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  • Investing in Kenya: Tax Laws

    22 September 2017

    The author of this article, Linsey Mulure, has recently joined Enterprise Tax Consultants having relocated to the UK from Kenya. She has over 6 years of experience in tax gained from two top international accountancy firms that she worked with. Whilst working in Kenya, she focused on advising both local and international clients on planning and implementing efficient tax structures for their businesses.

    The world is an oyster! Have you ever thought of investing in Kenya but the cost of doing business there weighed heavy on your mind? Worry not as we can help you understand the legal and regulatory affairs that surround doing business in Kenya and start off in the right tax footing.

    1. Introduction

    Businesses are constantly looking to expand their operations. For small and emerging businesses, going global is a significant undertaking that could disrupt existing business activities hence the need to gain a deep understanding of the targeted markets, the competition, current local market trends, and the requirements to successfully launch.

    Kenya is one of the fastest growing economies in Africa and has been one of the most sought out markets to invest in in the recent past.

    Kenya operates a liberal economy, which promotes trade and investment by providing a more secure environment for private sector investment decisions, and to position itself as a premier business hub. The currency used is Kenya Shilling (KES), there are no exchange controls and foreign currency is freely transferable in Kenya.

    In Kenya, the pertinent tax incentives include, tax holidays, investment allowances & tax credits, accelerated depreciation, special economic zones, export processing zones investment subsidies, tax exemptions, reductions in tax rates and indirect tax incentives.

    This study gives an overview of the key tax legislation that a one may find useful when looking to invest in Kenya.

    2. Establishing a presence

    Once a business has decided to invest in Kenya and established a formal presence, its main consideration will be the choice of vehicle through which to operate. The usual method for a foreign company operating in the Kenya is a subsidiary or a branch.

    Subsidiary Branch
    Legal Distinct legal personality from the parent company Not a separate legal personality from head office company
    Accounts Must file financial statements annually Must file financial statements annually
    Audit Independent Kenyan audit required Independent Kenyan audit required
    Tax Base Subject to corporation tax on profits accrued or derived from Kenya.
    A parent company in Kenya will also be obligated to declare income from their subsidiaries in other countries.
    Subject to corporation tax for income accrued or derived from Kenya
    Tax Rate 30% 37.5%

     

    3. Overview of taxation in Kenya

    Corporate entities and foreign corporate entities trading in Kenya are liable for corporation tax on their income and capital gains. Other taxes affecting companies include Withholding tax, Value Added Tax (VAT), Stamp duty and Excise duty.

    The tax laws are enacted by parliament, generally in an annual Finance Act that amends and supplements core law.

    The Kenya Revenue Authority (KRA) is responsible for administration and collection of direct, and indirect taxes.

    When you invest in Kenya, you should register your business with KRA for corporate income tax, personal income tax deducted from employees and VAT.

    Corporate tax in Kenya is payable in installments. The tax is due on or before 20th day of the fourth month, sixth month, ninth month and twelfth month of a financial year. Failure to which will attract a penalty of 20% of unpaid tax and an interest of 1% per month.  A Self-assessment return is filed by the company to KRA by the 6th month following the end of the accounting year-end.

    Companies who wish to invest in Kenya, can choose to appoint a tax representative who will have the responsibility for doing all things required of the non-resident under the Kenyan tax laws.

    A tax representative together with the non-resident person wishing to invest will be jointly and severally liable for the payment of all taxes, fines, penalties, and interest imposed under the Kenya laws.

    There are some special rates for resident and non-resident companies in Kenya as detailed below:

    Entity Rate
    EPZ Enterprises
    First 10 years Nil
    Next 10 years 25%
    Thereafter 30%
    Special Economic Zones
    First 10 years 10%
    Next 10 years 15%
    Thereafter 30%
     Newly listed companies over 20% issued shares listed (3 years)  27%
    Newly listed companies over 30% issued shares listed (5 years) 25%
     Company introducing shares through listing (w.e.f. 01/01/2016)  25%
    Newly listed companies over 40% issued shares listed (5 years) 20%
    Developers constructing at least four hundred residential units annually  15%

     

    4. Investment Tax Credit and Allowances

    Kenya, like other governments, introduce tax incentives with the belief that taxation is an appropriate policy instrument in attracting investments.

    Under an investment tax credit, companies in a different industry generally can make deductions against their tax liabilities, a fraction of expenditures on new additions to physical or capital stock.

