Kenya: Exploring the Tax Changes for Permanent Establishments in Kenya

The Income Tax Act (“Act”) has been in existence since 1974.  This Act has, over the years, undergone various changes, which are usually incorporated after every annual national budget cycle in June.  Following the enactment of the Finance Act, 2023, numerous changes were introduced to Kenya’s Income Tax Act.  Of interest, multinational companies doing business in Kenya via permanent establishments should be aware of the recent tax measures.

In 2021, Kenya expanded the definition of a permanent establishment to include the provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose.  This applies only where the services or connected business in Kenya, continues for a period of, or periods exceeding in the aggregate, 91 days in any twelve-month period in a calendar year.  With technology allowing for individuals to work from anywhere, multinationals should be especially cognizant of this aspect when engaging remote workers, as it would be possible for an employee’s physical presence in Kenya to create a permanent establishment of a non-resident company in Kenya.

Guided by the above and Kenya’s constantly metamorphosizing tax system, we highlight the following changes to the tax landscape affecting permanent establishments as a result of the enacted Finance Act, 2023:

• Introduction of the repatriation of profits tax at a rate of 15% effective on 1st January 2024.  The introduction of the repatriation tax is not unexpected, noting that it was first proposed to be introduced in 2018 via the Income Tax Bill, 2018.
• The repatriated income is to be computed using the following formula—

R=A₁ + (P – T) – A₂

In the above formula:

R is the repatriated profit;

A₁ is the net assets at the beginning of the year;

P is the net profit for the year of income calculated in accordance with generally accepted accounting principles;

T is the tax payable on the chargeable income; and

A₂ is the net assets at the end of the year.

“net assets” means the total book value of assets less total liabilities for the year of income and shall not include revaluation of assets.

• Reduction of corporate tax liability to a reduced rate from 37.5% to 30% effective from 1st January 2024.
• Lifting of certain restrictions on expenditure: The Finance Act, 2023 has lifted restrictions on the deductibility of expenditure on remuneration for services rendered by the non-resident directors, who have a controlling interest in the non-resident company.  Previously, this restriction applied to renumeration to such directors where the remuneration was in excess of 5% of the total income of that company.  From 1^st July 2023, permanent establishments can take a deduction on such remuneration.

Noting that the repatriated tax imposed shall be in addition to the corporate tax liability of the permanent establishment, the changes above are intended to equalise the corporate tax rate applying to both subsidiaries and permanent establishments in Kenya, from a non-resident perspective.

If you wish to discuss these topics, please contact:

Viva Africa Consulting LLP (WTS Kenya)