Kenya’s tax framework and international mobility

Alex Mathini
Bowmans, Nairobi
alex.mathini@bowmanslaw.com

Andrew Oduor
Bowmans, Nairobi
andrew.oduor@bowmanslaw.com

Patience Mbugua
Bowmans, Nairobi
patience.mbugua@bowmanslaw.com

Kelvin Mbithi
Bowmans, Nairobi
kelvin.mbithi@bowmanslaw.com

Victor Maina
Bowmans, Nairobi
 

Introduction

The Expats Essential Index 2023, by InterNations, ranked Kenya as the leading country in Africa for expatriates and ninth in the world out of 52 destinations.[1] As people and businesses move to Kenya, it is crucial that they understand the basic tax landscape. This article explores key aspects of Kenya’s tax system, highlighting the local taxation applicable, the tax consequences of moving to Kenya, potential exit tax consequences and the latest trends aimed at attracting foreign businesses and individuals.

The taxation of individuals and companies in Kenya

Kenya operates a self-assessment tax system, where both businesses and individuals are responsible for computing and paying their own taxes. The Kenya Revenue Authority (KRA) oversees compliance and has the power to review the tax affairs of individuals and companies to ensure that the correct amount of tax paid has been paid.

The taxation of individuals

Individuals that are resident in Kenya are subject to tax on their worldwide employment income, using the graduated scale rate shown in the table below.

Employers must deduct and remit pay as you earn (PAYE) income tax from their employees’ salary based on the individual graduated scale rates mentioned above and remit the taxes to the KRA. Other statutory deductions that are applicable include:

• the affordable housing levy at 1.5 per cent of the employee’s income;
• national social security fund contributions: the employer and the employee each contribute six per cent of the employee’s monthly pensionable earnings, up to a maximum monthly contribution of KES 2,160 (approx. $17) for workers earning more than KES 18,000 per month (approx. $139.53);
• a contribution to the National Industrial Training Authority of Kenya of KES 50 (approx. $0.38)) per month for each employee on the employer’s payroll; and
• employers are required to deduct and remit from the employee’s salary social health insurance fund contributions (SHIF). Under the SHIF, every employer is required to deduct 2.75 per cent of an employee’s gross salary and remit the same to the SHIF by the ninth day of the month following the deduction.

Tax reliefs

The tax relief available includes personal relief for all resident individuals of KES 28,800 (approx $223.26) per year and insurance relief (for all resident life insurance policy holders for themselves, their spouse or their children) of 15 per cent of the amount of the premiums paid, not exceeding KES 60,000 (approx $465.12) per annum.

The taxation of companies

Kenya harmonised its income taxes for Kenyan resident companies and permanent establishments (PEs) through the Finance Act 2023. Both types of entities are now subject to corporate income tax of 30 per cent on their taxable profits, after deducting any allowable expenses. Certain companies may benefit from reduced tax rates or tax holidays, as discussed later in the section on tax incentives.

The repatriation of dividends by a Kenyan resident company to a non-resident is subject to withholding tax at a rate of 15 per cent. The corporate income tax rate for a PE is 30 per cent. The PE is further required to pay a repatriation tax of 15 per cent on the repatriated income from a branch to its foreign head office. The repatriated income subject to such tax is determined on the basis of the net profit for the year the income was generated against the change in the net asset value for the year the income was generated.

Various other withholding taxes apply depending on the type of income generated, including management fees, royalties, rent, sales, promotional or marketing activities and digital content monetisation. These rates may be reduced where there is a double tax treaty between Kenya and the country of residence of the non-resident recipient of the income. Pursuant to Kenya’s Income Tax Act, a person can only take advantage of the tax benefits pursuant to a double tax treaty if: 50 per cent or more of the underlying ownership of the entity in question is held by an individual or individuals who are resident in that country for the purpose of the double tax treaty; or if the person owns a company listed on the stock exchange in the other contracting state.

Other applicable taxes

Other key taxes in Kenya include:

• capital gains tax of 15 per cent on the gain made from the disposal of property, which includes investment shares and immovable property;
• value-added tax on goods and services at the standard rate of 16 per cent. Some goods and services are zero-rated or exempt;
• excise duty, which is a tax charged on specific goods and services, such as alcohol, tobacco, fuel and financial services. The rates vary depending on the type of product being sold;
• stamp duty on certain instruments as set out in the Stamp Duty Act, Chapter 480 of the Laws of Kenya;
• customs duties. As a member of the East African Community (EAC), Kenya adheres to the Common External Tariff (CET) for goods imported from outside the EAC. Import duties vary by product category; and
• the export and investment promotion levy (introduced by the Finance Act 2023), import duties, the railway development levy and an import declaration fee applicable in regard to the import of goods into Kenya.

