Africa Tax Landscape

Kenya

30 Dec 2022

Kenya's tax landscape overview highlights the country's tax landscape together with other regulatory considerations of setting up an entity in Kenya.

Doing business in country

Overview of tax system (residence versus source)

Residency for companies but Source for individuals if it is salary.

Type of companies that can be set up (e.g., Close corporation, Partnership etc.,)
  • Sole Proprietorship, Partnership, Limited Liability Partnership(LLP)
  • Private Limited Liability Company(Ltd)
  • Public Liability Company(PLC)
  • Private/Public Company Limited by Guarantee(Ltd/Gte)
  • Unlimited Liability Company(ULtd) Incorporated Trustee - (Not for Profit Organisation)
Requirements for locals to own shares/stake in the company

Amount of Share Capital: A private company limited by shares (LTD.) must have a minimum issued share capital of 100,000, while a publicly quoted company (PLC) must have 2,000,000 minimum issued share capital. 

Implications of physical presence versus online presence

The Nigerian Finance Act 2019 amended Section 13(2) of the Companies Income Tax Act (""CITA"") by introducing a new paragraph (c) which subjects digital and online transactions of non-resident companies to companies' income tax in Nigeria.

Digital companies providing services and goods without a physical presence in Nigeria were not liable to previously pay income tax in Nigeria. The Finance Act, which came into force on 13th January 2020, introduced the concept of "significant economic presence" ("SEP'') as a new basis for the taxation of digital and online transactions by non-resident companies.

Invariably both physical and online presence companies are subject to almost the same taxes in Nigeria.

Process of opening a bank account

While opening a bank account, a business shall be required to undergo various KYC procedures during which they shall be required to provide the CR12 showing ownership of the company, PIN Certificate of the company and its directors; identification documents for the directors, physical address, email and phone numbers of the company and its directors.

Depending on the respective Bank's KYC procedures they may require additional information.

Corporate income tax

Viable option from a tax perspective (branch versus subsidiary)

This is largely dependent on the intended business model. From a tax perspective, a subsidiary enjoys a lower tax rate of 30% compared to a branch which is taxed at 37.5%.

Process of registering and setting up a branch or subsidiary

Registration of companies is done by Corporate Affairs Commission [CAC], and tax is done by Federal Inland Revenue Services (FIRS) for subsidiaries (resident company) in Nigeria. For branches that are Non-Resident in Nigeria, they are to register for tax with Federal Inland Revenue Services (FIRS).

Lodging of tax returns with the local Revenue Authority

Taxpayers are required to lodge their tax returns six months after the end of the financial year.

Corporate tax rate for branches and subsidiaries

A Branch is subject to tax at 37.5% while a subsidiary is subject to tax at 30%.

Tax rules on repatriation of after-tax profits for branch and subsidiary

The Kenya Foreign Investment Act (the Act) regulates capital repatriation and remittance of dividends and interest to foreign investors. Section 3 (1) of the Act allows foreign nationals wishing to invest in Kenya to be issued with approved enterprise certificates in relation to the intended investment.

There are generally no restrictions on the repatriation of profits in Kenya. However, all relevant taxes due to the Kenya Revenue Authority must be paid before the repatriation of funds.

Withholding taxes applicable

Yes. Section 35 of the Income Tax Act imposes a withholding tax obligation on a person making payments in form of management fees, royalties, interests and Dividends to both resident and non-resident persons.

Capital gains tax implications

Yes. CGT rate is at 5% and a new rate of 15% effective January 2023.

Value-Added Tax (VAT)

VAT rate applied

Currently, VAT is at 16% for General Supplies, 8% for Other rated (Petroleum products), 0% for Zero-rated goods and Exempt for certain categories.

Imposition of VAT

General rated, other rated, zero-rated and exempt.

System of submitting VAT returns (manual versus automated)

We have been operating under a manual system of VAT returns, however, effective 1st October 2022 all taxpayers are expected to go on automation courtesy of TIMS.

What are the export requirements that must be adhered to?

For basic exports a taxpayer is required to avail ; bill of lading, certificate of origin, pre-shipping inspection certificates and others.

VAT registration requirements

The basic requirement is the supply of goods and services in a given financial year of at least Kshs 5 Million.

VAT on electronic services

The standard VAT rate is 16% for general supplies and the provision of goods. Some of the electronic services include websites, software updates, transfer of copyright among others.

VAT registration requirements for the registration of a Group/Branch

In order for any person to be registered for VAT they must:

  1. Be dealing in vatable supplies
  2. Provide the company CR12
  3. Provide the PIN and original identification for the directors
  4. A business permit from the county government
  5. Work permit in the case of foreigners
  6. Tax compliance certificate of the company and Directors
  7. Contacts, verified telephone number; email address, utility meter number and office rent agreement where applicable
  8. Business agreements eg. LPO, sample invoices etc
VAT refunds for non-residents

In the case of VAT on digital supplies, where the non-resident person incurs a VAT liability in Kenya they cannot claim a refund or credit of the tax paid.