    We discuss below the incentives provided by the Kenyan Government to investors:

    Wear and Tear Reducing 
    Qualifying assets Bal rate
    Tractors, lorries over 3 tonnes, heavy self-propelled vehicles 37.5%
    Computers & computer peripherals, calculators, copiers, duplicating machines 30%
    Motor vehicles and aircraft (KES 2,000,000 for non-commercial vehicles) 25%
    Plant & Machinery, Furniture & Fittings and other equipment 12.5%
    *Telecommunication Equipment used by telecommunication explorer 20%
    Software allowance 20%
    Loose tools and implements 33.33%
    Investment Deduction Allowances
    Ships over 125 tonnes (w.e.f. 1/1/2016) 100%
    Film equipment 100%
    Hotel 100%
    Manufacturing 40%
    Expenditure incurred for construction, plant and machinery or installation in Special Economic Zones 100%
    Expenditure incurred for construction, plant and machinery or installation in Special Economic Zones (outside Nairobi or the Municipalities of Mombasa) 150%
    Qualifying investment exceeding KES 200 million in satellite towns (outside Nairobi or the Municipalities of Mombasa or Kisumu) 150%
    Capital expenditure incurred in blue economy 150%
    Farm works Deductions 100%
    Industrial Building Allowance
    Rental residential buildings with services 25%
    Hostels and approved educational buildings – from 2007 10%
    Hostels education buildings 50%
    Prescribed hotels – up to 2006 4%
    Prescribed hotels – from 2007 10%
    Prescribes low-cost residential housing developments 5%
    Commercial buildings places (up to 31/12/2012) 10%
    Commercial buildings with services 25%
    Factories 10%

     

    5. Anti-Avoidance Rules

    When you invest in Kenya, it is key that you look out for the anti-avoidance rules that the KRA aggressively use to limit base erosion and profit shifting by foreign investors.

    Thin Capitalisation

    A company is deemed to be thinly capitalised where it is in the control of a non-resident person who holds more than 25% of the company’s share capital and its highest amount of loans in a given year is more than three times its issued share capital plus revenue reserves.

    An interest payment on that part of the loan that exceeds the permissible ratio of 3:1 is not deductible for tax purposes.

    Thin capitalisation rules are typically designed to prevent erosion of the tax base through excessive interest deductions in the hands of companies that obtain financial assistance from non-resident affiliates.

    Deemed Interest

    Deemed Interest would arise when a parent entity, advances an interest-free loan to the subsidiary or branch in Kenya. To avoid deemed interest, the affiliated lender would be required to charge interest on the loan.

    The deemed interest is an off the financial statement adjustment that only affects the tax computation and not the financial statements. Deemed interest is not an allowable expense when computing the taxable income of the resident company.

    Force of Attraction Rule

    Force of attraction is a concept under which a permanent establishment is taxed by the country in which it is located not only on the income generated by it, but also on all income derived by its foreign head office from source in, and all property owned by the foreign head office situated in the country where the permanent establishment is located.

    According to the KRA, where other related enterprises within a group accrues income from Kenya in relation to any services conducted by company established in Kenya, such income would be subject to tax in Kenya.

    There lies a possibility where profits from foreign related entities would be assessed on the company established in Kenya should it be seen that these were accrued in Kenya.

    Transfer Pricing

    The Kenya Transfer pricing rules requires business carried on between a non-resident and a related Kenya resident to be conducted at arm’s length and gives the Commissioner the power to adjust the profits of the Kenya resident from that business to the profits that would be expected to have accrued to it had the business been conducted between independent persons dealing at arm’s length.

    An enterprise will be deemed to be related to another:

    • If one of the enterprises participates directly or indirectly in the management, control or capital of the other enterprise or a third person participates directly or indirectly in the management, control or capital of both enterprises: or
    • Where an individual who participates in the management, control or capital of the business of one, is associated by marriage, consanguinity or affinity to an individual who participates in the management, control or capital of the other.

    Failure to document a transfer pricing policy may result in price adjustments and subsequent tax on the adjusted transaction price hence a key consideration while investing in Kenya.

    6. Double Taxation Avoidance Agreement (DTA)

    Kenya is working towards achieving an extensive tax treaty network.

    Kenya has concluded Double Taxation Agreements (DTAs) with several countries including: United Kingdom, Canada, Denmark, India, Norway, Sweden, Zambia, France, Mauritius, Italy, South Africa, South Korea, UAE and Germany.

    DTAs are important as they assist in alleviating double taxation where business is conducted in different tax jurisdictions. Companies can offset their tax liability against any foreign tax credits when filing their annual company returns.

    7. Withholding taxes

    Withholding taxes applicable to different services rendered in Kenya.