Lower tax rates, tax exemptions and specialised taxes are also applicable in certain circumstances, as set out in Kenyan legislation.

The tax consequences of moving to Kenya

Individuals

Individuals moving to Kenya for work must obtain a Personal Identification Number from the KRA, as part of their work permit application.

The number of days spent in Kenya by an individual could trigger the tax residency threshold in Kenya. The implication of being a tax resident is that employment income earned abroad will also be taxable in Kenya subject to any existing double taxation agreements. Kenya has double taxation agreements with several countries. The list of such agreements is available on the National Treasury and State Department of Economic Planning website.[2]

If an individual is an employee in Kenya, the statutory deductions highlighted above will apply.

Companies

Kenya currently does not have any re-domiciliation provisions, meaning that a company cannot shift its tax domicile from another country to Kenya.

However, if a foreign company establishes a PE in Kenya it triggers tax obligations in Kenya. A PE is typically defined as a fixed place of business, such as an office or factory. However, the definition extends to dependent agents who conclude contracts on behalf of the company.

Further, a company that is managed and controlled from Kenya is also deemed to be resident in Kenya.  Recent decisions by the Tax Appeals Tribunal[3] have highlighted the risk of Kenyan income taxes being applied to foreign businesses that have individuals that are resident in Kenya as directors. Based on these decisions, businesses are required to ensure that key management decisions are exercised in the country where the business is resident to minimise the risks related to residency or PE. Additionally, where the role of Kenyan employees or related companies includes playing a principal role that leads to the conclusion of contracts or providing services in Kenya on behalf of a foreign entity, there is a risk that a Kenyan PE will be deemed to be in existence.

The potential tax consequences of leaving Kenya

Individuals

Kenya does not impose a specific exit tax on individuals leaving the country; however, the sale of assets or property may be subject to capital gains tax. It is also important to ensure that the individual is compliant with the relevant tax laws, as a failure to settle tax liabilities can lead to penalties and interest, which could complicate future dealings with Kenyan authorities.

Companies

The transfer of assets or business operations on exit may trigger capital gains tax, stamp duty and income tax, subject to applicable exemptions, as provided in law. Pursuant to the Tax Laws (Amendment) Act 2024, the transfer of business as a going concern is exempt from value added tax.

The transfer of shares or property is subject to capital gains tax, which is applicable to:

• gains accrued to a company, individual or partnership on the transfer of property situated in Kenya;
• gains derived from the alienation of shares or comparable interests in a partnership or trust if during the 365 days preceding the alienation, the shares or comparable interests derived more than 20 per cent of their value directly or indirectly from immovable property situated in Kenya; and
• gains derived from the alienation of shares of a company resident in Kenya if the alienator, at any time during the 365 days preceding such alienation, held directly or indirectly at least 20 per cent of the capital in that company.

Stamp duty is applicable on the transfer of shares at the rate of one per cent of the higher of the market value or the consideration for the shares. The transfer of immovable property is subject to stamp duty at the rate of four per cent for land within a municipality and two per cent for land outside a municipality. This rate is imposed on the higher of the consideration for the property or the market value of the property, as determined by a government valuer.

The transfer of shares is exempt from value-added tax.

It is, therefore, important for companies to plan their exit from the country carefully and to obtain advice on the most tax efficient manner in which to exit the country.

Tax incentives

Kenya offers various incentives to attract businesses to Kenya and has established government agencies to assist foreign investors to interface with other Kenyan regulators. The relevant regulatory bodies include:

• the Kenya Investment Authority, which is responsible for promoting and facilitating investment in Kenya. The agency lists the tax incentives available in Kenya on its website;[4]
• the Special Economic Zones Authority, which lists the tax incentives available for special economic zone enterprises.[5] The authority requires a Kenyan company to be registered for the purpose of applying for a licence; and
• the Nairobi International Financial Centre, which offers various incentives for licensed entities, as listed on its website.[6]

There are other tax incentives applicable to businesses in Kenya, such as investment allowances to encourage investments in buildings, machinery and other equipment.

Conclusion

Kenya’s reputation as an attractive destination for businesses and individuals has continued to grow due to the available incentives and clear tax legislation. Nevertheless, it is crucial that investors consult tax practitioners to assist in understanding the context-specific tax laws applicable.