What Are The different Tax Obligations For My New Business In Kenya?

When starting up a business, proprietors must note that all income is taxable as per the tax laws of the country in which they operate. Business income is no exception.

A business person needs to ask himself a few questions in this regard:

1. What different types of taxes do I need to pay
2. How is each type of tax applicable and what are the rates
3. When is each type of tax due to the taxman
4. What is the method of payment for each tax?

In the case of sole proprietors who are not organized into registered organizations, their business income/loss must be declared in their individual income tax returns. For employed proprietors, business tax income is declared alongside that of employment.

In the case of partnerships, business profit/loss must be declared in the partners’ individual tax returns alongside their other income whether it is from employment or otherwise. This means that the business does not pay any taxes, but all profit/loss is fully declared in the separate partners’ returns as per their share in the partnership, and remitted by the individuals to the tax authorities.

Limited Liability Companies, on the other hand, are subject to corporate tax at the prescribed rates. This tax is computed from taxable income netted of allowable expenses. Part of the allowable expenses may include salaries paid to owners of the companies, which are themselves taxable as employment income.

Types of taxes obligations

Broadly, taxes are divided into direct and indirect taxes. Start-up businesses will be affected by all types of taxes.

Direct Taxes

These taxes are levied directly to the taxpayer. They are also called income tax. They include:

Corporation income tax – Kenyan resident company’s rate is 30% of profit before tax. Startup companies that are structured as private limited are required to file annual tax returns and remit this tax to KRA.

Employment income tax – Startup companies with employees are required to deduct and remit tax as below:

• Pay As You Earn (PAYE) – Corporates which employ staff/directors must register for PAYE, deduct at source and remit to KRA.
• Withholding Tax (WHT) – Corporates are required to deduct from payment to non-employees a varying rate of WHT and remit the same to KRA. These include Interest payment (to certain institutions), Dividend payment, Royalties payment, Management or professional fees (including consultancy, agency or contractual fees), Commissions payment, Pension payment, Rent paid to non-residents, and other specified payments.
• Non-Cash benefits tax – Allowances, airtime, fringe benefits, company car provision and per diems exceeding certain amounts benefits taxable on employees.

Residential Rental income tax – This is tax chargeable on residential property rental income. Startup companies in this sector must comply and remit this tax to KRA.

Investment income tax – This is the tax on income from investments including interest and dividends. Startups who earn investment income must declare the same in their tax returns.

Services income tax – Professional and other services income are taxable as guided by tax laws. Startups earning this type of income must declare it — those receiving such services if required to withhold tax when paying must do so.

Pensions income tax – The pension part that was allowable at source is taxable on maturity/withdrawal. Startups need to be clear on this and tell their staff as much.

Advance tax – This is payable by public service vehicles (PSV) and commercial vehicles at the time of annual inspection. Startups in this sector need to be prepared when the time of inspection comes. They also need to be conversant with the rates.

Installment taxes – This is part of estimated annual income taxes paid quarterly in equal installments. Any startup must pay this quarterly tax if their annual tax liability that is not covered by PAYE equals or exceeds Kshs 40,000.

Capital Gains Tax (CGT) – This is the tax levied on the gain made on sale of property or shares (with exceptions). Startups must know that any transfer of property or shares will attract CGT, in addition to stamp duty, as may be applicable.