Ever caught yourself reviewing a payment and wondering why the amount received is less than what was agreed?
If you’re doing business in Kenya, chances are you’ve encountered withholding tax in action.
As a business owner working with African entrepreneurs for over a decade, I’ve seen firsthand how withholding tax affects cash flow and financial planning. Kenya’s withholding tax system is particularly comprehensive, affecting everything from professional services to rental income and digital content monetization.
In this guide, I’ll walk you through everything you need to know about Kenya’s withholding tax system. We’ll start from basic definitions and go to the latest rates, compliance requirements, and recent legal developments that might impact your business operations.
What Is Withholding Tax?
Withholding tax, in simple terms, is like a slice of your financial pie that’s reserved before you get it.
It’s a way for governments to ensure they get their share upfront, rather than chasing you down later. In a professional sense, it’s a tax levied on income, and a portion is withheld at the source—usually by an employer or payer—and sent directly to the government.
For instance, think of it like this: You earn some money, and your employer takes a small chunk before handing you the paycheck. This chunk, known as withholding tax, is then forwarded to the tax authorities. It’s akin to securing the government’s cut right away, ensuring they aren’t left waiting for you to settle your dues at the end of the fiscal year.
For example, if you hire a consultant for a service worth KSh 1,000,000, you might pay them KSh 950,000 and remit KSh 50,000 (5%) directly to the KRA as withholding tax.
This system serves several important purposes:
- Ensures upfront tax collection, reducing the risk of tax evasion
- Provides a steady revenue stream for the government
- Simplifies the tax collection process
- Improves overall tax compliance
So, withholding tax is essentially a preemptive measure, ensuring a steady stream of revenue for the government while simplifying the tax collection process for all parties involved.
What Is Kenya’s Withholding Tax?
In Kenya, withholding tax operates like a tax collection system where, if you’re shelling out some income, you’ve got to hold back a certain amount for the Kenya withholding taxman.
It’s a monthly deal – whatever tax you’ve held back needs to be sent to the Kenya Revenue Authority (KRA) by the 20th of the next month.
Kenya Revenue Authority (KRA) – Home Page
Remember, a delay in paying up comes with a 20% penalty, so best not to be fashionably late here. No need to sign up for anything special; if you’re the one paying, you’re also the one handling Kenya withholding tax.
Now, here’s a nifty part: the I-tax system does its magic and auto-generates a Kenya withholding tax certificate. This little document lands in the income receiver’s I-tax account and email.
Come tax-filing time at the end of the year, the income receiver spills the beans on all their earnings, including the Kenya withholding tax – a bit like getting credit for doing the taxman’s job in advance.
Understand with an example.
(Note that Sh. refers to the Kenyan currency of the Shilling)
Imagine a scenario where a professional offers services worth Sh. 1,000,000, and there’s a withholding tax rate of 5%. Now, the one getting the service deducts and sends Sh. 50,000 straight to the tax office. So, our professional doesn’t pocket the full Sh. 1,000,000; they get Sh. 950,000, with a heads-up that Sh. 50,000 has been taken out.
When tax return season swings around, our professional has to declare the full Sh. 1,000,000 as income.
The tax is then calculated on this amount, using the applicable rates (graduated scale for individuals, 30% for a company). But, the good news is, they get to subtract the Sh. 50,000 already withheld.
So, the final tax bill is on the net amount.
Here’s the kicker: If the one receiving the service doesn’t cough up the withholding tax, there’s a penalty – 10% of the amount.
Plus, these expenses won’t count as deductions if they haven’t faced the tax cut. Oh, and remember, some situations make withholding tax the final deal.
For instance, dividends to locals and interest income to individuals – no extra tax drama here.
Just remember not to declare these on your tax return.
When Does Withholding Tax Apply?
