Kenya passes corporate tax rate cut, modifies turnover tax and withholding tax

George Maina

By George Maina, Tax Partner, Rodl & Partner, Kenya – East Africa

Kenya’s president on 25 April signed into law a corporate tax rate cut and other tax amendments, including some measures that will have a significant impact on multinational groups.

Though some of the changes will help cushion individuals and businesses from the adverse impact of COVID-19, they are not designed to be temporary.

Kenya corporation tax rate

The new law has reduced Kenya’s corporation tax rate from 30 percent to 25 percent per annum. This applies from the financial year of income 2020.

The tax rate reduction is a welcome adjustment designed to attract foreign direct investment, especially for investors that operate as subsidiaries in Kenya.

Kenya’s new corporate tax rate is the lowest corporate tax rate in East Africa, therefore favourably improving the ease of doing business in Kenya.

For resident companies, the new tax rate provides a temporary cushion. However, the impact will benefit taxpayers even post-pandemic, when companies are back to profitability and in a growth trajectory.

It is important to note that the non-resident tax rate remains at 37.5 percent; this rate is applicable to branch companies and permanent establishments of foreign companies.

The extension of turnover tax registration threshold and range

Another key change to the income tax is the extension of the turnover tax registration threshold and range. The tax will now apply to companies that have a turnover of between KES one million to KES fifty million.

The turnover tax rate has also been reduced to one percent from the previous three percent.

This is good news for small businesses, although clarifications still must be made regarding the status of companies that have an annual turnover of below one million and other professional services.

Kenya capital allowances, personal tax rates

Other notable changes include an overhaul of capital allowances.

As was proposed by the president, the PAYE rates applicable to salaried taxpayers have been amended. The rates and new bands now cushion taxpayers with income below Kenya shillings 24,000 per month. The maximum tax rate now is 25 percent on those with annual income above Kenya shillings 688,000. The prior maximum rate was 30 percent. This has the net effect of increasing disposable income to salaried workers both for local and expatriate staff.

The amendments to the tax bands also apply to payments or withdrawals from pension schemes.

Dividend withholding tax rates

Another key change is the increase of withholding tax rate on dividend payments made by resident companies to nonresident shareholders from 10 percent to 15 percent.

This will impact multinationals that have subsidiary operations in Kenya. Lower rates would still be applicable in instances where Kenya has a double tax arrangement with the recipient’s country of resident.

Additional withholding tax changes have been made affecting services such as professional marketing,re-insurance business, and on-road transportation, which were previously not covered.

Changes to value-added tax

The new VAT rate of 14 percent is now confirmed and added to law. A closer look at the new act also reveals that the VAT net has been widened to include sectors such as insurance and security brokerage services.

All in all, the proposed lower tax rates for the corporation tax and PAYE will help the business community and individuals as the economy heads back on a recovery path after COVID-19.

It is evident in many countries that lower and simpler tax rates lead to a higher rate of compliance and tax yield.