To encourage economic growth and development, governments need to have long-term sources of money for social programs and public investments. Programs that provide health, education, infrastructure, and other services are important if we want to have a well-off and well-run society.
Taxes pay for public goods and services, but they also play a significant role in the social contract between citizens and the economy, so they are so important.
We’ll talk about corporate tax in Kenya in this article, so stay tuned.
We’ll talk about what it is, what a resident company is, what expenses are allowed and not allowed, and more.
Because this is a legal matter, we have tried to make it as simple as possible.
What is Corporate Tax?
It is part of the income tax that is charged to businesses. To run a business in Kenya, they need the form of a corporation, which they must do before they can start.
A co-op, limited company, or trust that makes money and pays taxes might also be one of these corporate bodies.
Because corporations have two main types for tax purposes: “resident” and “non-resident,” it’s important to note that they can be either.
What is a Resident Company?
When it comes to taxation, a company is a “resident company” if it meets the following rules.
- When the cabinet secretary in charge of the National Treasury declares this company to be a resident in a given year of income,
- A notice is put in the Kenyan gazette.
- The company’s business and management are done in Kenya.
The difference between a resident company and a non-resident company is important because both have different tax rates.
In Kenya, what are the Tax Rates for Corporates?
Resident corporations are taxed at 30% on their taxable income. However, if a non-resident company has a permanent office in Kenya, they are taxed at 37.5 percent on any taxable income that comes from that office.
There are important things to keep in mind, though. On March 25, 2020, Kenya’s president announced several ways to protect the country from the effects of COVID-19.
One of these steps was to cut the corporate tax rate from 30% to 25%. So, the current corporate tax rate for businesses that are residents in this year of income is 25%.
In addition, it is important to note that the taxable income is based on the amount of money the company makes. It’s important to note that we don’t use the accounting profit for tax purposes. We have to change the accounting profit by adding back all expenses that aren’t allowed and subtracting all allowed expenses.
So, it’s important to point out some of the allowed things.
Expenses that aren’t Taxed in Kenya:
- Any money spent on scientific research
- The capital allowances are a type of tax break.
- Subscriptions to trade groups like the Kenya Association of Manufacturers (KAM) and other groups.
- Any costs that were made before the business started.
- The costs of listing on the Nairobi Stock Exchange.
- Donations that are made with certain rules, like COVD 19 donations.
- The use of capital to improve farmland.
- Money that is given to the NSSF.
- Realized a loss or gain in the value of the foreign exchange.
- If you rent a house for business, you’ll have to pay any legal fees.
- The costs of sponsoring sports.
Expenses that are not taxable:
- Personal expenses
- All amortization and depreciation costs for things that don’t make money.
- The amount of pension contributions made by the employer has been higher than the amount set by KRA.
- School costs
- Unrealized loss of foreign exchange
- Repairs to the building and other big projects.
- Other general provisions
- Taxes paid
- Provisions of bad debt.
What if a business still suffers a loss, even after adjusting the allowed and not allowed expenses?
A business can carry forward for 10 years. When these ten years are up, it must also write to the finance minister.
However, companies that work in the gas, oil, and mining industries can incur losses for a long time.
Paying corporate taxes can be better for business owners than paying extra income taxes. Medical insurance for families and other fringe benefits, like retirement plans and tax-deferred trusts, can be taken off of corporate tax returns when they file them. It is easier for a business to write off its losses, too.
For your business to grow, you must follow the set tax rules. Many companies registered to do business in the United States haven’t yet paid their taxes. This is a dangerous place to work in Kenya.