Kenya’s withholding tax applies to various types of payments, with rates differing based on whether the recipient is a resident or non-resident. Here’s a breakdown of the main categories:
Professional and Service Fees
- Management and Professional Fees: 5% for residents, 20% for non-residents
- Consultancy Fees to EAC Citizens: 15% (reduced rate for regional cooperation)
- Training Fees: 5% for residents, 20% for non-residents
- Contractual Fees: 3% for residents, 20% for non-residents
Real-world example: If your company pays KSh 500,000 to a Kenyan marketing consultant, you would withhold KSh 25,000 (5%) as tax and pay the consultant KSh 475,000.
Investment Income
- Dividends:
- Exempt for resident companies holding >12.5% of voting power
- 5% for other resident recipients (previously 10% – this was updated in recent tax amendments)
- 15% for non-residents
- Interest:
- 15% on bank deposits for residents
- 15% on government bonds with 2+ years maturity
- 25% on other bearer bonds (except 10% for bonds with 10+ year maturities)
Property and Equipment
- Rent for Buildings:
- 10% for residents (can be 7.5% when collected by appointed tax agents)
- 30% for non-residents
- Rent for Other Property: Not applicable for residents, 15% for non-residents
- Equipment Leasing: Not applicable for residents, 5% for non-residents
Digital Economy
- Digital Content Monetization: 5% for residents, 20% for non-residents
- Sales Promotion, Marketing, and Advertising Services: 5% for residents, 20% for non-residents
Other Categories
- Winnings from Betting and Gaming: 20% for both residents and non-residents
- Telecommunication Services/Message Transmission: 5% for non-residents
- Extractive Industry Subcontractors: 5.625% for non-residents
I’ve noticed that many small business owners miss the digital content monetization category, which is particularly relevant in today’s economy.
If you’re a YouTuber, social media influencer, or content creator earning from digital platforms in Kenya, your payments are subject to withholding tax.
Kenya Withholding Tax Rates
Before we run into the Kenya withholding tax table, we need to note a few things.
There are many terms, conditions, and other legalities that surround the Kenya withholding tax. We’ll first run by them quickly, and then take a look at the Kenya withholding tax for different industries.
Training fees cover all extra costs, and if you’re an East African citizen since June 15, 2007, a 5% withholding tax is in play.
But hold on, this is just for individuals; corporations, you’re not off the hook.
For resident individuals wielding other financial instruments, like bearer instruments, it’s a 20% final tax.
Now, if you’re making up to KES 300,000 annually, you’re in the clear.
But, there’s a twist – only specific withholding tax agents, as appointed by the Commissioner, can handle rental income. This applies if it’s between KES 288,000 and KES 15,000,000 per year.
Thinking about cashing out early, waiting 15 years, or hitting 50?
For withdrawals on graduated PAYE tax rates or in sh. 400,000 bands, there’s a game plan. And, if you’re dealing with a resident broker, set aside 5%.
Flying high?
Insurance/reinsurance premiums for aircraft are in the clear.
However, if your consultancy fees to East African Community Partner states’ citizens surpass sh. 24,000 monthly, it’s a 15% withholding tax.
Quick note: Check the fine print for lower rates with active tax treaties. Currently, Kenya has deals with the UK, Germany, Canada, Denmark, Norway, Sweden, Zambia, and India.
Now that we have this in mind, let’s look at the Kenya withholding tax rate table.
Kenya Withholding Tax Rates Table
Note: Know more about the Kenya Withholding Tax rates here.
