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Global tax guide to doing business in Kenya

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Global tax guide to doing business in Kenya by Kenyans247(1): Sun 08, November, 2020 08:11am
The Constitution of Kenya 2010, which was promulgated in August 2010, created a decentralized two-tier system of government comprising of a national government and 47 political and administrative counties.

Only the national government may impose income tax, value-added tax, customs duties and other duties on the import or export of goods, and excise duties. County governments on the other hand, may only impose entertainment taxes, property rates and any other taxes they are authorized to charge pursuant to an Act of Parliament.

Functions such as the registration of business entities are undertaken exclusively by the national government. County governments have the power to issue and levy charges for licences such as business permits and fire safety clearance certificates. The government fees payable for business permits and fire certificates are dependent on the nature of the business the person is engaged in, the size of the office premises the person occupies and the number of employees. The said permits and certificates are renewable annually.

In this chapter
Legal system
Taxation authorities
Business vehicles
Financing a corporate subsidiary
Corporate income tax (CIT)
Cross-border payments
Payroll taxes
Indirect taxes
Turnover tax
Minimum tax
Digital services tax
Taxation of capital gains (CGT)
Legal system
Kenya's legal system is based on English common law with the primary sources of law being the Constitution of Kenya 2010, Acts of Parliament, the common law, doctrines of equity as well as statutes of general application in force in England in 1897. In making their determinations, Kenyan courts may make inference to African customary law in civil cases to the extent that it is not repugnant to justice and morality, or inconsistent with any other written law.

Taxation authorities
The Kenya Revenue Authority (KRA) is the agency in charge of the collection and receipt of all revenue on behalf of the Kenyan government. In performing this function, it has the responsibility of administering and enforcing all laws relating to revenue.

Business vehicles
Foreign entities wishing to conduct business in Kenya may choose to operate in various forms. The most common types of business vehicles in Kenya are companies, branches of foreign companies and partnerships.

Limited liability companies
The Companies Act, 2015 (Companies Act) provides for various types of companies, including private and public companies. The liability of shareholders in companies that undertake commercial activities is typically limited to their shareholding. Companies limited by guarantee do not have shares or shareholders but are owned by guarantors who agree to pay a set amount of money to the company’s debts should the company be wound up. Such entities are often formed to carry on charitable or social activities (not-for-profit organizations).

Limited liability companies may have a single shareholder and a single director. There are a few restrictions on foreign ownership of certain business in Kenya. These include:

Aviation: 51% of the voting rights, in the case of a body corporate or a partnership, must be held by the state or a citizen of Kenya or both
Insurance: A minimum of one- third of the controlling interest in an insurer, whether in terms of shares, paid-up share capital or voting rights must be held by citizens of a partner state of the East Africa Community; or a partnership whose partners are all citizens of a partner state of the East African Community; or a body corporate whose shares are wholly owned by citizens of a partner state of the East African Community; or is wholly owned by the government of Kenya
Telecommunications: A firm licensed to provide communication services as an operator or service provider is required to ensure that by the end of the third year from the date of the issuance of a license, or earlier as the case may be, and thereafter for the duration of the license term, that it has no less than 20% ownership and control by Kenyan persons, howsoever achieved.
Branches of a foreign company
Registering a branch of a foreign company in Kenya does not create a separate legal entity from the foreign company. Registration is a requirement for all companies incorporated outside Kenya that intend to operate in Kenya as foreign companies.

Branches must have a local representative resident in Kenya, who may be a citizen or a non-citizen. The local representative is answerable for the doing of all acts, matters and things that the company is required to do by or under Companies Act and is personally liable for any penalties imposed on the company for a contravention of, or failure to comply with, the Companies Act.

Disclosure of beneficial ownership

In 2019, Kenya’s Companies Act was amended to introduce the requirement for a company to keep a register of its beneficial owners containing prescribed information relating to the beneficial owners. Pursuant to the said amendment, the Companies (Beneficial Ownership Information) Regulations 2020 (BOI Regulations) have been enacted and entered into force on 18th February 2020. The BOI Regulations prescribe how companies (and their officers) should comply with their obligations relating to beneficial ownership information.

