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 taxes 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 licenses such as business permits and fire safety clearance certificates. The government fees payable for business permits and fire safety clearance certificates are dependent on the nature of the business in which the person is engaged, 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
• Cross-border payments
• Payroll taxes
• Indirect taxes

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 reference 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 investment. 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 businesses in Kenya. These include:

1. 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 a combination of both.
2. 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: a) citizens of a partner state of the East Africa Community; or b) a partnership whose partners are all citizens of a partner state of the East African Community; or c) a body corporate whose shares are wholly owned by citizens of a partner state of the East African Community; or d) the government of Kenya.
3. 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 all acts, matters and things that the company is required to do by or under the 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, the 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 February 18, 2020. The BOI Regulations prescribe how companies (and their officers) must 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:

1. Holds at least 10% of the issued shares of the company
2. Exercises at least 10% of the voting rights in the company
3. Holds a right to appoint or remove a director of the company or
4. 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:

1. Take reasonable steps to identify beneficial owners by investigating the nature of a shareholder's beneficial interest
2. 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)
3. 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
4. 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
5. File with the Registrar, in the prescribed form, a Register of Beneficial Owners (and changes to the same) within 30 days of its preparation.

The Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Act, 2023 introduced the requirement for disclosures on beneficial ownership for newly formed companies and Limited Liability Partnerships.

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

Effective January 1, 2022, a company is deemed to be thinly capitalized where the gross interest paid or payable by the company to related persons and third parties exceeds 30% of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) in any financial year. This requirement applies to interest on all loans, payments that are economically equivalent to interest and expenses incurred in connection with raising financing for a company. Where a company is thinly capitalized, the interest expense that exceeds 30% of the company’s EBITDA is not tax deductible. In addition to this, any realized foreign exchange losses will be deferred until the company’s state of thin capitalization ceases to exist.

Any interest not allowed as a deduction due to the 30% EBITDA threshold can be deducted in the subsequent three years, provided the deduction does not surpass the 30% EBITDA restriction. These restrictions are not applicable on loans sourced from resident persons.

Deemed interest

A Kenyan-resident entity that has received an interest-free loan from a non-resident entity will be subject to deemed interest provisions if the entity is in the control of a non-resident person alone or together with not more than four other persons. The Kenyan-resident entity will be required to compute an amount of deemed interest paid to the non-resident entity, which is not deductible 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 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 at CIT at the rate of 30%. Income repatriated by the PE will be subject to 15% branch repatriation tax.

The ITA provides for some preferential tax regimes for persons engaged in certain activities as set out below:

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 taxation year 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 taxation year. The SAR is to be completed in the prescribed form and must be accompanied by the entity’s audited financial statements. Where there is no tax due in a given year, a nil return must still be filed. SARs are filed on KRAs online portal.

Tax losses

Tax losses are an allowable deduction in the year in which they arise and, effective July 1, 2021, may be carried forward in perpetuity.

Generally, there is no carry back of tax losses except in the case of entities engaged in the extractive industries.

Cross-border payments

Transfer pricing

Transactions between Kenyan resident persons and 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 non-resident 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 arm’s-length principle.

Effective January 1, 2023, the scope of transactions that fall within the ambit of transfer pricing legislation include those between a Kenyan resident person and:

1. A related resident person operating in a preferential tax regime
2. A non-resident person located in a preferential tax regime
3. An associated person enterprise of a non-resident person or
4. A permanent establishment of a non-resident person.

In this context, a preferential tax regime is defined as:

1. Any Kenyan legislation, regulation or administrative practice which provides a preferential rate of tax to such income or profit, including reductions in the tax rate or the tax base or
2. A foreign jurisdiction which:
1. Does not tax income
2. Taxes income at a rate less than 20%
3. Does not have a framework for the exchange of information
4. Does not allow access to banking information or
5. Lacks transparency on corporate structure, ownership of legal entities located therein, beneficial owners of income or capital, financial disclosure or regulatory supervision.

Withholding tax

The general withholding tax rates are summarized below.

Dividends paid to a resident company that controls 12.5% or more of the share capital of the company paying the dividends 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 consulting fees paid to citizens of the East African Community.

Kenya has 15 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, the United Arab Emirates and Seychelles.

The DTTs provide for lower or nil withholding tax rates in some instances. Any reduced rate 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).

