When starting up a business, proprietors must note that all income is taxable as per the tax laws of the country in which they operate. Business income is no exception. A business person needs to ask himself a few questions in this regard:
- What different types of taxes do I need to pay
- How is each type of tax applicable and what are the rates
- When is each type of tax due to the taxman
- What is the method of payment for each tax?
Limited Liability Companies, on the other hand, are subject to corporate tax at the prescribed rates. This tax is computed from taxable income netted of allowable expenses. Part of the allowable expenses may include salaries paid to owners of the companies, which are themselves taxable as employment income.
Types of taxes obligations
Broadly, taxes are divided into direct and indirect taxes. Start-up businesses will be affected by all types of taxes.
These taxes are levied directly to the taxpayer. They are also called income tax. They include:
- Corporation income tax – Kenyan resident company’s rate is 30% of profit before tax. Startup companies that are structured as private limited are required to file annual tax returns and remit this tax to KRA.
- Employment income tax – Startup companies with employees are required to deduct and remit tax as below:
- Pay As You Earn (PAYE) – Corporates which employ staff/directors must register for PAYE, deduct at source and remit to KRA.
- Withholding Tax (WHT) – Corporates are required to deduct from payment to non-employees a varying rate of WHT and remit the same to KRA. These include Interest payment (to certain institutions), Dividend payment, Royalties payment, Management or professional fees (including consultancy, agency or contractual fees), Commissions payment, Pension payment, Rent paid to non-residents, and other specified payments.
- Non-Cash benefits tax – Allowances, airtime, fringe benefits, company car provision and per diems exceeding certain amounts benefits taxable on employees.
- Residential Rental income tax – This is tax chargeable on residential property rental income. Startup companies in this sector must comply and remit this tax to KRA.
- Investment income tax – This is the tax on income from investments including interest and dividends. Startups who earn investment income must declare the same in their tax returns.
- Services income tax – Professional and other services income are taxable as guided by tax laws. Startups earning this type of income must declare it — those receiving such services if required to withhold tax when paying must do so.
- Pensions income tax – The pension part that was allowable at source is taxable on maturity/withdrawal. Startups need to be clear on this and tell their staff as much.
- Advance tax – This is payable by public service vehicles (PSV) and commercial vehicles at the time of annual inspection. Startups in this sector need to be prepared when the time of inspection comes. They also need to be conversant with the rates.
- Installment taxes – This is part of estimated annual income taxes paid quarterly in equal installments. Any startup must pay this quarterly tax if their annual tax liability that is not covered by PAYE equals or exceeds Kshs 40,000.
- Capital Gains Tax (CGT) – This is the tax levied on the gain made on sale of property or shares (with exceptions). Startups must know that any transfer of property or shares will attract CGT, in addition to stamp duty, as may be applicable.
- Penalties and interest – Non-payment or delayed payment of taxes attracts penalties and interest payable to the tax authorities. This also forms part of the tax regime, and it is in the interest of any startup to know how this may affect them.
- Turnover Tax- Turnover tax targets business whose annual turnover does not exceed Ksh 5 million. Turnover tax is the final tax.The rate of tax is 3% on the gross receipts but it does not apply to the following business:
- Any income whose withholding tax is final;
- Rental income;
- Professional, management and training fees
- Income of incorporated entities
These are taxes derived from consumption. The final consumer bears the full tax. They include:
- Value Added Tax (VAT) – Corporates that have a turnover exceeding Kshs 5 million per annum are required to charge VAT on vatable supplies and remit to KRA the difference between output and input VAT. Startups who project to hit the Kshs 5 million turnovers in the next 12 months must register for VAT.
- Excise Duty – Tax imposed on specified goods manufactured in Kenya and those imported into Kenya as well as specified services. This is guided by the Excise Duty Act of 2015, whose schedules are revised with every annual finance bill. This tax is payable by corporates and individuals dealing with excisable goods and services. Common targets for excise duty include tobacco products, alcoholic beverages, mobile phone and banking services, mineral water, etc. Startups dealing with excisable goods and services must carefully read and understand the excise duty regulations and charge and remit the correct tax.
- Custom duty & levies – These include import duties such as excise duty, VAT, import declaration fee, and railway development levy. Startups involved with the import of goods or services must be conversant with this array of duties and levies relating to importation and how they affect their pricing.
– applicable to startups according to their industry:
County levies – County governments impose these in the jurisdiction of operations. They include Property taxes such as rent & rates, User charges such as water bills, User fees such as parking charges, market charges, advertising fees, approvals fees, cess, and License fees such as Single Business Permits and liquor licenses. These apply to all businesses including startups.
Tax on Agency Revenue – This is tax collected by KRA on behalf of other government entities. They include Stamp Duty collected for Ministry of Lands and Betting, Gaming and Pool tax.
Road maintenance levy
Import Declaration fees
Second-hand motor vehicle purchase tax
A company is tax resident in Kenya if:
- It is incorporated under Kenyan law.
- The management and control of its affairs are exercised in Kenya for any given year of income; or
- If the Cabinet Secretary in charge of the National Treasury declares the company to be tax resident for a particular year of income in a notice published in the Kenya Gazette.
Note: A different residency test exists under the double tax treaties entered into with Kenya.
