Comprehensive Guide to Business Taxes in Kenya, 2025

Types of Business Taxes in Kenya

1. Income Tax

Under Section 3 of the Income Tax Act (Cap 470), income tax is defined as “a tax charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya”

Income Chargeable to Income Tax in Kenya

Under the Income Tax Act, the following categories of income are subject to tax in Kenya:

• Gains or Profits
  • From any business (regardless of duration).
  • From employment or services rendered.
  • From granting rights for use or occupation of property.
• Investment Income
  • Dividends and interest.
• Retirement & Savings Withdrawals
  • Pensions, charges, annuities.
  • Withdrawals/payments from registered pension funds, provident funds, individual retirement funds.
  • Withdrawals from a registered home ownership savings plan.
• Digital Economy Income
  • Income from businesses conducted over the internet or through a digital marketplace.
• Deemed Income
  • Any amounts deemed as income under the Act or rules made under it.
• Capital Gains
  • Gains prescribed in and computed under the Eighth Schedule.
  • Net gain on disposal of an interest in a company/entity deriving ≥20% of its value from immovable property in Kenya.
• Natural Resource Income
  • Income derived from extraction or exploitation of natural resources.
• Financial Derivatives
  • Gains from financial derivatives (excluding those traded on the Nairobi Securities Exchange).

There are different methods of collecting income tax from companies & partnerships, based on their sources of income. They include the following:

A. Corporation Tax (Corporate Income Tax)

This is a form of Income Tax that is levied on corporate bodies such as Limited companies, Trusts, and Co-operatives, on their annual income. Corporate tax is levied on the profits of companies operating in Kenya, whether incorporated locally or having a permanent establishment.

Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay Corporation Tax on income accrued within Kenya only. The corporate tax is charged as per the following categories.

• Resident Companies: Taxed on worldwide income at a standard corporate income tax rate of 30%.
• Non-Resident Companies: Taxed on income derived from Kenya at 35%.
• Branches of Foreign Companies: Also taxed at 30% on income derived within Kenya.
• Special Rates:
  • Start-ups certified by the Nairobi International Financial Centre Authority (NIFCA) pay 15% for the first 3 years, then 20% for the next 4 years.
  • Export Processing Zone (EPZ) enterprises: 0% for the first 10 years, then 25% for the next 10 years, thereafter 30%.
  • Special Economic Zone enterprises: 10% for the first 10 years, then 15% thereafter.
  • Local motor vehicle assembly companies: 15% for the first 10 years.
  • Companies in the carbon market exchange or shipping businesses certified by NIFCA: 15% for first 10 years.
• Additional Taxes: Branch repatriation tax of 15% applies from January 2024 for foreign branches repatriating profits.

Key Deductions on Corporate Income Tax

1. Capital allowances
2. Bad debts (as per KRA guidelines)
3. Donations to exempt organisations
4. Housing levy and SHIF contributions

Please note, when filing your Corporation Tax Return (also referred to as Income Tax – Company Return), you are only allowed to claim expenses that have been wholly and exclusively incurred in the production of your income, as guided in sections 15 and 16 of the Income Tax Act, Cap. 470.

B. Pay-As-You-Earn (PAYE)

PAYE is “tax at source deducted from individuals in gainful employment,” collected by employers and remitted monthly to KRA.

Companies and Partnerships with employees are required to deduct tax according to the graded Income Tax Rates( Bands)  that range from 10 % – 35% scale of up to from their employees’ salaries or wages on each payday for a month and remit the same to KRA on or before the 9^th  of the following month.

Taxable employment income includes all cash payments, however described and the value of non-cash benefits (exceeding Kshs 5,000 per month).

PAYE is charged on both residents and non-residents, and it’s accounted for by the employers.

C. Withholding Tax (WHT)

This is a tax that is deductible from certain classes of income at the point of making a payment to non-employees. WHT rate varies by income type (5%–20% common bands)

WHT is deducted at source from the following sources of income:

• Interest
• Dividends
• Royalties
• Management or professional fees (including consultancy, agency or contractual fees)
• Commissions
• Pensions
• Rent received by non-residents
• Other payments specified

Companies and partnerships making the payment are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.

D. Instalment Tax

Instalment tax is paid by persons who have tax payable for any year that amounts to Kshs. 40,000 and above.

