Who is Liable to Pay Tax in Kenya?

Understanding the tax system in Kenya is crucial for individuals and businesses operating within the country. This comprehensive guide examines who is liable to pay tax in Kenya and provides essential information on the various tax obligations for residents and non-residents.

1. Resident Individuals

In Kenya, resident individuals are subject to income tax on their worldwide income. Residency is determined by a person's physical presence in the country, which is generally defined as spending 183 days or more in Kenya during a tax year or having a permanent home in the country. Resident individuals are liable to pay various taxes, including:

1.1. Personal Income Tax

Resident individuals are subject to income tax on their employment income, business income, and investment income. Kenya has a progressive tax system, which means that tax rates increase as the individual's income increases. The tax rates are as follows:

• Up to KES 288,000: 10%
• KES 288,001 to KES 466,560: 15%
• KES 466,561 to KES 645,120: 20%
• KES 645,121 to KES 823,680: 25%
• Above KES 823,680: 30%

1.2. Pay As You Earn (PAYE)

Employers are responsible for deducting PAYE from their employees' salaries and remitting it to the Kenya Revenue Authority (KRA) on a monthly basis. PAYE is calculated based on an employee's taxable income, which includes salary, allowances, and other benefits.

1.3. Rental Income Tax

Individuals who earn income from renting residential or commercial properties are subject to rental income tax. The tax rate is 10% of the gross rental income, and taxpayers are required to submit a monthly rental income tax return to the KRA.

2. Non-Resident Individuals

Non-resident individuals are subject to income tax only on their Kenyan-sourced income. This includes employment income, business income, and investment income earned within Kenya. The tax rates for non-resident individuals are as follows:

• Employment income: 15% to 35%
• Dividends: 10%
• Interest: 15% (although exemptions may apply)
• Royalties: 20%
• Management and professional fees: 20%

3. Resident Companies

Resident companies in Kenya are liable to pay tax on their worldwide income. A company is considered resident if it is incorporated under Kenyan law or if its management and control are exercised in Kenya. Resident companies are subject to the following taxes:

3.1. Corporation Tax

Corporation tax is levied on a company's net profits. The standard rate for resident companies is 30%. However, newly listed companies on the Nairobi Securities Exchange may benefit from reduced rates depending on the percentage of shares floated to the public.

3.2. Withholding Tax

Resident companies are required to withhold tax on certain payments made to both resident and non-resident persons. The withholding tax rates vary depending on the nature of the payment and the recipient's tax residency status.

3.3. Value Added Tax (VAT)

Companies that supply taxable goods and services in Kenya and have an annual turnover exceeding KES 5 million are required to register for VAT. The standard VAT rate is 16%, although some goods and services may be subject to reduced rates or exemptions.

4. Non-Resident Companies

Non-resident companies are subject to tax on their Kenyan-sourced income, including business income, investment income, and gains from the disposal of assets situated in Kenya. The tax rfor non-resident companies are as follows:

4.1. Corporation Tax

Non-resident companies with a permanent establishment in Kenya are subject to corporation tax on their Kenyan-sourced income. The tax rate for non-resident companies is 37.5%.

4.2. Withholding Tax

Non-resident companies are subject to withholding tax on certain Kenyan-sourced payments, such as dividends, interest, royalties, and management or professional fees. The withholding tax rates vary depending on the nature of the payment and any applicable tax treaties.

4.3. Branch Profit Tax

In addition to corporation tax, non-resident companies with a permanent establishment in Kenya are subject to a branch profit tax on their repatriated profits. The branch profit tax rate is 10%.

4.4. Value Added Tax (VAT)

Non-resident companies supplying taxable goods and services in Kenya are required to register for VAT if their annual turnover exceeds KES 5 million. The standard VAT rate is 16%, although some goods and services may be subject to reduced rates or exemptions.

5. Partnerships

In Kenya, partnerships are treated as pass-through entities for tax purposes. This means that the partnership itself is not subject to income tax; instead, each partner is taxed on their share of the partnership income. Resident partners are subject to income tax on their worldwide income, while non-resident partners are subject to tax on their Kenyan-sourced income.

6. Trusts and Estates

Income earned by trusts and estates in Kenya is subject to income tax. Resident trusts and estates are taxed on their worldwide income, while non-resident trusts and estates are taxed on their Kenyan-sourced income. The tax rates for trusts and estates are the same as those for resident and non-resident individuals, as applicable.

7. Other Taxes

In addition to the taxes discussed above, individuals and companies in Kenya may be subject to various other taxes and levies, such as:

• Excise duty on certain goods, such as alcohol, tobacco, and petroleum products
• Import duty on imported goods
• Stamp duty on certain transactions, such as the transfer of property or the registration of a mortgage
• Payroll taxes, such as the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF) contributions
• Turnover tax for small businesses with an annual turnover between KES 1 million and KES 50 million

In conclusion, understanding who is liable to pay tax in Kenya is essential for compliance with the country's tax laws. Both resident and non-resident individuals and companies have various tax obligations based on their income sources and residency status. It is advisable to consult with a tax