Doing business in Kenia
Kenya is bordered by Ethiopia to the north, Somalia to the east, Tanzania to the south, Uganda to the west and Sudan to the north-west. The Indian Ocean borders Kenya to the south-east. Kenya can be considered as the strategic gateway to landlocked countries in both East and Central Africa. For example, Kenya’s seaport in Mombasa is a serious business asset since it is a deep water harbour along the East African coast line.
Kenya enjoys a varied climate: hot and humid at the coast, temperate inland and very dry in the north and northeast of the country.
Kenya is a republic and is based on a democracy with a multi-party system with both Presidential and National Assembly elections. These elections are being held simultaneously after every 5 years.
Until 2008, the President of Kenya was both the Head of State and Head of Government. Following the post-election violence in early 2008, President Kibaki and the opposition signed a power-sharing agreement. President Kibaki remained as the president with a vice-president serving under him. Additionally, the posts of Prime Minister and two deputy prime ministers were created.
The recent creation of a coalition government is expected to stimulate the achievement of the ambitious reform agenda. The Kenyan government wants to avoid new post-election political and tribal violence.
The Executive, Legislature and Judiciary constitutes the three arms of the Kenyan government, based on the principle of separation of powers (although some of the powers and duties of the three arms overlap).
The Kenyan government actively encourages and stimulates private sector participation in economic activities in the country. The Kenyan government also engages in public private such as in the telecommunications and energy production industries.
The Kenyan government stated the aim to keep its interference in business at a minimum. Additionally, the Kenyan government is increasingly relegating itself to the role of a regulator rather than an active market participant.
Following the EAC’s establishment in 1999, Kenya, Tanzania and Uganda created a customs union (a duty-free trade area with a common external tariff) in 2005, and were joined by Rwanda and Burundi in 2009. This has created a larger regional market, and means that firms can be located in any EAC country to service this market.
Corporate income tax
Income tax is charged directly on profits made by corporate bodies such as limited liability companies and trusts.
The corporate tax rate differs between resident and non-resident entities. The corporate income tax rates are currently as follows:
- Resident Company: subject to 30% corporate income tax;
- Non-resident company (branch): subject to 37.5% corporate income tax.
Withholding tax is payable on dividends, interest, royalties and management fees.
Investment Tax Credit and Allowances
Under an investment tax credit, companies are allowed to make deductions against their tax liabilities. Several allowances are available:
Investment Deduction Allowance (IDA)
This allowance was introduced to stimulate investment in physical capital such as machinery, industrial buildings, and equipment. It is claimable on the amount of capital invested once manufacturing operations commence. This deduction allowance is currently pegged at 100%, but attracts an additional 50% for investment whose value is at least Kshs.200 million and is situated outside the municipalities of Nairobi, Mombasa and Kisumu. The 150% rate was introduced to encourage dispersion of investments outside the central business districts.
Industrial Building Allowances (IBA)
The Industrial Building Allowance was introduced to stimulate investments in buildings used for industrial purposes (for example tourism and hotel industry). The IBA is granted on the balance of the cost of construction and this at a rate of 2.5% for manufacturing buildings and 10% for hotels.
Mining Deductions Allowance (MDA)
The Mining Deductions Allowance was designed to stimulate investors to venture into the capital intensive mining industry. This Mining Deduction Allowance is granted and calculated at a rate of 40% in the first year and 10% for the remaining 6 years.
Farm Works Deductions (FWD)
The Farm Works Deductions were designed to stimulate capital accumulation and equipment modernisation in the agricultural sector. The Farm Works Deduction is computed at a rate of 20% for 5 consecutive years of income.
Export promotion incentives
Kenya introduced various schemes targeting different categories of exporters. 3 important schemes are available: Manufacture under Bond (MuB), the Tax Remissions Export Office (TREO) and the Export Processing Zones (EPZs).
Manufacture under Bond
The Manufacture under Bond incentive refers means manufacturers can import plants, equipment, machinery and raw material on a tax free basis, on the condition that the material is used exclusively in the manufacturing process of goods and services. The Manufacture under Bond incentive was designed to stimulate both local and foreign manufacturers to start export-related manufacturing operations in Kenya.
Tax Remissions Export Office
The Tax Remissions Export Office is designed for manufacturers who produce products for the export. Duty and VAT is remitted to the manufacturer if the raw material was used in the manufacture of the goods for export. The manufacturer can include any process by which a commodity is finally produced. These include assembling, repacking ,bottling, mixing, blending, grinding, cutting, bending, twisting, joining or any other similar activity.
Export Processing Zones
Export Processing Zones are set up by the Kenyan government in order to attract foreign investors and to turn Kenya into an export-based economy. The objective of Export Processing Zones is to stimulate and generate economic development, foreign direct investments and economic activities. The zones were also intended to create jobs and to create linkages between domestic producers and exporters.
The activities eligible to be carried out within an Export Processing Zone include manufacturing activities, commercial activities and service activities as well.
Export Processing Zones grant the following incentives:
- 10-year corporate income tax holiday (0% corporate income tax) and 25% corporate income tax rate for the following 10 years;
- exemption from the payment of withholding tax on dividends and other payments made to non-residents during the period that the EPZ enterprise is exempted from payment of income tax;
- exemption from the payment of VAT and customs duties on raw materials, machinery and equipment, spare parts, tools, raw materials, intermediate goods, construction materials and equipment, office equipment and supplies, and transportation equipment;
- exemption from stamp duty on the execution of any instruments relating to the business activities of an EPZ Enterprise.
Kenyan Export Processing Zones are perfect for international businesspeople who want to minimise taxes. Do you want to do business in Africa and do you want to minimise taxes? Then setting up a company in a Kenyan Export Processing Zone could be the perfect solution.
Real estate developers can decide to set up and run their own Export Processing Zone by obtaining a license to develop or operate a zone having land gazetted as an Export Processing Zone.
Money Transfers outside Kenya
There are no exchange controls in Kenya after the Exchange Control Act was repealed in 1995.
Double tax treaties
Kenya has concluded double tax treaties with the United Kingdom, Canada, Denmark, Norway, Sweden, Germany, Zambia and India. Kenya has also signed treaties with Italy, Uganda and Tanzania but the treaties are not yet in force.