Under the BOI Regulations, a company’s beneficial owner is any natural person who, either directly or indirectly:

Holds at least 10% of the issued shares of the company;
Exercises at least 10% of the voting rights in the company;
Holds a right to appoint or remove a director of the company; or
Exercises “significant influence or control” over the company. Significant influence or control has been defined to mean participation in the finances and financial policies of a company without necessarily having full control over them.
The BOI Regulations require a company to, among other things:

Take reasonable steps to identify beneficial owners by investigating the nature of a shareholder's beneficial interest;
Notify a person it reasonably believes to be a beneficial owner, to provide it with the relevant particulars for registration (if such person fails to respond within the stated period, the company is required to restrict such person from undertaking transactions such as transferring shares, exercising certain rights, subscribing for more shares or receiving dividends);
Enter the necessary particulars of such beneficial owners into its Register of Members. These include, among others, one’s birth certificate number, date of birth, residential address, telephone number, email address, nature of ownership or control, and date one became (or ceased to be) a beneficial owner of the company;
File the updated Register of Members within 30 days of its preparation with the Registrar of Companies (the Registrar)(failure to comply with this requirement is an offence and the company and its officers would each be liable to a fine of up to KES 500,000); and
Lodge with the Registrar, in the prescribed form, a Register of Beneficial Owners (and changes to the same) within 30 days of its preparation.
Limited liability partnerships (LLPs)
LLPs combine some of the features of a traditional partnership with the advantage of limited liability. LLPs have a separate legal identity from their members, but are transparent for tax purposes, meaning partnership income is allocated to the individual partners and taxed in their hands.

Financing a corporate subsidiary
Equity financing
Companies can raise capital by issuing shares. There are no prescribed minimum or maximum share capital requirements for a private company limited by shares except for certain regulated sectors, such as banks and insurance companies.

Debt financing
Thin capitalization

A company is deemed to be thinly capitalized where it is under the control of a non-resident person alone or together with four or fewer other persons, and the highest amount of loans at any time during the year exceeds three times the sum of the company’s revenue reserves and the issued and paid-up capital of all classes of shares.

For contractors and licensees in the extractives industry, the debt-to-equity ratio for purposes of thin capitalization is 2:1.

Where a company is thinly capitalized, interest expenses on that part of the loan that exceeds the 3:1 debt to equity ratio will not be deductible for tax purposes. In addition, realized foreign exchange losses on loans will be deferred (not treated as tax deductible) until the company’s state of thin capitalization ceases to exist.

Thin capitalization provisions do not apply to financial institutions as licensed under the Banking Act.

Effective January 1, 2020, the thin capitalization provisions do not apply to companies implementing projects under the government’s affordable housing scheme, upon the recommendation of the Cabinet Secretary responsible for housing.

Deemed interest

A Kenyan-resident entity that is foreign-controlled and has an interest-free loan from a non- resident entity will be subject to deemed interest provisions. Such a company will be required to compute an amount of deemed interest and disallow it in its tax computation. The amount of deemed interest will also be subject to withholding tax at the rate of 15%.

Stamp duty
Currently, there is no stamp duty on authorized share capital at the point of incorporation. Stamp duty is chargeable at the rate of 1% on any increase of a company’s authorized share capital and on the transfer of shares. The specific stamp duty implications arising from debt financing will depend on the nature of the debt instrument.

Corporate income tax (CIT)
All income accrued or derived in Kenya by any person (individual or body corporate), whether resident or non-resident, is subject to tax. The whole profit of a business carried on partly within and partly outside Kenya by a resident company is deemed to accrue in or be derived from Kenya and is therefore taxable in Kenya. The resident rate of CIT is 25% effective in the 2020 year of income. Prior to this year of income, the applicable rate of CIT was 30%.

Where a non-resident person carries on business in Kenya through a permanent establishment (PE), the income attributable to the PE will be considered income accrued in or derived from Kenya. The tax adjusted business profits of the PE will be subject to tax at the non-resident CIT rate of 37.5%.

Other rates of CIT are as tabulated below:

Entity CIT rate
Export Processing Zone enterprise
First 10 years
Next 10 years


Nil
25%
Special Economic Zone (SEZ) Enterprises, Developers & Operators
First 10 years of operation
Next 10 years




10%
15%
Companies whose business is local assembly of motor vehicles 15% for the first 5 years of operations.
(This reduced rate may be extended for another five years if local content targets are achieved.)
Companies whose business is local assembly of motor vehicles 15% for the first 5 years of operations
(This reduced rate may be extended for another 5 years if local content targets are achieved.)
Companies that construct at least 100,000 residential units 15% for that year of income subject to approval of the Cabinet Secretary responsible for housing
Companies engaged in business with the Government of Kenya under a Special Operating Framework Agreement It is no longer possible to agree on preferential rates of CIT under Special Operating Framework Agreements effective April 25, 2020.

