Whilst this shouldn’t be considered as official tax advice, it is right at the time of writing.
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Let us have a look at some of the important terminology before we can proceed with our topic for today, which covers the information on expat taxes in Kenya.
Tax – There is no need to explain about taxes, as most people are already familiar with this. Yet, for the people who don’t have a proper understanding, we will have a look at it.
Tax is nothing but the charge imposed on an individual by a specific government in order to deal with the expenses and development programs of that respective government.
Expat – A person who lives in a country other than his/her country of origin is called as an Expat.
The most common reasons that a person will generally opt for living in other countries are employment, education, retirement, etc.
Generally, expats have taxes applicable to them, which may be imposed on them in their country of origin or in their country of residence.
In certain cases, some taxes might be levied on the individual in both their country of origin as well as the country of residence.
However, if an individual’s country of residence has a tax treaty with their country of origin, the individual won’t have to pay tax in the country of residence. The main objective of these tax treaties is to make the individual avoid double taxation.
Kenya – Kenya is a country, which is officially known as the Republic of Kenya and is located in Eastern Africa.
Kenya currently consists of more than 53.7 million people (based on the statistics from mid-2020) and is said to consist of a 0.69% population of the world.
The official languages of Kenya are English & Swahili, and the currency of Kenya is Kenyan Shilling (represented as KES).
There are no specific foreign exchange controls in Kenya, but the banks would have to report the foreign exchange transactions having a significant amount to the Central Bank of Kenya.
A significant amount would usually be equivalent to an amount of more than USD 10,000.
Expat Taxes in Kenya:
Working in Kenya makes you live at the center of the African economy. However, people (expats) who want to work in Kenya or start a business there might have to keep some important things in mind.
Most people who are living in Kenya are excluded from most taxes, which includes some mandatory taxes such as NHIF (National Hospital Insurance Fund) and NSSF (National Social Security Fund).
Corporate Taxation – Let us see the taxes applicable to the companies in Kenya before we can move on to individual taxation.
The general corporate income tax rate in Kenya is 30% while having a capital gains tax rate of 5% and branch tax rate of 37.5%.
A company or a corporate entity will be a tax resident if the company has been incorporated under the Kenyan law and the management activities and affairs are done in Kenya.
A company shall also be determined as a tax resident if the Secretary of Finance proclaims the entity as a tax resident in a notice, which is published in the Kenya gazette.
Both the resident and non-resident companies or entities are subject to taxation if the income has been generated from the sources in Kenya.
The taxation of a branch is usually similar to the subsidiary with some changes given below.
Unless there is an existing tax treaty, a branch of a company is subject to tax on the following expenses.
- Management fees that are paid or have to be paid by the branch office to the head office
- Professional fees that are paid or have to be paid by the branch office to the head office.
- Remuneration to expats, who are directors of the company. However, there is an exception for the full-time service directors in excess of 5% of the total income or KES 150,000 (whichever is low).
- Exchange differences due to the dealings made with the head office, whether it is a gain or a loss.
- Certain types of administrative expenses that have been paid out by the head office.
Another thing to consider is that the branch is not subject to weak capitalization restrictions, which are usually applicable to a head office.
Taxable Income – Generally, the expenses that have been incurred as a whole or incurred exclusively for generating income (not capital in nature) can be deducted for tax purposes.
The following types of income are taxed when it comes to the taxation of a company in Kenya. They are:
- Gross income
- Less allowable deductions
The following are assessed for tax purposes separately, which are:
- Business income
- Investment income. In the case of financial institutions, investment income also falls under the category of business income.
- Rental income
- Income from agriculture
As discussed earlier, the usual corporate income tax rate as of 2020 is 30% and the branches are taxed at 37.5%.
The corporate tax rate is reduced to 25% in the case of startup companies, which is up to a period of 5 years starting from the year of income right after the year of listing.
In order to increase the developmental activity in the real estate sector, the company that can be able to build at least 400 residential houses will be taxed at 15%.
However, it has to be approved by the respective Cabinet Secretary, which is responsible for the housing. Also, there is a restriction on the proportion of turnover that is associated with the housing activity.
