1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
Kenya has a multi-level tax regime. The Constitution of Kenya creates two levels of government (national and county government), which can raise revenue through taxes, levies and duties. The national government is empowered to impose income tax, value added tax, customs duties and excise duty. County governments are empowered to impose property rates and entertainment taxes.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
The current corporate tax rate applicable to corporations resident in Kenya is 30% on taxable income. Non-resident companies with a permanent establishment in Kenya are taxed at the rate of 37.5% on the taxable income attributable to the Kenyan permanent establishment.
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
Taxation is based on profits after the deduction of allowable expenses. Profits are taxed on an accrual basis for each year of income. Taxable profits are based on adjusted accounting profits, having added back non-deductible expenses and having deducted allowable expenses and capital allowances. Generally, expenses such as capital expenditure, restricted loan interest due to thin capitalisation, personal expenses, unrealised foreign exchange losses and depreciation are disallowed for tax purposes. On the other hand, capital allowances ranging from 12.5% to 37.5% are allowed against taxable income for equipment used in the production of income.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
Yes. Kenya has seven ‘specified sources' of income which are computed and taxed separately when a person is in a tax loss position (ie, where respective profits or losses from one specified source of income cannot be offset or aggregated with profits or losses from another specified source of income). These specified sources of income are:
- rights granted to other persons for the use or occupation of immovable property;
- employment of personal services for wages, salary, commissions or similar rewards (not under an independent contract of service);
- agricultural, pastoral, horticultural, forestry or similar activities;
- surplus funds withdrawn by or refunded to an employer in respect of registered pension or registered provident fund;
- income from mining rights;
- investment income; and
- business income.
1.5 Is the regime a worldwide or territorial regime, or a mixture?
Kenya applies a territorial (source-based) taxation system and therefore only income accrued or derived from Kenya is subject to tax in Kenya. However, employment income and business income earned partly in Kenya and partly outside Kenya are wholly taxable in Kenya.
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
Effective 1 January 2016, tax losses are deductible in the year in which they are incurred and can be carried forward for the subsequent nine years. If the losses are not exhausted within this period, an application can be made to the Commissioner of Domestic Taxes to extend the period for claiming the tax losses beyond this total 10-year period. The cabinet secretary for the National Treasury and Planning has powers to extend the tax loss utilisation period indefinitely. Kenya is in the process of enacting a new Income Tax Act and has published a draft Income Tax Bill. Under the bill, the extension can be granted only for a further period of two years.
For companies in the mining, oil and gas industries, any losses incurred in a year of income can be carried forward indefinitely. These companies are also allowed to carry back tax losses for a period of three years, from the year of income in which the loss arose and operations ceased. However, the licensee or contractor must apply to the Commissioner of Domestic Taxes to allow the tax loss carry-back. Tax losses can only be used domestically.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
There is no concept of beneficial ownership of taxable income in Kenya and only the legal owner of the income can be taxed.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
No. All companies are taxed at the corporate rate of 30%. However, the bill proposes to introduce a new tax rate of 35% for companies that have taxable income in excess of KES 500 million (approximately $5 million).
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
No. Partnerships are considered to be tax transparent, with the income of the partnership being taxed in the hands of the partners at individual income tax rates and in accordance with whether such partner is resident or non-resident in Kenya. Trustees in a trust are responsible for accounting for corporate tax, if any, due on the income of the trust.
2 Special regimes
2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
As stated above, taxable income in Kenya generally comprises gross income less deductions provided for in the Income Tax Act. The Income Tax Act does not presently provide specific or detailed rules in relation to the shipping, insurance or securitisation sectors, and the standard corporate tax rates will therefore apply.
Oil and gas: The Ninth Schedule to the Income Tax Act provides detailed rules on the deductibility of expenses incurred in the exploration, development and production phases. Over the years, specific exemptions have also been granted in relation to this sector, including exemptions from withholding tax on interest payments for foreign sourced loans and from stamp duty on instruments in relation to loans from foreign sources for investment in the energy sector.
Rental income: As a separate source of income, rental income is taxed separately from business income. Further, residential rental income is taxed differently from commercial rental income, at a rate of 10% on the gross rental income, where the rental income earned is less than KES 10 million per year. Where a company has constructed at least 100 residential units annually, the applicable corporate tax rate is 15%, subject to approval by the cabinet secretary responsible for housing.
