Corporate Tax in Kenya: An Overview

Kenya’s corporate tax landscape is structured to encourage business growth and development while ensuring revenue collection for the government. This article provides a comprehensive overview of the key aspects of corporate tax in Kenya, including tax rates, special rates, VAT, payroll taxes, local government rent and rates, and capital gains tax.

 

Taxes on Corporate Income

In Kenya, corporate income tax (CIT) is levied on income accrued or derived from Kenya by resident companies. Non-resident companies are taxed on income derived from business activities outside of Kenya. The standard corporate income tax rate for resident companies, which also applies to subsidiary companies of foreign parent companies, stands at 30%. For branches of foreign companies and permanent establishments (PEs), the rate is also 30%. Moreover, the Finance Act 2023 introduced an income tax on repatriated income for branches of foreign companies and PEs at a rate of 15%, effectively increasing the tax rate to 40.5% for these entities.

 

Special Rates

Kenya offers special rates for certain resident and non-resident companies to encourage specific industries. For example, Export Processing Zone (EPZ) enterprises have a 0% rate for the first ten years, followed by a 25% rate for the next ten years and 30% thereafter. Registered unit trusts/collective investment schemes are exempt under certain conditions. Companies listed on the securities exchange have a 25% rate for the first five years. Special economic zone (SEZ) enterprises, developers, and operators have a 10% rate for the first ten years, followed by a 15% rate for succeeding ten years. Local motor vehicle assembly companies have a 15% rate for the first five years, followed by a 15% rate for succeeding five years under certain conditions.

 

Value-Added Tax (VAT)

VAT in Kenya is levied under the VAT Act, 2013, and the VAT Regulations, 2017. It is a tax on value addition and is accounted for using the input-output mechanism. Kenya has three rates of VAT: standard at 16%, zero-rated, and exempt. VAT registration is obligatory for individuals who are either making or anticipating making taxable supplies exceeding KES 5 million within 12 months. Non-resident suppliers supplying electronically supplied services to Kenyans are required to register for VAT in Kenya if the supplies are made to a recipient in Kenya.

 

Payroll Taxes

Payroll taxes are administered through the Pay-As-You-Earn (PAYE) mechanism, which deducts income tax from employment income. Employers are obligated to deduct and account for payroll taxes on a monthly basis and pay them to the Kenya Revenue Authority (KRA) by the 9th day of the following month.

 

 Local Government Rent and Rates

Rent and rates are levied annually on properties in Kenya, with the rateable value payable to the county government varying based on various forms of ratings, such as area rate, agricultural rental value, or site value.

 

 Capital Gains Tax (CGT)

Capital gains tax is levied on gains derived from the sale or transfer of property by an individual or company at a rate of 15%. The Finance Act, 2023, introduced a tax on gains from the sale of shares or comparable interests if more than 20% of their value directly or indirectly comes from immovable property in Kenya. The timing of CGT payment has been amended to be paid at the earlier occurrence of either the vendor receiving the full purchase price or the registration of the transfer.

Commissioner of Domestic Taxes v CKL Africa Limited (Income Tax Appeal E050 of 2022) [2023] KEHC 17270 (KLR) (Commercial and Tax) (12 May 2023)

On 12th May 2023, the High court at Milimani, Nairobi delivered a judgment which upheld an investment deduction claim in respect of capital expenditure incurred on the construction of a building and the installation of machinery.

 

Key Points of the Case

• Investment Deduction Claim: The taxpayer claimed an investment deduction for capital expenditure incurred on the construction of a building and the installation of machinery, arguing that the deduction should be allowed at a rate of 150% of the capital expenditure incurred in the financial year 2018/2019.
• Challenge: The Kenya Revenue Authority (KRA) disallowed this claim, arguing that the deduction could only be made in the year 2019/2020 based on the commencement of manufacturing in that year
• Tax Laws (Amendment) Act, 2020: This amendment reduced the allowable investment deduction from 150% to 50%. The taxpayer’s position was based on Paragraph 24(1)(f) and Paragraph 24(2)(c) of the Second Schedule to the Income Tax Act, which allowed for a deduction equal to 150% of the capital expenditure.
• High Court Decision: The High Court upheld the taxpayer’s claim, allowing the deduction at the rate of 150% of the capital expenditure incurred. This decision was based on the interpretation of the Income Tax Act, which the taxpayer argued supported their claim.

Significance of the Case

• Interpretation of Tax Laws: This case clarifies the conditions under which an investment deduction can be claimed, providing valuable guidance for taxpayers in similar situations.
• Impact on Corporate Tax Residency: It highlights the importance of case law in shaping the interpretation and application of tax laws in Kenya, especially in the context of corporate tax residency and the interpretation of the Income Tax Act.
• Future Precedent: The decision sets a precedent for future tax disputes involving investment deductions, potentially influencing tax policy and practice in Kenya.

In conclusion, Kenya’s corporate tax system is designed to support business growth while ensuring revenue collection for the government. The system includes a variety of taxes and rates to cater to different types of businesses and transactions, reflecting the country’s commitment to fostering a conducive business environment.

Please note that this is a general commentary on corporate tax, and it is intended to provide general information and should not be taken as legal advice. For specific legal concerns or situations, clients should consult with a lawyer from B M Musau & Company, Advocates LLP directly.