Taxation in Kenya
Kenya’s taxation framework is a complex system that is fundamental to the country’s economic strategy, providing a balance between generating revenue and promoting growth and investment. This framework includes various taxes, each regulated by intricate rules and rates. For businesses, investors, and individuals, having a thorough understanding of this environment is crucial for effective financial management and compliance.
Taxation system
Kenya’s taxation system is created to conform to local fiscal policies as well as international responsibilities, providing both a systematic and flexible approach to taxation. It may include a mixture of flat rates, progressive structures, and specific exemptions that represent the nation’s economic goals and social aims. Grasping the complexities of these tax mechanisms is essential for maximizing financial results, maintaining compliance, and taking advantage of the opportunities available within the legal framework.
Capital gains tax
In Kenya, capital gains tax (CGT) is set at a flat rate of 15% on the net gains obtained from selling chargeable assets. This covers profits from the sale, transfer, or exchange of various assets, including property and shares. The net gain is determined by subtracting the acquisition cost of the asset, along with any allowable expenses, from the sale price. CGT is labeled as a final tax, indicating that no additional taxes will be levied on the profit once CGT has been paid. The tax is applicable to both resident and non-resident individuals and companies, and it must be settled at the time the transaction is completed.
Corporate taxation
In Kenya, the corporate income tax is typically set at a rate of 30% for both resident companies and branches of foreign firms. Certain sectors benefit from reduced rates, such as 15% for companies that build at least 100 residential units each year, new motor vehicle manufacturers, shipping companies, and those involved in carbon market exchanges, while companies producing human vaccines are taxed at a rate of 10%. Additionally, foreign branches face a further 15% tax on repatriated profits. Income earned from business operations, investments, and rental activities within Kenya is taxable, and taxpayers can claim allowances and deductions for expenses that are entirely and exclusively related to generating that income.
Personal income taxation
In Kenya, personal income tax operates on a progressive scale, with rates varying from 10% to 35% depending on the taxable income of the individual. This tax applies to all income earned by residents, such as earnings from employment, business activities, and investments. For non-residents, taxation is limited to income generated within Kenya. Kenyan citizens are taxed on their global income, whereas non-citizen residents are required to report their after-tax foreign employment income as part of their taxable income in Kenya. Employment income is usually subject to withholding at the source through the Pay-As-You-Earn (PAYE) system.
Dividend taxation
In Kenya, dividend tax is deducted at the source, with the rate varying based on the recipient’s classification. Resident companies that hold 12.5% or more of the payer company’s capital are exempt from withholding tax on dividends. For other resident individuals and entities, as well as citizens from East African Community partner states, the withholding tax is set at 5%. Non-residents face a standard rate of 15%. These specified rates are final taxes, which means the recipient will not incur any additional tax on the dividend income. The distributing company is responsible for collecting the dividend tax and sending it to the Kenya Revenue Authority (KRA).
Property tax
In Kenya, property tax is mainly managed by local county governments. This encompasses taxes like land rates, which are determined by the property’s value. The rates differ based on the property’s location, type, and usage, with each county establishing its own specific rates. The revenue generated from these taxes is generally allocated to local services and infrastructure. Property owners must pay these taxes either annually or as specified by local authorities. Adhering to property tax regulations is crucial to prevent penalties or legal repercussions, including the possibility of property seizures.
Inheritance taxation
Kenya does not have a dedicated inheritance or estate tax. Nevertheless, the allocation of an estate’s assets to heirs may incur other taxes, including capital gains tax or personal income tax, based on the type of assets involved. For instance, if an estate contains real estate or investments, beneficiaries might have to pay taxes on profits made from transferring or selling these assets. While inheritance itself is typically exempt from direct taxation, transactions related to inherited assets could be subject to other tax obligations. It is crucial to adhere to applicable tax regulations when managing inherited assets.
International taxation
Kenya’s international tax framework encompasses various tax categories, including a corporate income tax (CIT) set at a standard rate of 30%, a branch tax of 30% along with a 15% branch repatriation tax, and a capital gains tax (CGT) of 15%. Companies that are residents are taxed on their global income, while non-resident companies and individuals face taxation on income generated within Kenya. Double taxation treaties might alleviate taxation or lower rates for certain international transactions, including dividends, interest, and royalties. Although Kenya has not implemented the global minimum tax (Pillar Two), it provides numerous incentives for specific sectors, offering lower CIT rates to housing developers and motor vehicle assemblers.
Cryptocurrency taxation
Kenya has implemented a 3% tax on digital assets that applies to income generated from the transfer or exchange of these assets, which includes cryptocurrencies, tokens, and non-fungible tokens (NFTs). This tax is levied on each transaction without considering whether a profit is made. Introduced in the Finance Act 2023, it covers all cryptocurrency transactions taking place within Kenya. The tax is collected at the moment of the transaction and must be submitted to the Kenya Revenue Authority (KRA) by the platform that facilitates the transaction. This flat rate is applied consistently, regardless of the type or size of the transaction.
VAT system
In Kenya, VAT is applied at a standard rate of 16% on the sale of taxable goods and services within the country, as well as on the import of taxable goods and services. A reduced rate of 0% is in place for certain supplies, including exports and specific zero-rated goods and services. VAT generally applies at all levels of production and distribution, requiring businesses to collect VAT from their sales and remit it to the Kenya Revenue Authority (KRA). Companies that provide taxable goods or services with an annual turnover exceeding KES 5 million must register for VAT. The VAT framework permits the deduction of input VAT on purchases related to taxable supplies, although there are particular limitations on certain expenses.
Our taxation solutions
In a tax landscape that is constantly changing, expert guidance is crucial. Our firm provides a range of specialized tax solutions that cater to the varied requirements of individuals, corporations, and investors in Kenya. Our offerings are aimed at navigating the complexities of the tax code, reducing liabilities, and ensuring complete regulatory compliance.
- Personal tax advisory: Tailored advice to minimize tax exposure while ensuring legal compliance.
- Corporate tax strategy: Comprehensive planning to maximize tax efficiency and leverage incentives.
- Capital gains optimization: Expert guidance to manage and reduce taxes on capital gains.
- International tax planning: Advanced strategies for optimizing cross-border tax outcomes.
- Cryptocurrency advisory: Compliant tax strategies for both individual and corporate crypto activities.
- Inheritance and estate planning: Strategic planning for efficient wealth transfer and reduced inheritance taxes.
- VAT compliance: Full-service support for VAT registration, reporting, and optimization.
Book a consultation
In the intricate realm of taxation, seeking professional guidance can be extremely beneficial. Get in touch with us today to arrange a consultation with our team of tax specialists. We will collaborate closely with you to create a personalized tax strategy that meets your goals and guarantees complete adherence to Kenya’s regulatory framework.
Disclaimer
Tax laws and regulations are in constant flux and can differ depending on personal situations. The information presented here serves as a general guide and may not represent the latest updates. It is strongly advised to seek the expertise of a qualified tax professional for specific and current advice tailored to your circumstances.