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:
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:
These are taxes derived from consumption. The final consumer bears the full tax. They include:
– 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:
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:
The following expenses are specifically disallowed:
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:
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:
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.
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.
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.
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.