E. Turnover Tax (TOT) & Presumptive Tax

Introduced under Section 12C of the Income Tax Act, TOT applies to businesses with annual gross turnover above KES 1 million but below KES 25 million.

TOT excludes rental income, management fees, professional services, and income subject to WHT.

A person who is liable to pay TOT may, by notice to the Commissioner, elect not to pay the TOT, in which circumstances they will be liable to pay for the other income tax.

F. Significant Economic Presence Tax (SEPT)

Section 12E of the Income Tax Act introduced a tax known as the Significant Economic Presence Tax (SEPT).

1. Scope
   • Payable by non-resident persons earning income from the provision of services in Kenya through the internet or electronic networks, including digital marketplaces.
   • A non-resident is considered to have a “significant economic presence” if the user of the service is located in Kenya.
2. Exemptions
   • Services provided through a permanent establishment in Kenya.
   • Income already chargeable under other provisions of the Act (e.g., section 9(2) or 10).
   • Digital services provided to an airline where the Government of Kenya owns at least 45% shareholding.
3. Tax Base & Rate
   • The taxable profit is deemed to be 10% of the gross turnover from such services.
   • The applicable tax rate is then applied to this deemed profit.
4. Compliance
   • Non-resident persons must file a return and pay the tax by the 20^th day of the month following the month in which the service was provided.
   • The Cabinet Secretary may issue regulations to guide implementation.

G. Advance Tax

This is a tax paid in advance at the rates specified in the Third Schedule of the Income Tax Act before a public service vehicle or a commercial vehicle goes for the annual inspection.

Registration for Corporate Income Tax & VAT in Kenya

1. Company Tax PIN Certificate Registration

Once a company is incorporated in Kenya, it must obtain a KRA Tax PIN Certificate before commencing any business operations.

• Locally Owned Companies: Where directors are Kenyan citizens, obtaining a Tax PIN for the company is straightforward; any director can use their PIN to facilitate the company’s registration.
• Foreign-Owned Companies: Where the company is set up exclusively by foreign directors (without a Kenyan co-director or secretary), the foreign director must first obtain an Investor’s Permit. This permit enables them to apply for a personal KRA PIN, which then allows them to obtain the company’s Tax PIN certificate.
  • For foreign promoters who do not yet have a KRA PIN, Njaga & Co. Advocates LLP can assist in obtaining one, enabling smooth progression to incorporation, compliance, and opening a company bank account.

2. VAT Registration & Compliance

VAT registration in Kenya becomes mandatory once a company achieves a turnover of KES 5 million in the preceding 12 months.

• Voluntary registration is available for businesses below this threshold, but engaging in Vatable supplies.
• After registration, VAT-registered companies must file monthly VAT returns through iTax, whether or not they made taxable supplies, unless specifically exempted.
• VAT-registered businesses are required to maintain an Electronic Tax Register (ETR).
• Since 2024, KRA mandates that all VAT invoices must be generated and transmitted through the Electronic Tax Invoice Management System (eTIMS). This platform ensures real-time transmission of invoices to KRA and forms the legal basis for claiming input VAT.

Frequently Asked Questions (FAQs)

Q1: What is the corporate tax rate for locally incorporated companies?
A: 30%. Non-resident companies without a permanent establishment pay 37.5%.

Q2: When must a business register for VAT?
A: Mandatory if annual taxable turnover exceeds KES 5 million; optional below that.

Q3: What is Turnover Tax?
A: A simplified 3% tax on gross sales for MSMEs with turnover between KES 1M–25M.

Q4: Does Kenya tax capital gains?
A: Yes. Capital Gains Tax is 15% on the net gain from the sale of land, buildings, and securities.

Q5: Do foreign companies pay Kenyan taxes?
A: Yes, on Kenyan-sourced income. They must register with KRA, obtain a PIN, and comply with VAT, WHT, and corporate tax obligations.

Q6: Are there county-level income taxes?
A:  No. Income tax is national, but counties may impose property and entertainment levies

Q7: Can foreign companies operate in Kenya?
A: Yes, foreign companies can operate through branches, subject to local tax on income arising from Kenya and registration requirements as per the Companies Act.

Q8: How long can companies carry forward tax losses?
A: From July 2025, tax losses can be carried forward for a maximum of five years under the Finance Act, 2025.

Q9: What is the process for VAT registration?
A: Register through the KRA iTax portal by amending your PIN details to include VAT obligation, submitting documents, and undergoing a mandatory KRA site visit for approval.