Tax Guide for US Expats Living and Working in Kenya
Who Is Liable For Income Taxes in Kenya
Individuals are subject to income tax on employment earnings if they meet either of the following conditions:
- They are resident during the time of employment, regardless of whether their duties are performed within or outside Kenya.
- For nonresidents, their employer is resident or has a permanent establishment in Kenya.
An individual is considered resident in Kenya if he or she is present in Kenya for 183 days or more during a fiscal year or for an average of 122 days or more in that year and in the two preceding years. If an individual has a permanent home in Kenya and spends time in Kenya, he or she qualifies as resident.
It is irrelevant for tax purposes where an employment contract is signed or remuneration is paid.
Income subject to tax
Employment income. Employment income includes directors’ fees and almost all cash and noncash remuneration, allowances and benefits arising from employment. Taxable benefits arising from employment include the following:
- Housing. The taxable benefit from employer-provided housing equals the higher of rent paid by the employer or 15% of employment income excluding the value of housing premises. If the premises are provided under an agreement with a third party that is not at arm’s length, the benefit is valued at the higher of the fair market rental value of the premises or the rent paid by the employer. If the employer owns the premises, the benefit is taxed at the fair market rental value of the premises.
- Education. Education allowances provided by employers to their local or expatriate employees’ relatives are taxable for income tax purposes.
- Motor vehicles. The value of the benefit of an employer-provided motor vehicle is the higher of 2% per month of the initial capital expenditure by the employer on the car or the actual cost to the employer. If an employee is provided with a leased or hired car, the taxable benefit is the cost of lease or hire of the vehicle. For employees who have restricted use of motor vehicles, the Commissioner of Income Tax determines a lower rate of the benefit depending on the usage of the motor vehicle if the Commissioner is satisfied based on proof provided by the employee that use of the motor vehicle is restricted.
- Loans. The benefit from employer loans is taxable to the employer as fringe benefit tax for loans granted after 11 June 1998 and for loans granted before that date if the terms or conditions of the loan have been changed since 11 June 1998. The tax is imposed on the benefit at the resident corporate tax rate of 30% and is payable by the 10th day of the month following the imposition of the tax. For loans granted on or before 11 June 1998, the benefit is taxable to the employee as a low interest rate benefit. The benefit is valued at the difference between the interest rate on the employer’s loan and the rate prescribed by the Commissioner of Income Tax.
- Employer-provided stock options. The value of the benefit from employer-provided stock options equals the difference between the market value per share and the offer price per share at the date the option is granted by the employer. The benefits under employee share ownership plans accrue only if such plan is registered with the Commissioner of Income Tax as a collective-investment scheme, as defined under the Capital Markets Authority Act. The benefit is deemed to have accrued to the employee at the end of the vesting period.
Specific exemptions include the following:
- The cost of medical services borne by the employer.
- Employer contributions to accredited pension or provident fund schemes.
- Withdrawal benefits from a pension or provident fund. The limit is KSH 60,000 for each year worked, up to a maximum of KSH 600,000.
- The first KSH 300,000 of annual pension income.
- Refunds of National Social Security Fund contributions plus interest. The limit is KSH 60,000 for each year worked, up to a maximum of KSH 600,000.
- For noncitizens recruited outside Kenya and their families, the cost of passage on joining the company, for annual leave and for departure.
- The first KSH 2,000 paid to an employee per day as an allowance while on official duty. This amount is deemed to be a reimbursement and, consequently, not taxable.
- Noncash benefits, up to a maximum of KSH 36,000 per year.
- Meals served in canteens and cafeterias operated by an employer for the benefit of low-income employees.
Up to KSH 50,000 per month of costs relating to healthcare services and facilities for persons with disabilities are not taxable benefits. The minimum taxable income for persons with disabilities is KSH 150,000 per month.
Self-employment and business income. All income accrued in or derived from Kenya is subject to income tax. For a resident, this includes profits from a business carried on both inside and outside Kenya.
Business income includes income derived from any trade, profession or vocation, as well as from manufacturing or other related operations. A partnership is transparent for tax purposes, with the individual partners taxed on their shares of partnership profits.
Business profits and losses are determined using normal commercial methods, matching expenses with income from similar activities and using the accrual method of accounting.
Initially, a business may select any accounting period, but generally must continue using the same accounting date thereafter. The Domestic Taxes Department must approve a change in the accounting date. All individuals and unincorporated businesses must have a 31 December year-end.
Investment income. Dividends and interest income from investments in Kenya are subject to a final withholding tax in the year received. For residents, the tax rates are 5% on dividends and 15% on interest.