For existing agreements, the rate of CIT specified under the Special Operating Framework agreement will continue to apply until the expiration of the agreement.
Computation of taxable income
Taxable base

A taxpayer is subject to tax on its profits from carrying on its business. Taxable profit is generally calculated by deducting allowable expenses from taxable income.

Deductions

Taxpayers are permitted to deduct expenditures incurred in a year of income that are wholly and exclusively incurred for the purposes of producing income.

CIT reporting

Both subsidiary companies and branches are required to file a Self-Assessment Return (SAR) no later than the last day of the sixth month following the end of a year of income. The SAR is to be completed in prescribed form and must be accompanied by the entity’s audited financial statements. Where there is no tax due for a year of income, a nil return must still be filed. SARs are filed on KRA’s online portal.

Tax losses

Tax losses are an allowable deduction in the year in which they arise and may be carried forward for nine years. It may be possible to extend the 10-year period in which to utilize tax losses with the prior approval of the Cabinet Secretary responsible for the National Treasury.

Generally, there is no carry back of tax losses except in the case of the extractive industries, which are entities involved in mining or petroleum operations.


Cross-border payments
Transfer pricing
Transactions between Kenyan resident persons and their non- resident related parties must be carried out on an arm’s length basis. Kenyan transfer pricing legislation also applies to transactions between a Kenyan branch and its head office or any other non-resident related parties.

A Kenyan resident company that operates in a preferential tax regime that transacts with a related resident company that is not operating in a preferential tax regime must also adhere to the arms length principle. In this context, a "preferential tax regime," with respect to an item of income or profit, means any legislation, regulation or administrative practice that provides a preferential rate of taxation to such income or profit, including reductions in the tax rate or the tax base. An SEZ entity is one such example.

Withholding tax
The general withholding tax rates are summarized below.

Nature of payment Resident rate (%) Non-resident rate(%)
Dividends 5% 15%
Interest (including deemed interest)
Bearer instruments
Government bearer bonds with a maturity over 2 years 15%
25%
15% 15%
25%
15%
Royalties 5% 20%
Management or professional fees, including training fees 5% 20%
Contractual fees – Building, civil and engineering works 3% 20%
Rent – Immovable property
Property other than immovable property N/A
N/A 30%
15%
Commissions paid to brokers by insurance companies 5% 20%
Commissions paid to agents and other persons by insurance companies 10% 20%
Insurance or reinsurance premiums, except those paid in respect of aircraft. N/A 5%
Fees for sales promotion, marketing, advertising services and transportation of goods (excluding air and shipping transport services) N/A 20%
Dividends paid to a resident company that controls 12.5% or more of the share capital of the company paying the dividend are exempt from withholding tax. A reduced rate of 5% applies to dividends paid to citizens of the East African Community and a reduced rate of 15% applies to consultancy fees paid to citizens of the East African Community.

Kenya has 14 Double Taxation Treaties (DTTs) in place. The countries with which Kenya has a DTT in effect are: the United Kingdom, Germany, Canada, Denmark, Norway, Sweden, Zambia, India, France, South Africa, Iran, South Korea, Qatar, and the United Arab Emirates.

The DTTs provide for lower withholding tax rates in some instances. Any reduced rates of tax provided for under a DTT will not apply automatically, but rather will be subject to the limitation of benefits provisions in the Kenyan Income Tax Act (ITA).

Kenya is also signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.


Payroll taxes
Pay As You Earn (PAYE)
Business entities are required to deduct and account for PAYE from all emoluments (cash and non-cash) paid or provided to employees. Kenyan residents are taxed on their worldwide employment income. PAYE applies based on a graduated scale with tax rates ranging from 10% to 25%.

Employers are required to deduct and submit to the KRA the tax due on the amounts they pay to their employees as wages. The employer is required to submit the tax deducted and file, on or before the ninth day of each month following the month of payment, a return indicating the amount of tax deducted from each employee’s income.

Employers must also account for a number of statutory deductions on a monthly basis, as discussed below.

National Social Security Fund (NSSF)
Any person who employs one or more employees must register with NSSF as a contributing employer. Employees are required to register as members of the NSSF as well. There are no registration costs. Registered employees are required to contribute to NSSF. The contribution is divided into two tiers. The tier I contribution is based on the lower earnings limit which is KES 6,000. The Tier II contribution is based on the upper earnings limit, which is KES 18,000. The total pension contribution is 12% of the pensionable wages made up of two equal portions of 6% from the registered employee and 6% from their employer.

National Hospital Insurance Fund (NHIF)
Employers are also required to register with the NHIF and to deduct and account for monthly contributions to the NHIF for each employee based on their monthly income. There are no registration costs.

