Relevant Taxes Pertaining to the Business Operations of a Company in Kenya

Businesses operating as companies in Kenya are obliged to pay various taxes as set out in:

1. the VAT Act of 2013;
2. the Income Tax Act, (Cap 470); and
3. other relevant tax acts such as the Excise Duty Act.

Additionally, not all companies are subject to pay the same taxes hence the need for proper legal taxation advice depending on the particular circumstances of each company.

Corporation Tax

Corporation tax is stipulated under Section 4 of the Income Tax Act (Cap 470) as a tax on the whole of the gains or profits from such business that shall be deemed to have accrued in or to have been derived from Kenya.

Corporation tax is levied on worldwide profits of companies that are resident in Kenya at the rate of 30% and for foreign companies (e.g. a branch in Kenya of a company incorporated in a foreign jurisdiction) at the rate of 37.5%.

Corporation tax is payable at least bi-annually.

Dividend Tax

Where a shareholder receives dividends in a given year, calculated from the profits of the company; the dividends are deemed income to the shareholder which is chargeable to a dividend tax at the rate of 5% when paid to Kenyan residents and 15% paid to non-residents. This is a withholding tax meaning that the payer withholds the tax on the income paid to the shareholder and remits the tax to the Kenya Revenue Authority, the payee then receives a withholding tax certificate as proof of withheld and remitted taxes.

Where a resident company receives dividend income from a company in which it is a shareholder, that dividend income is exempt from tax so long as the dividend-receiving resident company holds more than 12.5% shareholding in the dividend-paying company.

Minimum Tax

The Finance Act of 2020 introduced an amendment to the Income Tax Act, providing for the payment of 1% minimum tax, payable by the company on turnover. This amendment was introduced to tackle the problem of businesses that consistently declare losses in order to avoid paying 30% corporation tax which is a tax on profits by the company. However, the Kenyan High Court on April 2021 issued an interim injunction halting the application of this tax temporarily as the matter proceeds to full hearing. The argument made by the opponents of this tax is that it is contrary to the spirit of the income tax act as pertains to the statute governing tax on gains and profits as opposed to turnover.

The applicability of this tax will subsequently be finally decided after full hearing on the merits of the case.

Employment Tax

This is remitted by companies employing employees whose salary is taxable and the tax is payable monthly (otherwise called Pay as you Earn/PAYE tax). This tax is payable on salaries paid to employees on a graded scale up to a maximum rate of 30%.

Stamp Duty

Under the Stamp Duty Act, the authorised share capital of a company is exempt from stamp duty. However, changes to nominal capital are chargeable to stamp duty.

Further, many agreements that companies enter into in the course of business are chargeable to stamp duty unless specifically exempted under the Stamp Duty Act. Examples of these agreements chargeable to stamp duty as pertains to companies are: debentures; land transfers; charges to land; leases and business agreements.

It is important for the company to pay stamp duty on the agreements the company enters into, because otherwise such agreements may be rendered inadmissible as evidence in court.

Withholding Tax on Professional Fees

Any person providing professional services as defined under the Income Tax Act under a contract for service shall pay tax on the professional fees received, which shall be withheld by the payer of the income.

VAT

This is a tax chargeable to all companies making taxable supplies of goods and services. Any person or company making taxable supplies worth more than KES 5M in a year is required to register for VAT and remit VAT to the Kenya Revenue Authority. Unless otherwise specifically stipulated, the VAT rate in Kenya is 16%. A VAT payer must make monthly VAT returns and the VAT is due at the time of making the sale of the goods and services chargeable to VAT.

Excise Duty

This is levied only on excisable goods which are specified goods manufactured in Kenya or imported into Kenya. Goods subject to Excise Duty are outlined in the Excise Duty Act, and include beverages, petroleum products, motor vehicles including cars and motorbikes and tobacco products. The rates and calculations applicable to different goods are stipulated in the Act.

Capital Gains Tax (CGT)

This is a tax on profits made from the transfer of a capital asset such as land and shares. This is a final tax and the burden is on the company to remit the tax if it makes a profit on such transfers. The CGT rate in Kenya is 5% of the profit/gain.

How to Register as a Taxpayer

Company Tax Pin Certificate Registration

In Kenya, once a company is incorporated, the promoters shall obtain a tax pin certificate for the company before it can commence business operations. This is straightforward for a company whose directors are Kenyan citizens, any such director may use their personal tax pin number to obtain a tax pin certificate for the company.

However, when it comes to companies set up by foreigners without a Kenyan co-director or company secretary; such foreign director will obtain an investor permit which will make him/her eligible to apply for a personal tax pin number and subsequently allow them to apply for a tax pin certificate for the company that they have incorporated in Kenya.

VAT Registration

VAT Registration is mandatory once the company has made a turnover of KES 5M in the preceding 12 months. Subsequent to registration, the VAT taxpayer must file VAT returns periodically unless specifically exempt by the Kenya Revenue Authority, whether or not they have made vatable supplies in that specific period. A VAT agent, i.e. someone mandated under to collect VAT must record transactions via an Electronic Tax Register which is the basis for any VAT returns to be filed by such a VAT registered company.