 25% (commercial buildings as well as rental residential buildings constructed in a planned developed area approved by the minister responsible for housing), 10% (hotel buildings) and 50% (hostels and buildings used for educational and training purposes). A first-year deduction of 100% applies to capital expenditure on farm works. The rates for plant and machinery are 12.5%, 25%, 30% or 37.5%, according to the type, using the declining-balance method. The qualifying cost of a non-commercial vehicle is restricted to KES2 million. The rate for software and telecommunication equipment is 20%. The rate for the irrevocable right to use fiber optic cable is 5%. A deduction may be claimed with respect to concessionary arrangements on a straight-line basis over the period of the concession.

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.
For year ending on 31st December 2017

Taxable Income
Tax Rate
First 134,164
Next 126,403
Next 126,403
Next 126,403
Above 513,373

For year ending on 31st December 2018

Taxable Income
Tax Rate
First 147,580
Next 139,043
Next 139,043
Next 139,043
Above 564,709

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

Income category
Rate (%)
Management and professional fees, training fees, royalties and performance fees
Use of immovable property
Use of other property
Pensions and retirement annuities
Telecommunication service fees
Disposal of interest in a person derived from immovable property
Natural resource income
Winnings payable by bookmakers to punters

These rates normally constitute the final liability for Kenyan income tax.

Relief for losses. Tax-adjusted profits and losses from the following 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 self-employment, 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. They may be used in the income year in which they arise and in the following nine years. Losses may not be carried back.

Corporate Income Tax

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 tax year following the date of such listing. For a company that constructs at least 400 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.

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 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 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 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.

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 a rate of 42.86% 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.

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

No comments:

Post a Comment