Multilateral Instrument

Kenya is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) but, has yet to ratify it. Once ratified, Kenya will have adopted the minimum standard provisions and the following optional provisions of the MLI:

1. Article 6(3) on the existing preamble language to its existing double taxation agreements
2. Article 7(8), (9), (10), (11), (12) and (13) on the simplified limitation of benefits provisions
3. Article 9(4) on the taxation of gains derived by a resident of a contracting state from the alienation of shares or comparable interests in the other contracting state if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in that other contracting state and
4. Article 13(2) on exclusions of activities of a preparatory or auxiliary character from the definition of a permanent establishment under Option A of Article 13.

Digital service tax

The Finance Act, 2020 introduced a digital service tax (‘DST’) that took effect on January 1, 2021. This tax is payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace at the rate of 1.5% of the gross transaction value. In this context, a ‘digital marketplace’ is defined as an online or electronic platform which enables users to sell or provide services, goods or other property to other users.

A person subject to DST is required to submit a return and pay the tax due to the KRA on or before the twentieth day of the month following the end of the month in which the digital service was offered.

Effective July 1, 2021, DST does not apply to the following incomes:

1. Income of a non-resident person chargeable to WHT under section 35 of the ITA or
2. Income of a non-resident person carrying on the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication.

International tax reform

Kenya is a member of the OECD/G20 Inclusive Framework on BEPS. However, Kenya did not agree to the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.

Kenya has made the following proposals to OECD with regard to the same:

1. Reduce the revenue threshold from EUR 20 billion to EUR 750 million,
2. To bring more companies in scope within the jurisdiction.
3. Developing countries to retain taxing rights on DST for out-of-scope companies.

The Kenyan government has given its commitment to continue actively pursuing discussions aimed at fine-tuning the various aspects of the two-pillar solution proposed by the inclusive framework.

Payroll taxes

Pay As You Earn (PAYE)

Business entities are required to deduct and account for PAYE from all remuneration (cash and non-cash) paid or provided to employees. Kenyan resident individuals are taxed on their worldwide employment income. PAYE applies based on a graduated scale with tax rates ranging from 10% to 35%.

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 7,000. The Tier II contribution is based on the upper earnings limit, which is KES 36,000. 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 per employee.

National Industrial Training Authority (NITA) levy

All employers are required to pay the NITA levy at an annual rate of KES 600 per employee. The NITA Levy is payable annually by the 9th day of the subsequent month following the end of the financial year of an employer.

Affordable Housing Levy (AHL)

The Affordable Housing Act 2024 introduced the Affordable Housing Levy which is aimed at financing the government’s affordable housing agenda. The introduction of the levy brings about an obligation on an employer to deduct 1.5% of the gross income of an employee and to make a matching contribution. Employers are required to remit the levy by the ninth day of the following month. There is a 3% penalty on the unpaid amount on persons who fail to remit the levy by the due date.

The amounts contributed by the employer towards the Affordable Housing Fund are allowable deductions for the business for CIT purposes.

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:

1. Zero rated supplies taxable at the rate of 0%
2. Standard rated supplies taxable at the rate of 16% and
3. Exempt supplies on which there is no VAT.

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:

1. The date on which the goods are delivered or services performed
2. The date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity
3. The date on which the invoice for the supply is issued and
4. 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 banks and 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 25 million during any year of income. The applicable rate of tax is 3% of the gross receipts of the business.

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

The Finance Act, 2020 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 was to take effect on January 1, 2021. On April 19, 2021, the High Court issued conservatory orders suspending the implementation of the minimum tax pending the determination of a petition challenging the constitutionality of the minimum tax provisions.

The minimum tax is intended to apply at the rate of 1% of gross turnover and will not be payable by persons:

1. Whose income is tax -exempt
2. Earning employment income, residential rental income, capital gains or income from extractive industries or
3. Whose installment tax payable is higher than the minimum tax.

The High Court and the Court of Appeal have found minimum tax to be unconstitutional however the issue is yet to be determined with finality.

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:

1. 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
2. Gains derived from the alienation of shares or comparable interests, including interests in a partnership or trusts, if at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 20% of their value directly or indirectly from immovable property situated in Kenya or
3. Gains derived from the alienation of shares of a Kenyan-resident company if the alienator at any time during the 365 days preceding the alienation held directly or indirectly at least 20% of the capital of that company.

Effective January 1, 2023 the chargeable gain is taxed at the rate of 15% 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.

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:

1. A legal or regulatory requirement
2. As a result of a directive or compulsory acquisition by the government
3. An internal restructuring which does not involve a transfer of property to a third party within a group which has existed for a least 24 months
4. In the public interest and approved by the Cabinet Secretary.