Recordkeeping requirements

Under section 43 of the VAT Act, a taxpayer is required to keep a record of all sales, purchases and stock records for accountability purposes.                                                               

Employees Tax

Tax year for Individuals

Tax on employment income is accounted for every month by the employer. An employee is required to file their tax return on 30th June of each subsequent year.

Is employees’ tax is collected from employers via payroll?

Yes, employers will be assessed, deduct and remit the tax due on employees' earnings.

Collection of Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL)

Not applicable.

Should employers register and file returns with both the Revenue Authorities?

Not applicable.

When is the monthly submission and payment of the EMP201 tax return due for each month following the collection?

Not applicable.

Submission of the employee's tax reconciliation return?

Not applicable.

Method of calculating individuals tax

Yes. Income Tax Computation for individuals is on a graduated scale

Labour law registration requirements for employers

There is no mandatory requirement for employers to register under the labour Act. However, employers are required to register with the National Industrial Training Levy. New businesses with less than 100 employees are exempt from registration.

System of submitting employees' tax returns (manual versus automated)

Some registration is manual, while some are automated. Note: Grant Thornton Nigeria and its associated Legal unit assist local and foreign entities on registration issues with government agencies.

Transfer pricing

Transfer pricing documentation guidelines or regulations

Transfer Pricing documentation guidelines and rules in Kenya fall under the Income Tax Act, Cap 470 (ITA). Section 18(3) of the ITA forms the basis of legislation in Kenya on TP with specific rules provided under the Income Tax (Transfer Pricing) Rules, 2006.

The current OECD TP Guidelines are also used as supplementary guidance but not as a legally binding instrument (Unilever Kenya Limited Vs Commissioner of Domestic Taxes).

Transfer pricing documentation materiality limits or thresholds in relation to transactions or revenue

Broadly, the TP law and regulations in Kenya require taxpayers having transactions between a resident enterprise and its related non-resident enterprise, to document and maintain a TP policy to ensure that transactions are performed at arm’s length.

The Finance Act, 2022 introduced the Country by Country Reporting (CbCR) requirements, for MNEs with a gross turnover of KES 95 billion to disclose information on entities, income and taxes paid in each jurisdiction and indicators of economic activity and substance, effective 1st July 2022.

The Kenyan local file is a requirement under the CbCR rules, with its form and content specifically prescribed under the domestic TP regulations.

Statutory deadline for submitting transfer pricing documentation

The Income Tax (Transfer Pricing) Rules do not apply a statutory deadline, however, a transfer pricing policy translated into English will be expected to be submitted upon the Commissioner's request, within 14 - 21 days of the request. Failure to maintain or submit TP documentation may attract undue scrutiny from the KRA, resulting in high penalties if the KRA disagrees with the pricing arrangement when conducting an audit.

Country by Country Report (CbCR) and Local file should be filed within 12 months and 6 months from the group financial year-end, respectively.

Penalties imposed for non-submission and/or incomplete documentation.

There is no specific transfer pricing penalties, however general penalties, under the domestic TP laws and regulations, may apply.

It is good to note that the Income Tax Act has provisions related to the underpayment or under declaration of income earned in Kenya.

International tax

Tax nexus (Permanent Establishment)

A PE in Kenya is treated as a distinct and separate enterprise from its head office and related branches. The Finance Act, of 2021 expanded the scope of PEs in Kenya, it is crucial for non-resident enterprises to assess whether their operations in Kenya form a PE, in light of the changes.

The domestic TP laws and regulations apply to transactions between a PE and its head office or other related branches. Establishing a PE in Kenya creates transfer pricing risks that affect business functionality. Risks may include unforeseeable penalties, interest, non-compliance with reporting obligations and drawing undue scrutiny from the revenue authority to conduct a review into operations.

Effective Management

Foreign entities can be treated as residents in Kenya if their management and control of the affairs of the body were exercised in Kenya in a particular year of income.

The Finance Act, of 2021 expanded the definition of the term 'control' in the Income Tax Act which broadens the scope of TP by extending the meaning of 'related entities'. This amendment will also have a direct impact on the deductibility of foreign exchange losses on loans advanced to controlled persons.

Controlled Foreign Company

Kenya does not have specific Controlled Foreign Companies (CFC) rules, however, CFC's effectively managed and controlled in Kenya are generally considered resident in Kenya.

Exchange control

There are no exchange control laws in Kenya, however, there are restrictions on the deductibility of interest and foreign exchange losses for thinly capitalised CFCs. The Finance Act, of 2021 replaced the thin capitalisation rules with EBITDA-based interest limitation on the deductibility of interest expenses for CFCs, effective 1st January 2022.

The thin capitalisation rules however still apply to the deductibility or deferral of foreign exchange losses. Deemed Interest is applicable on interest-free borrowings received by foreign-controlled entities in Kenya at a rate prescribed by the Commissioner of Domestic Taxes.

The Finance Act, 2022 also introduced new legislation with regard to the applicability of withholding tax on deemed interest arising from a bearer bond issued to non-residents outside Kenya of at least 2 years. The Finance Act, 2022, amended the Income Tax Act, to include a preferential tax regime within the scope of Transfer Pricing, effective 1st January 2023.

This will apply to foreign jurisdictions which do not have a framework for the exchange of information with Kenya, among other criteria specified in domestic law.

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