The corporate tax rate for companies that assemble motor vehicles is 15% for the first five years. This 15% tax rate can be extended to another 5 years if the ex-factory value of the motor vehicles is attributed to local materials.
From 1st January 2020, any company that involves in the business of plastic recycling is subject to a reduced corporate tax rate of 15% for the first 5 years of starting the business activities.
Companies that have a special agreement with the government can get some discounted special tax rates, which can be very low compared to the normal corporate tax rates.
Surtax and Alternative Minimum Tax – The Kenyan government does not impose any sort of surtax or alternative minimum tax on the companies.
Dividends – The income obtained in the form of dividends is not subject to any additional tax rate other than the tax that is deductible at the source, i.e., withholding tax. Dividends earned from a foreign company are not taxable in Kenya.
Capital Gains – The tax rate for capital gains is 5% of the overall gain and it is the final rate.
Gains that have been arisen from the transfer of shares, which are traded on a securities exchange having a license from the Capital Markets Authority are not imposed with the capital gains tax.
Losses – Losses are deductible for up to 10 years from the year they have arisen. There is even a possibility of extending this period by submitting an application.
Losses can be used to set off against the income obtained from the same source. Adding to that, capital losses are not deductible.
Foreign tax relief – Foreign taxes, which have been paid by a company/business are accepted as an allowable expense. Whereas a tax credit is applicable to the cases where a tax treaty is applicable.
Participation Exemption – For dividends, participation exemption is applicable when a company holds 12.5% or more shares of another resident company.
However, there is no holding company regime in Kenya.
Incentives – 100% investment deduction is applicable to hotel buildings as well as buildings & machinery used in manufacturing.
Not only that, but a 100% investment deduction is also available for the expenditure incurred on filming equipment that has been used by local film producers. These producers should have had acquired a license from a minister that deals with communication matters.
An investment allowance of 150% is offered to the companies that have made an investment with an amount of at least KES 200 million in buildings or machinery involving in the process of manufacturing.
However, these companies should be located outside the municipalities of Kisumu, Mombasa, or Nairobi. Companies located in zones that process exports are able to enjoy a 10-year tax holiday.
Companies that are located in special economic zones (SEZ) are offered a 100% investment deduction on buildings, plants, and machinery being used for the manufacturing process.
This investment deduction process will be increased to 150% if the investment has been done outside the municipalities of Kisumu, Mombasa, and Nairobi.
The withholding tax rates are reduced for certain payments made to a non-resident by an SEZ enterprise.
The tax year for corporations – The tax year in Kenya is a calendar year, however, a company (excluding a financial institution) can adopt any year-end.
When a company prepares accounts for a period other than 12 months, that period will be considered a tax year for assessment purposes. In a fiscal year in which a company’s accounting ends, all the taxable income will be assessed.
Consolidated returns – Consolidated returns are not allowed in Kenya, and each company must file an individual return.
Filing and Tax Payment – Self-assessment of a company should be filed within six months of the end of an accounting period. With the help of an online system called ‘iTax’, the returns must be filed electronically.
Tax can be paid in 4 equal installments and these installments should be paid on the 20th day of April, June, September, and December.
The installments of the payable amount of the tax depend on the significant proportion of the current tax or 110% of the tax for the previous year, fewer installments paid previously, and the tax deductible at the source.
The tax due, if any, should be paid within the fourth month after the completion of a tax year.
Agricultural companies are able to pay their taxes in two installments. They should pay the first installment which amounts up to 75% of the total payment and it should be paid within 20 days after the end of the third quarter.
The second installment should be paid within the 20th of the last month of the year. An employer must file the monthly returns electronically.
Penalty – If tax payments for self-assessed tax are not made within the due date, then a penalty of 5%is applicable. In addition to that, 1% will be added for every month that has been delayed.
If a person becomes late in filing their returns, a penalty of 25% of the due amount of the tax is applicable, with a minimum of KES 10,000. If not, a 5% penalty with a minimum of KES 20,000 is applicable on any amount that still needs to be paid after the ending of a year.
