Today, we will discuss corporate tax in Kenya.
We will define what it is, what a resident company is, allowable and disallowable expenses among others.
Since this is a legal issue with a lot of uncommon terms, I will try to simplify it as much as possible.
What is Corporate Tax?
Corporate Tax is part of the income tax that is charged on corporate bodies. It is important to note that in order for businesses to operate in Kenya, they have to adopt a corporate form.
These corporate bodies may be co-operatives, limited companies, or even trusts which are taxed on their income.
However, it is important to note that for tax purposes, corporations exists in two major forms. Resident companies and non-resident companies.
What is a Resident company?
For taxation purposes, a company is a resident company if it meets the following criteria.
- For any given year of income, the control of the company’s affairs and management takes place in Kenya
- A company incorporated in the Kenyan law
- When a notice is published in the Kenyan gazette after the cabinet secretary in charge of the National Treasury declares this company a resident in a given year of income.
It is important to note that this distinction between a resident company and a non-resident company is very important as both have different tax rates.
What tax rates apply to corporate entities in Kenya?
Resident corporate entities are taxed at 30% on taxable income. However, non-resident companies with a permanent establishment in Kenya are taxed at 37.5% on any taxable income that can be attributed to the Kenyan office.
However, it is important to note that on 25th March 2020, the president announced various measures to cushion Kenyans from the effects of CODV 19.
One of these measures was the reduction of Corporate tax from 30% to 25%.
Therefore, the current Corporate tax for resident companies in this year of income is 25%.
Moreover, it is important to note that the taxable income is based on profits.
It’s worth noting that for taxation purposes, we do not use the accounting profit.
We have to adjust the accounting profit by adding back all disallowable expenses and subtracting all allowable expenses.
It is therefore important to point out some of the allowable expenses.
Allowable Expenses for corporate tax in Kenya
- Any expenses incurred on scientific research
- Capital allowances
- Subscriptions to trade associations such as the Kenya Association on Manufacturers(KAM) among others.
- Any expenses incurred prior to starting operations
- Costs incurred on listing on Nairobi Stock exchange
- Donations made subject to certain conditions such as COVD 19 donations
- Expenditure of capital nature to farmlands
- All monies contributed to the NSSF
- Realized foreign exchange loss or gains
- On leasing property for business use, any legal fees incurred
- Expenses incurred in sponsoring sports
- Personal expenses – all expenses not incurred in the production of income
- All amortization and depreciation costs
- Pension contributions by the employer that have exceeded the amounts prescribed by KRA
- school fees
- Unrealized foreign exchange loss
- Maintenance of building and other capital repairs
- Other general provisions
- Taxes paid
- Provisions for bad debt
What if a business incurs loses even after adjusting allowable and disallowable expenses?
A business that has incurred loss can carry it forward for 10 years. Moreover, when these ten years lapse, the business has to write to the minister of finance for an extension.
However, for companies operating in the gas, oil, and mining industries their losses can be carried forward indefinitely.
Conclusion on corporate tax in Kenya
In order for your business to thrive, it is important that you adhere to the set tax obligations.
There are many registered resident companies that have not yet started paying their returns. This is a very dangerous place to operate from in Kenya.