    Resident Non-Resident
    Dividends 5% 10%
    Interest 15% 15%
    Royalties 5% 20%
    Management & professional fees* 5% 20%^
    Contractual fees 3% 20%
    Rent on immovable property 10% 30%
    Leasing of equipment 0% 15%
    Interest on housing bonds 10% 25%
    Interest on 2 years government bearer instruments 15% 15%
    Interest on other bearer instruments 25% 25%
    Bearer bonds of 10 years and above 10% 10%
    Gains from bandwidth 0% 5%
    Insurance broker’s commissions 5% 20%
    Agent’s commissions 10% 20%
    Shipping gains 0% 2.5%
    Pension/Retirement annuity 0% 5%

     

    In cases where there is a double taxation agreement, the following are the reduced rates of tax provided by the signed and concluded DTAs.

    Management Services Dividends Royalties Interest
    United Kingdom (UK) 12.5% 10% 15% 10%
    Germany & Canada 15% 10% 15% 15%
    Denmark 20% 10% 20% 15%
    Norway 20% 10% 20% 15%
    Sweden 20% 10% 20% 15%
    Zambia 20% 10% 20% 15%
    India 17.5% 10% 20% 15%
    France Nil 10% 10% 15%
    Netherlands Nil 5% 15% 15%
    Mauritius Nil 10% 10% 10%

     

    8. VAT

    VAT is chargeable by a taxable person on most supplies of goods and services made in Kenya in the course of business.

    Businesses act as VAT collectors, paying KRA the tax paid by their customers and receiving a credit for the tax they pay to suppliers. Voluntary registration is also available.

    Registration is compulsory for businesses if their taxable turnover exceeds KES 5 Million. In determining the threshold, it excludes the:

    • sale of capital assets
    • sale of a person’s enterprise, or cessation of business permanently
    Rate
    Standard rate 16%
    Export of goods and services 0%
    Import of goods and services 16%
    Registration threshold KES 5M

    9. Stamp Duty

    Stamp duty is the form of tax that is payable pursuant to the Stamp Duty Act (Chapter 480 of the Laws of Kenya). Under the Act, for documents that are liable to be stamped with duty.

    The requisite rate of duty is supposed to be paid and the documents embossed with duty within 30 days after execution by the parties, and where the documents are being executed abroad, from the date when the documents are received in Kenya.

    Currently, the rate of duty payable on the transfer of property is 4% and 2% for a property within a municipality and outside a municipality respectively.

    10. Excise duty

    Excise duty is imposed on the local manufacture on the importation of certain commodities and services. Excisable commodities include items such as bottled water, soft drinks, cigarettes, alcohol, fuels, and motor vehicles. Excisable services include mobile cellular phone services, fees charged for money transfer services, and other fees charged by financial institutions.

    11. Tax planning measures

    With evolving laws and regulations, it is always wise for businesses to plan their taxes efficiently. Some of the tax planning measures to be considered when planning to invest in Kenya would include:

    • Registering a company as a resident company as opposed to a non-resident company as the corporate tax rate is lower for resident companies.
    • The debt structure of the company should be such that the company is not thinly capitalised for tax purposes. This however does not apply for financial institutions.
    • Any funds received in form of loans from a non-resident entity should have a notional interest to avoid deemed interest.
    • A company should have a Transfer Pricing policy in place for its transactions with a related non-resident entity.
    • Any losses made by a company should be utilised within ten years to avoid losing the losses.
    • Any donations made by a company should be made to a registered charitable organization for the donation to be allowed as an expense for tax purposes.
    • Companies should plan for capital investments such that the investment are at the end of the accounting period to manage cash flows and to claim full-year capital allowances and take advantage of all capital allowances available.
    • Businesses whose principal markets are foreign can set up in licensed Export Processing Zones and enjoy a raft of tax incentives. These include the 10-year corporate tax holiday, significant capital allowances and VAT exemption.
    • Businesses can mitigate their tax burden on offshore investment by establishing offshore entities, specifically in countries with relatively lower tax rates such as Mauritius.
    • As investing in Kenya will be with an aim to make profits, one should consider the most tax efficient way for repatriation of profits which could be through payment of dividends, interest, royalties, management fees and capital gains, considering withholding tax and Transfer pricing rules.
    • All entities registered in Kenya should be tax compliant which involves paying all the taxes on time to avoid incurring penalties and interest and to avoid triggering KRA audits.

    Enterprise Tax Consultants can help if you are considering investing in Kenya

    We have a wealth of experience advising on international tax planning and related issues, with Linsey Mulure bringing specialist expertise in Kenyan tax law. If you need any advice or assistance in dealing with the tax implications of investing in Kenya, please get in touch.