Export Processing Zone (EPZ): The EPZ Authority offers a range of attractive fiscal, physical and procedural incentives to ensure low-cost operations, fast set-up and smooth operations for export-oriented businesses. EPZ enterprises are subject to 0% corporate tax for the first 10 years, commencing from the first year of production, sales or receipts. For the next 10 years, the tax rate increases to 25%.
Special economic zones (SEZs): An SEZ is a designated geographical area where business-enabling policies are implemented and sector-appropriate on-site and off-site infrastructure and utilities are provided by the Kenyan government. SEZs are considered to be outside the customs territory of Kenya and therefore operate in a jurisdictional bubble that shields them from taxes and other regulatory bureaucracy.
SEZs may be designated as single sector or multi-sector, which may include free trade zones, industrial parks, free ports, information, communication and technology parks, science and technology parks, agricultural zones, tourist and recreational zones, business service parks, livestock zones and convention and conference facilities. For SEZ enterprises (whether they sell their products to markets within or outside Kenya), a tax rate of 10% applies for the first 10 years of operation and a rate of 15% for the next 10 years thereafter. A number of additional tax incentives also apply to SEZs, including attractive capital allowances and reduced rates of withholding tax on payments made by the SEZ.
Motor vehicle assembly: For a company engaged in local assembly of motor vehicles, a 15% corporate income tax rate will apply for the first five years of operation. This 15% rate can be extended for another five years if the company achieves a local content equivalent of 50% of the motor vehicles' ex-factory value.
Special operating framework: Where a company is engaged in business under a special operating framework arrangement with the Kenyan government, the tax rate specified under such arrangement will apply to such a company.
Intellectual property: While there is no patent box regime in Kenya, there is an important provision in the Income Tax Act which allows for expenditure of a capital or revenue nature incurred in scientific research for business purposes to be fully deducted in a year of income.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
Certain exemptions from stamp duty are available in connection with business combinations under Sections 95 and 96 of the Stamp Duty Act. These relate to relief on duty otherwise chargeable in reconstructions, amalgamations and property transfers between associated companies. They are applicable where the effect of the transfer will be to convey or transfer a beneficial interest in property from one company to another, and either:
- one of such companies (the transferor or the transferee) is the beneficial owner of not less than 90% of the issued share capital of the other company; or
- not less than 90% of the issued share capital of each of the transferor and the transferee is in the beneficial ownership of a third company with limited liability.
For capital gains tax purposes, a transaction involving the incorporation, recapitalisation, acquisition, amalgamation, separation, dissolution or similar restructuring of corporate identity involving one or more companies can be exempted from CGT by the Cabinet Secretary for the National Treasury, at his discretion, as long as the transaction is in the public interest.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
Except for residential rental income of up to KES.10 million, which is taxed at the rate of 10% on the gross revenue, there is no provision for alternative taxation regimes.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
Kenyan taxes must be declared and paid in Kenyan shillings, although companies are at liberty to report in their financial statements or management accounts in foreign currency also.
2.5 How are intangibles taxed?
For the creator of the intangible property (ie, the licence, trademark or copyright), there will be tax on gains or profits accruing from a right granted to use this property at individual income tax rates. If the owner is a resident corporate entity, this will be taxed at the corporate tax rate of 30%; for a non-resident person with a permanent establishment, this will be taxed at 37.5%.
The main form of extracting tax from intangibles is through royalties. Withholding tax is levied on payment of royalties at the rate of 5% for resident persons and 20% for non-resident persons.
Royalties are outlined as a specified source of income, meaning that taxes on them are computed separately from other income. In addition, double taxation agreements may provide for taxation of royalties in cross-border transactions at rates lower than the 20% non-resident withholding tax rate.
Arrangements between related parties involving intangibles are subject to close scrutiny by the Kenya Revenue Authority.
2.6 Are corporate-level deductions available for contributions to pensions?
Contributions by an employer towards a pension, provident or individual retirement fund or scheme are tax deductible for the company only if the fund or scheme is registered with the Commissioner of Domestic Taxes.