The principal sources of exempt investment income are the following:
- Interest derived from savings accounts held with the Post Office Savings Bank
- For each individual, up to KSH 300,000 of gross interest derived from investments in housing bonds, except for a 10% withholding tax deducted at source
- Interest and dividend income accruing to a resident from investments outside Kenya
- Interest that is earned on deposits of up to KSH 3 million with a registered Home Ownership Savings Plan (HOSP)
Rental profits are aggregated with profits from other sources and taxed at the rates.
Capital gains. Kenya does not impose a capital gains tax. Property transfers are subject to stamp duties at a rate of 4% on urban property and a rate of 2% on rural property.
Deductions and reliefs. An individual not resident in Kenya for tax purposes is not entitled to any deductions or credits. Expatriate employees of accredited non-trading liaison branches of foreign corporations who spend at least 120 days during the fiscal year working outside Kenya may deduct one-third of their total income.
Deductible expenses. Resident individuals may deduct the following expenses in computing taxable income:
- Professional and technical subscriptions
- The cost of special clothing or necessary tools
- Contributions to a registered pension or provident fund, up to a maximum of KSH 240,000 per year
- Interest, up to a maximum of KSH 150,000, on borrowings to finance the purchase of owner-occupied residential property
- Contributions to a home ownership savings plan, up to a maximum of KSH 48,000 per year
Reliefs. Resident taxpayers are granted the following reliefs against tax payable:
- Personal relief in the amount of KSH 13,944 per year
- Insurance relief (including education and health insurance) in the amount of 15% of premiums paid, up to a maximum relief of KSH 60,000 per year
Business deductions. In general, expenses and losses are not deductible unless incurred wholly and exclusively to produce income.
Accounting depreciation is not deductible, but capital allowances are available. A first-year investment deduction of 100% of qualifying expenditure on the following is allowed:
- Manufacturing premises
- Plant
- Electric power generating projects with capacity to supply the national grid or to transform and distribute electricity through the national grid
- Hotel buildings
The investment deduction is increased to a rate of 150% for an investment for manufacturing purposes that is made outside the city of Nairobi or the municipalities of Kisumu or Mombasa and that has an investment value of KSH 200 million or more. Allowances are available on a straight-line basis for other industrial buildings and hotels, and on the amount remaining after subtracting the investment deductions, at a rate of 10% (manufacturing), 25% (commercial buildings as well as rental residential buildings constructed in a planned developed area approved by the minister responsible for housing), 10% (hotel buildings) and 50% (hostels and buildings used for educational and training purposes). A first-year deduction of 100% applies to capital expenditure on farm works. The rates for plant and machinery are 12.5%, 25%, 30% or 37.5%, according to the type, using the declining-balance method. The qualifying cost of a noncommercial vehicle is restricted to KSH 2 million. The rate for software and telecommunication equipment is 20%. The rate for the irrevocable right to use fiber optic cable is 5%. A wear-and-tear allowance may be claimed with respect to concessionary arrangements on a straightline basis over the period of the concession.
Other deductible capital expenditure includes expenses incurred for scientific research and development, the prevention of soil erosion by a farmer, the development of agricultural land and structural alterations to rental premises. Realized foreign-exchange losses on capital borrowings are also deductible.
Deductions are allowed for employer and employee contributions to registered pension and provident funds, with certain restrictions.
Relief for losses. Tax-adjusted profits and losses from the following specified sources must be categorized separately:
- Agricultural activities
- Rental or other use of immovable property
- Services rendered (including employment)
- A wife’s employment and professional income (including self-employment, rent, dividend and interest income)
- Other business activities
Profits are aggregated. Losses may be carried forward to offset future profits from the same specified source without monetary limits. They may be used in the income year in which they arise and in the following four years. Losses may not be carried back.
B. Other taxes
Kenya does not levy property tax, net worth tax, inheritance tax or gift tax.
C. Social security
The only social security tax levied in Kenya is the National Social Security Fund (NSSF). The NSSF is a statutory savings scheme to provide for retirement. The rate of contribution is 5% of an employee’s salary, with employers and employees each required to pay up to a maximum monthly amount of KSH 200.
An individual earning more than KSH 1,000 per month must make a monthly contribution to the National Hospital Insurance Fund, which entitles him or her to a reduction in certain hospital charges. The contribution required is calculated on a graduated basis, with a minimum monthly contribution of KSH 30 and a maximum monthly contribution of KSH 320.
Kenya is a member of the International Social Security Association.
D. Tax filing and payment procedures
Employee withholding. For employees, tax is withheld at source under the Pay-As-You-Earn (PAYE) system.
To learn more about the history, culture, economy and other information about Kenya
We have been preparing US income tax returns for US Citizens and permanent residents living in Kenya for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Kenya and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Kenya.
We have helped hundreds of expats around the world catch up because they have failed to US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email