Subject to certain restrictions, all expenditure which is wholly and exclusively incurred in the production of that income shall be deducted in arriving at the taxable income including capital allowances and investment deductions. Besides the normal revenue expenses the following expenses have been specifically allowed against business profits:
- Specific bad debts written off but subject to meeting some set criteria;
- Capital allowances (as investment incentives);
- Pre-operating expenses;
- Legal fees incurred on leases for premises used for business;
- Legal and other costs incurred on listing on securities exchange in Kenya;
- Subscriptions to trade associations;
- Capital expenditure on farmlands;
- Structural alterations to premises incurred by the landlord where such expenditure is necessary to maintain the existing rent;
- Diminution of loose tools;
- Expenditure on scientific research;
- Interest paid to generate investment income;
- Club subscriptions paid for employees;
- Sums contributed national retirement benefit schemes;
- Expenditure, which the commissioner considers just and reasonable, incurred on advertising and promoting goods and services provided by that business;
- Operating and finance lease payments paid by the lessee under a lease contract where the title of the asset leased always remains with the lessor;
- Donations made subject to certain conditions; and
- Realised foreign exchange gains or losses.
- Effective 01July 2016 expenditure incurred to sponsor sports, with prior approval of the sports cabinet secretary, is allowable
- Effective 3rd April 2017 Expenditure incurred in that year of income on donations to the Kenya Red Cross, county governments or any other institution responsible for the management of national disasters to alleviate the effects of a national disaster declared by the President.
The following expenses are specifically disallowed:
- Non-business and personal expenses (expenses not wholly and exclusively incurred in the production of income);
- Expenditure or loss which is recoverable under an insurance contract;
- All donations with the exception of those specified above;
- School fees;
- All legal fees with the exception of those specified above;
- Legal and other professional fees of a capital nature e.g. in relation to borrowings, stamp duty, valuation e.t.c);
- General and other provisions for bad debts;
- Other general provisions;
- Capital expenditure, or any loss, diminution or exhaustion of capital;
- Capital repairs and maintenance of buildings;
- Taxes paid;
- Employer pensions contributions exceeding prescribed limits;
- Unrealised foreign exchange losses;
- Interest expenses for thinly capitalized companies;
- Depreciation and amortisation.
Specified Sources of Income
There are seven specified sources of income (“specified sources”).Profits derived from one of the seven sources shall be computed separately from profits derived from any of the other specified sources and losses incurred in any specified source can only be offset against income from the same source. The seven sources are:
- Business income;
- Employment and self employment professional income;
- Income from agricultural activities;
- Surplus funds from pension schemes;
- Investment income – dividends and interest; and
- Capital gains tax
Branches of non-resident companies are taxable on all their incomes derived from or accrued in Kenya. In determining the profits of a branch, interest, royalties or management or professional fees paid to the head office are not tax deductible. However withholding tax does not apply to the above payments and after tax profit remittances likewise does not attract withholding tax.
The current corporate tax rate applicable in Kenya is 30% in the case of resident corporations (i.e. limited liability companies). A non-resident company with a permanent establishment in Kenya is taxed at 37.5%. The tax is computed on the taxable income of a company, having deducted expenses which are wholly and exclusively incurred in the production of income.
There are preferential tax rates available for newly listed companies, pursuant to which the tax rates range from 20% to 27% for a period ranging from three to five years. The preferential rates depend on the percentage of listed shares made available to the public through the Nairobi Securities Exchange, as follows:
- 20% rate if 40% of issued share capital is listed – (for five year period).
- 25% rate if 30% of issued share capital is listed – (for five year period).
- 27% rate if 20% of issued share capital is listed – (for three year period).
For any other businesses owned by individuals directly or through transparent entities e.g. partnerships, the individuals are taxed on individual tax rates. The individual tax rates are based on a graduated scale ranging from 10% to 30%(see under individual taxation). Monthly income in excess of Kshs. 38,892 earned by an individual would be subject to tax at the highest bracket on the graduated scale (i.e. 30%).
All the non Resident entities are taxed through withholding tax regime.
Tax returns and tax payments
Each corporate entity is required to file a self assessment tax return (SAR) together with a set of audited financial statements within 6 months after the end of the accounting period. The final tax for a year is payable not later than four months after the end of accounting period while advance instalment taxes are due per the table below:
|First Instalment||4th Month||25%|
|Second instalment||6th Month||25%|
|Third instalment||9th Month||25%|
|Fourth instalment||12th Month||25%|
|First Instalment||9th Month||75%|
|Second instalment||12th Month||25%|
The basis of assessing instalment tax is the lower of the preceding year’s tax liability multiplied by 110% and the current year’s estimate.
Export Processing Zone Enterprises
EPZ’s are exempt from corporate tax during the first 10 years. Licensing of an EPZ shall not include activities that are commercial in nature but manufacturing.
The corporate tax rate is 25% commencing from the 11th year. However employees and directors, other than non-residents, of an EPZ enterprise are liable to personal income tax.
Interest free loans, deemed interest and withholding tax
Where a Kenyan resident company receives an interest free loan from a foreign source the loan will be deemed to be interest bearing at rates specified by the Commissioner.
The effect of this is to charge withholding tax at 15% on the computed deemed interest on a monthly basis.