Rulings – A taxpayer can ask for a binding interpretation issued by the Kenyan Revenue Authority on the tax legislation as applicable to a specific situation.
The individual income tax rate in Kenya ranges between 10% to 30% and the capital gains tax rate is 5%. The marginal income tax rates applicable to individuals are given below:
|Taxable Income||Tax Rate|
|Up to KES 147,580||10%|
|KES 147,581 to KES 286,623||15%|
|KES 286,624 to KES 425,666||20%|
|KES 425,667 to KES 564,709||25%|
|More than 564,709||30%|
Tax residence – a person would be considered as a tax resident in Kenya if they qualify for the following criteria:
- A person having a permanent residence in Kenya and is present in the country for the respective tax year.
- A person who is present in Kenya for more than a period of 183 days in a specific tax year.
- A person that has been present in Kenya for an average of 122 days per year in the previous two tax years.
A person who is already a resident of Kenya but has left Kenya permanently won’t be considered a tax resident.
Basis of Taxation – Any income, which has been derived from the sources in Kenya is subject to taxation. Employment income, even if has been accrued from sources outside of Kenya will be taxed for the Kenyan residents.
A non-resident, however, will be taxed on the income that has been earned within Kenya. Non-residents if deemed to be residents because of meeting the requirements for becoming tax residents, would have to include the income (earned locally as well as internationally).
The tax year is a calendar year, which is similar to that of the tax year that has been mentioned earlier for corporate taxes.
Deductions and Allowances – Personal relief offered to individuals in Kenya is KES 16,896 per tax year.
An amount of KES 300,000 can be deducted annually from the taxable income on mortgage interest for owner-occupied property.
15% can be deducted from health or life insurance up to an amount of KES 60,000 annually.
An amount of up to KES 240,000 can be deducted from the contributions to a registered pension or provident fund, however, this deduction should not exceed 30% of the employment income.
Daily subsistence allowance paid up to KES 2,000, which is paid when working away from the normal working place is excluded from taxes.
Filing – people who are married can opt for filing the returns separately. If that’s not the case, the taxon combined income is assessed proportionately while the earned income of the wife being considered as the sole source of joint income.
Tax Payment – An individual is required to pay the returns by the end of June following the tax year.
Late payments incur a penalty of 5% with an additional 1% being imposed per each month. The late-filing penalty will still be applicable to a person on the amount owed by them after 4 months after the end of the tax year.
Rulings – An individual can request a binding interpretation from Kenya Revenue Authority on the tax legislation, just like a corporate company can do.
Withholding tax – Given below are two tables showing the details of withholding tax for both residents and non-residents.
Withholding tax for residents:
|Dividends||0% – 5%||5%|
|Interest||10% – 25%||10% – 25%|
|Fees for technical services||3% – 5%||3% – 5%|
Withholding tax for non-residents:
|Dividends||0% – 10%||0% – 10%|
|Interest||5% – 25%||5% – 25%|
|Royalties||5% – 20%||5% – 20%|
|Fees for technical services||5% – 20%||5% – 20%|
Dividends – Withholding tax is not imposed if the dividend has been received from a qualifying Kenyan financial institution. It is also excluded if the recipient company controls an amount of 12.5% or more capital of the payer.
The rate for dividends is 5% if paid to the other residents and people living in the East African Community partner states.
The rate for dividends is 10% in the case of non-residents. However, withholding tax won’t be imposed on the non-residents if the dividends have been paid from an SEZ enterprise.
Interests – Interest accrued from financial institutions has a withholding tax of 15%. This rate will be increased to 25% for the interest paid on bearer certificates and 10% for the interest on bearer bonds.
The above-mentioned rates are similar for both residents and non-residents. The withholding tax will be reduced to 5% if it has been paid to a non-resident by an SEZ enterprise.
Royalties – A withholding tax rate of 5% is applicable to a resident on royalties as well as natural resource income, and royalties paid by an enterprise to a non-resident.
The usual rate for royalties paid out to non-residents is 20%.
Fees for technical services – The withholding tax is 5% on the fees for the payments of technical services along with professional & management fees (excluding contract fees), if:
- Services are rendered by a resident
- The fees are paid out to a non-resident by an SEZ enterprise.
