August 27 2021

Kenya Enacts Direct Taxation Amendments Aimed at Widening Tax Base

Source: IBFD Tax Research Platform News

The Kenyan government enacted several tax amendments related to direct taxation including the deeming of family trust income as chargeable income. This income will, however, be exempt if the family trust is registered.

More details of the various amendments which unless otherwise indicated will apply from 1 July 2022 relating to direct taxation are as follows:

  • exempting the following from minimum tax:
    • persons whose retail price is controlled by the government;
    • persons engaged in insurance business;
    • persons engaged in manufacturing businesses whose cumulative investment from 2017 to 2021 is at least KES 10 billion; and
    • persons engaged in distribution businesses whose income is wholly based on a commission and persons licensed under the Special Economic Zones Act;
  • family trust income is deemed as income chargeable to income tax;
  • applying an income tax exemption to registered trusts on:
    • any amount that is paid out of the trust income on behalf of any beneficiary and is used exclusively for the purpose of education, medical treatment or early adulthood housing;
    • income paid to any beneficiary which is collectively below KES 10 million in the year of income; and
    • such other amount as the Commissioner General of the Kenya Revenue Authority (Commissioner) may prescribe from time to time;
  • exempting the transfer of property to a family trust from capital gains tax;
  • exempting registered family trusts from income tax;
  • introducing withholding tax on deemed disbursements to trust beneficiaries at a rate of 25% except where such income is exempt from tax; and
  • the new limitation of interest deductibility rule, which will take effect on 1 January 2022, will not apply to banks or financial institutions licensed under the Banking Act or to micro and small enterprises registered under the Micro and Small Enterprises Act 2012. This rule limits the deductible interest expense to 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA;
  • the double taxation agreements or arrangements shall be subject to the Treaty Making and Ratification Act 2012;
  • extending the transitional period on capital allowances claimable relating to capital expenditure for bulk storage and handling facilities supporting the Standard Gauge Railway to 31 December 2022;
  • reintroduction of the definition of farm works with effect from 1 January 2022. "Farm works" means "farmhouses, labourers quarters, any other immovable building necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works and other works necessary for the proper operation of the farm". The Finance Bill 2021 had only proposed a review of the definition of "manufacture" and reintroduced a definition of "civil works" to include:(i) roads and parking areas; (ii) railway lines and related structures; (iii) water, industrial effluent and sewerage works; (iv) communications, electrical posts, pylons and other electrical supply works; and (v) security walls and fencing; and
  • introducing investment deductions at 100% with effect from 1 January 2022 where:
    • the investment value outside Nairobi City County and Mombasa County in that year of income is at least KES 250 million;
    • a person has invested in a special economic zone; and
    • the cumulative investment value in the preceding 3 years outside Nairobi City County and Mombasa County is at least KES 2 billion: Provided that where the cumulative value of investment for the preceding 3 years of income was KES 2 billion on or before 25 April 2020, and the applicable rate of investment deduction was 150%, that rate shall continue to apply for the investment made on or before 25 April 2020.