Kenya: Virtual work – Tax considerations of the new normal

At the time of the onset of the COVID-19 pandemic in Kenya, the President of Kenya made certain directives to cushion the country against its impact on employment and to increase disposable income. With a view to containing the spread of the virus, international flights to and from Kenya were suspended on 25 March 2020. These restrictions were, however, lifted on 1 August 2020 subject to certain conditions. Amidst all these changes, many employers also implemented work-from-home protocols to minimise the mobility of their employees, ensure social distancing and, ultimately, facilitate the safety of their employees.

As a result, there arose instances where employees of foreign companies were stuck in Kenya and unable to travel to their places of work abroad and were, therefore, forced to remain and work remotely from Kenya. This has resulted in tax implications such as permanent establishment (PE) and individual residency risks.

The remote working of employees has raised concerns regarding the creation of PE risks for their foreign employers in Kenya. According to Kenya’s Income Tax Act (ITA) in which an agent has - and habitually exercises - authority to enter into contracts on behalf of an enterprise, there is a PE. Accordingly, part of the employer’s profits will be treated as having accrued in Kenya for this period and is, therefore, taxable in Kenya.

As regards tax residence, the ITA considers an individual a resident if that person either has a permanent home in Kenya, or that person was present in Kenya for a period of 183 days or more in that year of income, or that person was present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income. Noting that a resident individual is subject to tax in Kenya on his/her overall income, a resident individual who is an employee of a foreign company will be subject to tax on his/her worldwide income and virtual employment will not impact this. This is, however, subject to the existence of a double tax treaty between Kenya and the country of residence of the foreign company. Conversely, a non-resident employee of a foreign company will only be subject to tax on income deemed to have accrued in Kenya, which would be the case where the employee continues to work remotely from Kenya during the COVID-19 crisis and even thereafter.

The Organisation for Economic Co-Operation and Development (OECD) considers that, due to the exceptional nature of the COVID-19 crisis which has led to the inadvertent temporary dislocation of individuals globally, the same would not create a PE risk and tax administrators should not assess the existence of a PE risk given the current circumstances. In addition, the OECD has encouraged tax administrations to consider a more normal period of time when assessing the resident status of an individual. The OECD has also encouraged countries to develop country-specific guidance to provide clarity. Kenya, which is not an OECD member, has yet to release country guidance with respect to COVID-19 and the tax impact thereof in relation to the tax issues discussed herein.

Notwithstanding the above, it is evident that virtual work will, for most organisations, remain the norm and the Kenyan tax laws may have to be adapted to accommodate this even after the pandemic.

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