Contract fees incur a withholding tax of 3% if the payment has been made to a resident of Kenya.
The basic withholding tax rate for technical services fees is 20% if the services provider is a non-resident. This can change if the non-resident’s country of origin has a tax treaty with Kenya.
Others – a withholding tax of 10% is imposed on the gross rent in case of immovable property and has been paid to residents. Nonetheless, this tax can only be withheld only by agents who have been appointed by the Kenya Revenue Authority.
The withholding tax is 30% for the rent of an immovable property that has been paid out to a non-resident.
The tax rate for rent of movable properties is 15% if paid to non-residents, however, the rate for residents is 0%.
A withholding tax of 5% is applicable to insurance as well as reinsurance premiums paid to non-residents, excluding the insurance & reinsurance premiums paid for aircraft insurance.
Value Added Tax (VAT) – The standard rate for VAT is 14% and can be vary ranging between 0% – 8% for certain types of goods and services.
VAT is imposed on the supply of goods & services that are taxable or provided by a person living in Kenya (who is taxable). It is also applicable to the goods and services imported into Kenya by a taxable person.
VAT on the imported services in Kenya operates with the help of a reverse VAT mechanism, where the recipient of the services has to account for the taxes.
The reverse VAT that has been calculated is considered the liability of a recipient.
Registration for VAT – Registration is compulsory if the turnover of the taxable supplies is more than or equal to KES 5 million in a 1-year period.
Social Security – It is mandatory that an employee should contribute to the NSSF (National Social Security Fund) as well as NHIF (National Hospital Insurance Fund), anyhow, an employer only contributes to the NSSF.
The contribution that is required to be made for NSSF is 5% and NHIF is 1% of the payroll. The amounts should not exceed KES 2,400 for NSSF and KES 3,840 for NHIF respectively.
Stamp Duty – Stamp Duty is imposed on individuals at nominal rates or ad valorem rates, which are applicable to certain financial transactions/financial instruments.
Capital Duty Tax – No.
Inheritance Tax – No.
Estate Tax – No.
Net Wealth Tax – No.
Net Worth Tax – No.
Foreign Tax relief – Foreign tax credits can be claimed by a non-resident if there is a double tax treaty (DTT) existing between the individual’s country of origin and Kenya.
There is also an availability of Unilateral Tax Credits for the residents of Kenya.
Tax Treaties – The countries that have a Double Taxation Treaty with Kenya are as follows:
- South Africa
- South Korea
Anti-avoidance rules – There are no controlled foreign company rules, hybrid rules, economic substance requirements, and exit tax in Kenya.
Kenya has anti-avoidance rules for taxes, which provide the Kenya revenue Authority with the full empowerment to take the necessary measure if any person or a company are trying to avoid taxes.
Interest deduction limitations – Interest expenses are comparatively restricted for companies that are controlled by foreign individuals/foreign corporations, excluding licensed financial institutions.
This is applicable when the ratio of all the interest-bearing liabilities exceed 3 times more than the capital and revenue reserves/accumulated losses issued to a payer.
Deemed interest is imposed on the companies that acquire an interest-free loan from a non-resident affiliated company. This deemed interest can’t be deducted for tax purposes and has a tax rate of 15% that is deductible at source.
Transfer Pricing – Kenyan law requires individual pricing between related companies. Association with the OECD guidelines basically makes sure that everything is followed under the Kenyan law. However, domestic transfer pricing rules are also rapidly followed.
Disclosure requirements – The tax authorities have the right to require a taxpayer to provide information regarding tax affairs or banks regarding payments & interest.
Before going to live in Kenya as an expat, it is better to take note of all the above-mentioned details so that you won’t be charged with additional taxes.
This article will also come in handy for paying the taxes on time and avoiding penalties.
It should be taken into consideration that these rates and percentages may or may not differ by the time you read this article. However, we have tried our best to provide you with the utmost accurate information regarding this topic.
If you are in the requirement for a financial advisor or wealth manager, you can avail of the best-in-class financial services offered by us. Moreover, we can also help you in getting a second passport in a country that you want to move to.