Contributions by an employer to a pension, provident or individual retirement fund or scheme are generally not chargeable to tax for the employee. However, employees of organisations not chargeable to tax will be liable to tax on contributions made by the employer to an unregistered fund or on excess contributions made to a registered fund.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
No. There is an excise duty of 20% of the excisable value on fees charged by banks, money transfer agencies and other financial service providers for money transfer services. In the telecommunications sector, telephone and internet data services are charged excise duty at a rate of 15% of their excisable value. Banks, insurers and microfinance institutions are also required to charge excise duty at 20% on fees to customers.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
2.9 Are there any deemed deductions against corporate tax for equity?
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
The general principle in Kenya is that, unless expressly provided otherwise, expenses are tax deductible if they are incurred wholly and exclusively to generate taxable income, save for any expenditure that is capital in nature, and any loss, diminution or exhaustion of capital such as depreciation or impairment. There are no specific rules governing depreciation and impairment, and the rates applied largely follow the accounts.
However, wear and tear allowance is permitted at varying rates (on a straight-line basis), ranging from 12.5% to 37.5% for certain asset classes used for business purposes. Investment deduction is applicable on the construction of a building and on the purchase and installation therein of new machinery, where the owner of that machinery – being also the owner or lessee of that building – uses that machinery in that building for the purposes of manufacture. Investment deduction can be claimed in the year of income in which the building and equipment are first used. The rate of investment deduction is 100%. Where an investment in excess of KES 200 million ($2 million) is made outside the municipalities of Mombasa, Kisumu or the City of Nairobi, the applicable investment deduction rate is 150%.
Where a party incurs capital expenditure on the construction of an industrial building to be used in a business carried on by it or its lessee, a deduction known as ‘industrial building allowance' shall be made in computing the gains or profits of that party for any year of income in which the building is used, at a rate of 10% on a straight-line basis. ‘Industrial building', for the purposes of the Income Tax Act, means a building in use as a transport, dock, bridge, tunnel, inland navigation, water, electricity or hydraulic power undertaking.
A commercial building allowance at the rate of 25% is applicable on the construction of a commercial building (defined as a building for use as an office, shop or showroom, but excluding buildings which qualify for any other deduction), on condition that roads, power, water, sewers and other social infrastructure are provided.
For tax purposes, a taxpayer that disposes of assets which benefited from wear and tear deductions must make a balancing deduction (where a loss is made) or a balancing charge (where a gain or profit is made) upon ceasing to be the owner of those assets. A balancing charge has the effect of increasing the taxable profits of a company, while a balancing deduction reduces the taxable profits of a company.
3.2 Are there research and development credits or other tax incentives for investment?
Pursuant to the Income Tax Act, expenditure of a capital or non-capital nature incurred by a person in scientific research for business purposes is wholly deductible for tax purposes in the year in which the amount is incurred. The term ‘scientific research' refers to activities in the fields of natural or applied science for the extension of human knowledge and, when applied to any particular business, includes scientific research that may lead to or facilitate an extension of that business.
3.3 Are inventories subject to special tax or valuation rules?
Inventory or stock in trade is not subject to any special tax rules. Income tax is charged on the adjusted profit derived from the sale of inventory.
3.4 Are derivatives subject to any specific tax rules?
Derivatives are not subject to any specific tax rules in Kenya. The tax applicable to a derivative transaction will depend on the characterisation of the income (eg, interest or capital gains) that is derived from the relevant derivative transaction.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
Income that is accrued in or derived from Kenya by a non-resident person is subject to tax in Kenya through a withholding taxation system whereby the payer deducts tax from the income paid to the non-resident person and remits it to the Kenya Revenue Authority (KRA). Withholding tax is chargeable on income in the form of dividends, royalties, interest and management and professional fees payable to a person, both resident and non-resident.
Where a non-resident person creates a permanent establishment in Kenya, all income of that non-resident person attributable to the permanent establishment is taxable in Kenya at a non-resident rate of 37.5%.
