How to Calculate Corporate Tax in Kenya

Welcome to our comprehensive article on calculating corporate tax in Kenya. Understanding the Kenyan tax system is crucial whether you are a resident company, a non-resident company, or just starting your business journey. In this article, I will break down the process of calculating corporate tax, explain the rates, and answer common questions. By the end, you'll clearly grasp corporate taxation in Kenya.

Before that, here is what to know:

• Corporate tax in Kenya applies to both resident and non-resident companies.
• PAYE applies to employment income, including casual employment.
• Companies must pay instalment tax during their accounting period.
• The Corporation Tax return (IT2C) must be filed within six months after the end of the accounting period.
• Special tax rates and incentives are available for specific industries and zones.
• Partnerships and self-employed individuals do not pay Corporation Tax.
• Expenses claimed when filing must be wholly and exclusively incurred in income production.
• Losses can be carried forward to offset future taxable income.
• Timely compliance with tax obligations is crucial for businesses in Kenya.

Now let us dive deeper into what you want to read and understand

Who is KRA?

The Kenya Revenue Authority (KRA), established by an Act of Parliament (Chapter 469 of the laws of Kenya), is responsible for collecting revenue on behalf of the Kenyan government. The core functions of the KRA include assessing, collecting, and accounting for all revenues following the written laws and specified provisions, advising on revenue-related matters, and performing other functions as directed by the Minister.

Pay As You Earn (PAYE)

What is PAYE?

PAYE (Pay As You Earn) is a tax on employment income. If you're an employer, you must deduct PAYE from your employees' salaries and remit it to the KRA. After filing the PAYE return, generate a payment slip online via iTax and make the payment at any of the KRA-appointed banks.

Does PAYE Include Earnings from Casual Employment?

Yes, PAYE includes earnings from casual employment. All employment income is subject to PAYE, whether from a formal or casual job.

Are Employee Benefits Taxable?

Yes, employee benefits are taxable. They are considered part of an employee's income and are subject to PAYE.

How Are Loans to Employees Taxed?

Loans to employees are considered a taxable benefit, and the loan's value is subject to PAYE.

Corporation Tax

Corporate Income Tax Rate

In Kenya, resident and non-resident companies must pay corporation tax. The tax rate for resident companies is 30%, while non-resident companies are taxed at 37.5%.

What Defines a Resident Company in Kenya?

A company is considered resident in Kenya if it is incorporated under Kenyan law or if the management and control of its affairs are exercised in Kenya for any given year of income. The Cabinet Secretary, National Treasury & Planning can also declare it tax resident.

Instalment Tax

Companies must pay tax in four equal instalments during their accounting period, known as instalment tax. These payments are due on the company's accounting period's 4th, 6th, 9th, and 12th months. The tax balance, if any, is due and payable by the last day of the 4th month after the accounting year.

How to File Corporate Income Tax Return

At the end of the accounting period, companies must have their books of accounts audited before filing their annual return within six months after the end of their accounting period. The Company tax return, IT2C, is available on iTax under the returns menu.

How to Determine Taxable Income

To calculate taxable income, declare the gross income earned during the year and deduct expenses that have been wholly and exclusively incurred in producing that income.

Special Corporate Tax Rates

Some companies may enjoy special corporate tax rates and incentives, such as:

• Export Processing Zone (EPZ) Enterprises: These enterprises are subject to varying tax rates, starting at 0% for the first ten years.
• Companies Listed on the Securities Exchange: They pay a reduced rate of 25% for the first five years.
• Special Economic Zone (SEZ) Enterprises: They pay 10% for the first ten years and 15% for the succeeding ten years.
• Local Motor Vehicle Assembly Companies: They pay 15% for the first five years, subject to conditions.
• Carbon Market Exchange or Emission Trading System: They pay 15% for the first ten years from the commencement of their operations.

Do Partnerships and Self-Employed Individuals Pay Corporation Tax?

No, partnerships do not pay corporation tax. Partnership income is declared through the partnership return, and the payment is distributed to individual partners.

Self-employed individuals and sole proprietorships are not subject to corporation tax. They declare their total income in the Individual Income Tax Return and pay Income Tax.

Claiming Company Expenses

When filing your Corporation Tax Return, you can only claim expenses that have been wholly and exclusively incurred in the production of your income, as guided by the Income Tax Act, Cap. 470.

Handling Losses

Companies can carry forward their losses to offset against future taxable income. However, losses cannot be transferred to a different entity. Companies in the extractive industry (e.g., mining, oil, and gas) can carry their losses forward for three years from when the loss arose.

READ ALSO: How to Reset Your KRA Password: A Simple Guide

Final Thoughts

Understanding how to calculate corporate tax in Kenya is vital for any business. The Kenyan tax system can be complex, but you can navigate it successfully with the proper knowledge and compliance. Ensure you meet your tax obligations, including timely filing and payment, and seek professional guidance if needed.

Frequently Asked Questions

Who is responsible for collecting revenue on behalf of the Kenyan government? 

The Kenya Revenue Authority (KRA) is responsible for managing income on behalf of the government of Kenya.

What is PAYE, and how is it paid?

 PAYE (Pay As You Earn) is a tax on employment income. Employers deduct PAYE from employees' salaries and remit it to the KRA. Payment can be made online via iTax or at KRA-appointed banks.

What is the Corporation Tax rate for resident and non-resident companies?

 Resident companies are taxed at 30%, while non-resident companies are at 37.5%.

Are employee benefits taxable in Kenya? 

Employee benefits are taxable and considered part of an employee's income.

Do partnerships and self-employed individuals pay Corporation Tax? No, partnerships and self-employed individuals do not pay Corporation Tax. They declare their income and pay Income Tax.

Can companies claim expenses when filing their Corporation Tax Return? 

Yes, companies can claim costs that have been wholly and exclusively incurred in the production of income, as guided by the Income Tax Act, Cap. 470.

How are losses handled for companies in Kenya?

 Companies can carry forward their losses to offset against future taxable income. Still, losses cannot be transferred to a different entity. Some industries, like mining and oil, have specific rules for loss forward.

What are the special corporate tax rates and incentives available in Kenya?

 Special rates and incentives include those for Export Processing Zone (EPZ) enterprises, companies listed on securities exchanges, Special Economic Zone (SEZ) enterprises, local motor vehicle assembly companies, and carbon market exchanges or emission trading systems.