The contributions are based on a graduated scale and range from KES 150 up to a maximum contribution of KES 1,700 per month.

National Industrial Training Authority (NITA) levy
All employers are required to pay the NITA Levy at a monthly rate of KES 50 per employee.

National Housing Development Fund (NHDF) levy
The Finance Act, 2018 introduced a NHDF levy, which is aimed at financing the government’s affordable housing agenda. The introduction of the NHDF levy has been challenged in court and the levy is yet to take effect as of August 1, 2020.

Indirect taxes
Value-added tax (VAT)
VAT in Kenya is charged on the supply of taxable goods and services and on the importation of goods or services into Kenya. A registered person who makes taxable supplies, including standard rated and zero rated supplies, is eligible to recover input tax, while a person who makes exempt supplies is not required to register for VAT and is not able to recover the input tax incurred in the production of those supplies.

Persons whose turnover of taxable supplies is or is expected to be KES 5 million or more in a 12-month period must register for VAT.

Supplies fall within the following categories:

Zero rated supplies taxable at the rate of 0%
Standard rated supplies taxable at the rate of 14%
Exempt supplies on which there is no VAT and
Petroleum products, which are subject to VAT at the reduced rate of 8%.
A registered person in Kenya is required to file and make VAT payments no later than the 20th day of the month following the month of the supply.

The time of supply for VAT purposes is the earlier of:

The date on which the goods are delivered or services performed;
The date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;
The date on which the invoice for the supply is issued; and
The date on which payment for the supply is received, in whole or in part.
Excise duty
Excise duty is imposed under the Excise Duty Act, 2015 on the local manufacturing or the importation of certain commodities and the provision of excisable services. Excisable goods include items such as bottled water, soft drinks, cigarettes, alcohol, fuels, motor vehicles and imported confectionary. Excisable services on the other hand include mobile cellular phone services, fees charged for money transfer services, other fees charged by financial institutions and betting.

Turnover tax
Turnover tax is payable by any resident person, including companies, whose turnover from business is more than KES 1 million but does not exceed or is not expected to exceed KES 50 million during any year of income. The applicable rate of tax is 1% of the gross receipts of the gross receipts of the business with effect from April 25, 2020. Turnover tax is due and payable on the 20th day of every the month following that to which the tax relates.

Turnover tax does not apply to rental income, management or professional fees, training fees, or any income that is subject to withholding tax as a final tax.

Taxpayers liable to Turnover Tax may make an election in writing to the Commissioner of KRA not to be subject to the tax, in which case they will be subject to the other taxing provisions of the ITA.

Minimum tax
Finance Act, 2020 has introduced a Minimum Tax payable by persons whose total installment taxes payable in a year of income falls below 1% of the company’s gross turnover. This tax is set to take effect on January 1, 2021.

The Minimum Tax will apply at the rate of 1% of gross turnover and will not be payable by persons:

Whose income is tax exempt;
Earning employment income, residential rental income, capital gains or income from extractive industries (mining and petroleum operations); or
Whose installment tax payable is higher than the Minimum Tax.

Digital services tax
Furthermore, Finance Act, 2020 has introduced a Digital Services Tax that is set to take effect on January 1, 2021. This tax will be payable by a person whose income from the provision of services is derived from or accrues from Kenya through a digital marketplace at rate of 1.5% of the gross transaction value of services. In this context, a "digital marketplace" is defined as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.

The Digital Services Tax will be due at the time of the transfer of the payment for the service to the service provider.

Taxation of capital gains (CGT)
Effective January 1, 2015, CGT is applicable on the transfer of property situated in Kenya including land and shares. CGT is applicable on the whole gain accruing to a person on a transfer of property situated in Kenya whether or not the property was acquired before or after January 1, 2015.

The chargeable gain is taxed at the rate of 5% and is not subject to further taxation. The obligation to account for CGT is on the transferor. The chargeable gain is computed as the difference between the transfer value of the property (i.e., selling price) and the adjusted cost base of the property to the transferor.

Gains arising from the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority are not subject to CGT.

From November 7, 2019, taxpayers may seek an exemption from CGT on the transfer of property necessitated by a transaction involving the incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring of a corporate entity, where such transfer is:

A legal or regulatory requirement;
As a result of a directive or compulsory acquisition by the government;
An internal restructuring within a group which does not involve transfer of property to a third party; or
In the public interest and approved by the Cabinet Secretary.

https://www.dentons.com/en/issues-and-opportunities/global-tax-guide-to-doing-business-in/kenya

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