The Commissioner of Domestic Taxes is empowered to adjust the profits accruing to a resident person from a course of business conducted with related non-resident persons to reflect such profit as would have accrued if the course of business had been conducted by independent persons dealing at arm's length. In effect, the Commissioner can adjust prices in cross-border transactions involving related parties to reflect an arm's-length price. The Transfer Pricing Rules are broadly modelled along the principles set out in the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
Dividends paid by a Kenyan company to its non-resident shareholders are subject to withholding tax in Kenya at a rate of 10%. Interest payments to a non-resident person are subject to withholding tax at a rate of 15% of the gross interest paid. Royalties, management and professional fees are chargeable to withholding tax at a rate of 20% when paid to a non-resident person. The payer (resident person) has the obligation of calculating, deducting and remitting the withholding tax to the KRA.
A lower rate may apply in respect of payment of dividends, royalties, interest and management and professional fees to a non-resident person where there is an effective double taxation agreement between Kenya and the jurisdiction in which the non-resident person is resident.
Excise duty in Kenya is managed and administered under the Excise Duty Act 2015. Excise duty is imposed on excisable goods manufactured in Kenya by a licensed manufacturer, excisable services supplied in Kenya by a licensed person and excisable goods imported into Kenya by a registered person. Excise duty therefore does not apply to non-residents from Kenyan resident companies.
4.3 Do double or multilateral tax treaties override domestic tax treatments?
The provisions of double tax treaties in force in Kenya override the provisions of domestic law relating to tax matters.
However, with effect from 1 January 2015, it is a requirement under the Income Tax Act that for a foreign entity to be entitled to the benefits arising from a double tax treaty:
- at least 50% of its underlying ownership must be held by persons who are tax resident in the foreign contracting state; or
- it must be listed on a stock exchange in the foreign state.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
Section 39(2) of the Income Tax Act provides for a set-off by way of credit for Kenyan citizens for any year of income on employment income that is accrued in or derived from another country, if they can prove to the satisfaction of the Commissioner that they have paid tax in such other country for such year of income. In addition, a deduction is allowed when computing adjusted profit in respect of foreign income tax or tax of a similar nature paid on income that is charged to tax outside Kenya. This deduction applies to the extent that the tax payable is in respect of income deemed to have accrued in or derived from Kenya.
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
Yes. When a purchaser (whether individual or corporate) buys an asset, the purchase price will be the tax base for that asset on future sale. Capital gains tax (CGT) on the capital gains made from the future sale of that asset are calculated as the excess of the transfer value of the asset over its adjusted cost.
The adjusted cost of the property is the value of the consideration for the acquisition or construction of the property, including any amounts of expenditure wholly and exclusively incurred on the property at any time after its acquisition for the purpose of enhancing or preserving the value of the property. This also includes any expenditure incurred in establishing, preserving or defending the title to the property and any incidental costs incurred when buying the property.
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
Any gain derived from the disposal of property in Kenya (including shares not listed on the Nairobi Securities Exchange) is subject to CGT at the rate of 5%. The gain is calculated as the difference between the transfer value and the adjusted cost relating to the property. As such, the sale of a Kenyan company's shares will be subject to CGT at the rate of 5%. A sale of immovable property in Kenya (by a company or an individual) will similarly be subject to CGT.
Where the seller of shares in a Kenyan company is resident in a country that has concluded a double tax treaty with Kenya, an exclusion from CGT may be available at exit.
Kenyan law does not contemplate a change of tax residence by a company.
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
Yes; anti-avoidance rules applicable to corporate taxpayers are contained in both statute (which is the primary source of law) and jurisprudence.
5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?
The main anti-avoidance rules are set out under Section 23 of the Income Tax Act, which provides as follows:
Where the Commissioner is of the opinion that the main purpose or one of the main purposes for which a transaction was effected (whether before or after the passing of this Act) was the avoidance or reduction of liability to tax for a year of income, or that the main benefit which might have been expected to accrue from the transaction in the three years immediately following the completion thereof was the avoidance or reduction of liability to tax, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as respects liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.
Under the Tax Procedures Act, 2015, ‘tax avoidance' is defined as a transaction or scheme to avoid liability to tax under any tax law. The penalty for tax avoidance is twice the amount of tax avoided or intended to be avoided.
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
Controlled foreign companies (CFCs): Kenya has no specialised rules on CFCs. However, there are restrictions on the deductibility of interest and foreign exchange losses of companies that are foreign controlled and thinly capitalised.
Thin capitalisation: In Kenya, a company is thinly capitalised if all of the following criteria are satisfied:
- The company is controlled by a non-resident person alone or together with four or fewer persons.
- The company is not a bank or financial institution.
- The highest amount of all loans held by the company at any time exceeds the sum of three times the revenue reserves (including accumulated losses) and the issued and paid-up share capital of all classes of shares of the company.
A company that is thinly capitalised cannot claim a deduction on the interest expense incurred by the company on loans that exceed the 3:1 ratio. The company also cannot claim a deduction for any foreign exchange loss realised while the company remains thinly capitalised. For companies in the extractive sector (oil, gas and mining), the debt-to-equity ratio is 2:1.
Deemed interest rules: Kenya has "deemed interest" rules which apply with respect to interest-free loans from non-resident shareholders. Where a non-resident shareholder has extended a loan to a resident company on an interest-free basis, the resident company is required to compute a deemed interest charge based on the prevailing treasury bill rates and remit the withholding tax of 15% to the KRA.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
Yes. A taxpayer may apply to the KRA for a private ruling to seek clarity on a specific issue. The private ruling sets out the KRA's interpretation of a tax law in relation to a transaction entered into, or proposed to be entered into, by the taxpayer.
An application for a tax ruling should be in writing, setting out the relevant details of the transaction in question and the taxpayer's interpretation of the relevant law, as well as the specific question on which the KRA's interpretation is required. The law requires the KRA to respond within 45 days of receipt of the application.
Where the taxpayer has made a complete and accurate disclosure of the transaction and the transaction has proceeded in all material respects as described in the application, the private ruling shall be binding on the KRA. A private ruling, however, is not binding on a taxpayer.
5.5 Is there a transfer pricing regime?
Yes. A company is required to ensure that related-party transactions are at arm's length. The related-party transactions that are subject to transfer pricing include:
- the sale or purchase of goods;
- the sale, purchase or lease of tangible assets;
- the transfer, purchase or use of intangible assets;
- the provision of services; and
- the lending and borrowing of money.
The company is therefore required to prepare a transfer pricing policy to justify the pricing arrangements. The transfer pricing methods which can be applied in determining the arm's-length price include:
- the comparable uncontrolled price method;
- the resale price method;
- the cost-plus method;
- the profit split method; and
- the transactional net margin method.
The KRA is empowered to specify conditions and procedures for the application of the methods for determining the arm's-length price and to adjust the prices if they do not conform to the arm's-length principle. The policy should be prepared and submitted to the KRA upon request.
The transfer pricing rules are broadly modelled along the principles set out in the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises.
5.6 Are there statutory limitation periods?
The tax authorities must commence an audit before the expiry of five years after the end of a year of income. The KRA may go back past five years where fraud, wilful neglect or evasion is proven. There is no time limit for completing tax audits. However, they are normally completed within a reasonable time, especially if there are no major disputes.
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
Every company chargeable to tax is required to furnish the Commissioner with a self-assessment return of tax from all sources of income by no later than the last day of the sixth month following the end of its accounting period.
Instalment tax is a form of advance corporation tax and is a credit against the company's corporate tax liability. It is payable only by companies whose annual corporate tax is in excess of KES 40,000 (approximately $400). Instalment tax is payable by the 20th day of the fourth, sixth, ninth and 12th months following the company's accounting year end.
The balance of tax is the difference between the company's instalment tax paid in advance and the actual corporate tax liability of the company. This balance of tax is payable before the last day of the fourth month following the end of the company's accounting year.
Pay as You Earn (PAYE) is the method of collecting income tax at source from individuals in gainful employment. PAYE is payable on salary, benefits and any other emoluments received by an employee by virtue of employment. An employer ought to remit PAYE by the ninth day of the subsequent month in which the tax falls due.
If registered for value added tax (VAT), a company ought to submit VAT returns and pay VAT by the 20th day of the subsequent month in which the tax falls due.
6.2 What penalties exist for non-compliance, at corporate and executive level?
For instalment tax, any underpayment will be subject to a penalty of 20% of the difference between the amount of instalment tax payable in respect of a year of income and the instalment tax actually paid.
For the balance of tax, a penalty of 5% of the amount of tax payable under the return or KES 20,000 ($200), whichever is the higher, is payable in case of failure to remit on time.
Regarding PAYE, a penalty of 25% of the amount of tax involved or KES 10,000 ($100), whichever is greater, is payable. All directors and officers of the corporate body concerned with its management shall be guilty of an offence unless they prove to the satisfaction of the court that they did not know, and could not reasonably be expected to have known, that the deducted amount was not remitted, and that they took all reasonable steps to ensure that the offence was not committed. Those found guilty shall be liable to a fine of between KES 10,000 ($100) and KES 200,000 ($2,000), imprisonment for a term not exceeding two years or both.
For VAT, a penalty of 5% of the amount of tax payable under the VAT return or KES 10,000 ($100), whichever is higher, is payable for failure to file VAT returns.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
Kenya signed the Convention on Mutual Administrative Assistance in Tax Matters on 8 February 2016, which has brought into force the Common Reporting Standard. This provides for all forms of administrative assistance in tax matters, such as the exchange of information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examination and assistance in tax collection. While its provisions are not yet in force, the government of Kenya intends to operationalise its provisions in 2019 in an effort to capture offshore income accrued by Kenyans and not previous disclosed to the KRA.
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
Section 34 (9) of the Value Added Tax Act, 2013 allows the cabinet secretary for the National Treasury to formulate regulations that provide for the registration of a group of companies as one registered person for value added tax purposes. However, these regulations have not yet been issued.
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Value added tax (VAT) is a consumption tax accounted for using the input-output mechanism. Different types of supplies attract VAT at different rates, as follows:
- 16% for local taxable supplies;
- 8% for local supply of fuel (with effect from September 2018); and
- 0% for zero-rated supplies and exports and exempt supplies (which are outside the ambit of VAT).
VAT registration is required for persons making or expecting to make taxable supplies of over KES 5 million ($50,000) in a 12-month period. In determining the registration threshold, the sale of capital assets is excluded.
Excise duty is imposed on the local manufacture or import of certain commodities and services. Excisable commodities include bottled water, soft drinks, sugar confectionaries (chocolates and chewing gum), cigarettes, alcohol, fuels and motor vehicles. Excisable services include mobile cellular phone services, internet data services, fees charged for money transfer services and other fees charged by financial institutions.
Import (customs) duty is levied under the East African Community (EAC) Customs Management Act. Imported goods are generally subject to import duty at varied rates, including:
- 0% for raw materials and capital goods;
- 10% for intermediate goods; and
- 25% for finished goods in accordance with the EAC Common External Tariff.
However, a different rate of duty can be prescribed by the Council of Ministers of the EAC partner states.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
Capital gains tax (CGT) is chargeable on the transfer of property, including marketable securities such as shares in a company. CGT is payable on the net gain realised on the disposal of shares at the rate of 5%. This tax is borne by the sellers to which the capital gain accrues. Except for entities operating in the extractive sector, the indirect change of control of a Kenyan company (by sale of shares in a foreign company) does not trigger any CGT liability in Kenya.
9 Trends and predictions
9.1 How would you describe the current tax landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Kenya is in the process of reviewing its income tax regime through the enactment of the Income Tax Bill, which will lead to the repeal of the Income Tax Act, Chapter 470, Laws of Kenya. The bill was released to the public for comment by the National Treasury in mid-2018. The bill aims to simplify compliance, widen the tax base and align Kenyan tax legislation to international best practices. The bill is currently undergoing public participation as part of the legislative process before being introduced to the National Assembly for debate and enactment. It is expected that the bill will be enacted in 2019.
10 Tips and traps
10.1 What are your top tips for navigating the tax regime and what potential sticking points would you highlight?
Given the complexity and intricacies of the Kenyan tax regime, tax advice should be sought from a tax expert at all stages when undertaking a business venture in Kenya.
Further, in relation to transactions where the law is unclear, it is advisable to seek a private ruling from the KRA to confirm its interpretation of the application of the law to the transaction and to avoid potential tax disputes in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.