| Source/Type of Income | Residents | Non-residents |
|---|---|---|
| Artists and entertainers | 0% | 20% |
| Management fees | 5% | 20% |
| Professional fees | 5% | 20% |
| Training fees | 5% | 20% |
| Gambling Earnings | 20% | 20% |
| Natural Resource Income | 5% | 20% |
| Shareholding dividends | 10% | 15% |
| Equipment leasing | 0% | 5% |
| Bank interest | 15% | 15% |
| Housing bond interest | 10% | 15% |
| Interest on at least two-year government bearer bonds | 15% | 15% |
| Other bearer bonds’ interest | 25% | 25% |
| Rent – buildings (immovable) | 10% | 30% |
| Rent – others (except aircraft) | 0% | 15% |
| Pensions/provident schemes (withdrawal) | 10-30% | 5% |
| Insurance Commission (Brokers) | 5% | 20% |
| Insurance Commission (Others) | 10% | 20% |
| Consultancy and agency(from 1 July 2003), ( Consultancy fees to EAC citizen – 15%) | 5% | 20% |
| Contractual (from 1 July 2003) | 3% | 20% |
| Telecommunication services/Message Transmission | 0% | 5% |
| Natural Resource Income (w.e.f. 1st January 2015) | 5% | 20% |
| Digital content monetization (w.e.f. 1st July 2023) | 5% | 20% |
| Sales promotion, marketing, and advertising services | 5% | 20% |
| Withholding of rental income tax by tax agents (w.e.f. 1st January 2024) | 7.5% | N/A |
| Gains from financial derivatives | N/A | 15% |
How does the Kenya withholding tax work?
Before disbursing payments, the payer is obligated to withhold a portion for tax, which is subsequently remitted to the Kenya Revenue Authority (KRA).
After the remittance of withholding tax to the KRA, the payer is mandated to generate a withholding tax certificate through iTax. This certificate is automatically dispatched to the payee.
It is imperative to observe the timeline for remittance.
The withholding tax, once deducted, must reach the KRA by the 20th day of the month succeeding the month of deduction.
Importantly, withholding tax constitutes a claimable credit for the payee during their annual tax filing, serving as a credit against their total tax liability rather than an additional tax burden.
How To Pay Kenya’s Withholding Tax?
The remittance of any withheld amount must be completed on or before the 20th day of the subsequent month and is conducted through the Kenya Revenue Authority (KRA).
Kenya withholding tax payments are facilitated online via the iTax platform, where a payment slip can be generated. This generated slip can be presented at any designated KRA bank for the settlement of the due tax.
iTax platform by Kenya Revenue Authority (KRA)
Alternatively, payment can be executed through M-Pesa using the KRA Pay Bill Number 572572.
The Account Number required is the Payment Registration number, located at the top right corner of the generated payment slip.
Upon successful remittance of the deducted amount to the KRA, a Withholding Certificate will be dispatched to the email address registered on iTax. This certificate serves as documentation of compliance with your Kenya withholding tax obligations.
Is Withholding Tax a Final Tax?
One question I frequently get from business owners is whether withholding tax is the end of the story or just the beginning. The answer depends on specific circumstances:
For Non-Resident Persons
For non-residents with no permanent establishment in Kenya, withholding tax is generally considered a final tax. This means once the tax is withheld and remitted, the non-resident’s tax obligation for that income is complete.
An important 2023 amendment made the non-resident withholding tax non-refundable, which significantly impacts cross-border transactions.
For Resident Persons
For residents, withholding tax is a final tax only in certain cases:
- Winnings from betting and gaming
- Qualifying interest
- Qualifying dividends
- Pensions
In all other cases, withholding tax serves as an advance payment of income tax, which can be offset against the recipient’s annual tax liability when filing returns.
Example: If you’re a consultant who earned KSh 2,000,000 during the year with KSh 100,000 withheld as tax, you can offset this against your total income tax liability of, say, KSh 600,000 (at 30% tax rate), leaving KSh 500,000 payable.
If, after filing your tax return, it’s discovered that your tax liability is less than the tax withheld, you may be eligible for a refund.
Conversely, if your liability exceeds the withheld amount, you’ll need to pay the difference.
Withholding Tax Process and Compliance
Understanding the withholding tax process is crucial for both payers and recipients. Here’s a step-by-step breakdown:
- Calculation and Deduction
The payer calculates the applicable withholding tax amount based on the appropriate rate and deducts it from the payment. The KRA’s iTax portal can help determine the correct rate.
- Remittance
The withheld tax must be remitted to the Kenya Revenue Authority by the 20th day of the month following the month in which the deduction was made. This is a critical deadline; missing it incurs penalties.
You can remit the tax through:
- KRA iTax portal
- Bank payment slips
- M-Pesa (Paybill 572572)
- Certification
Once remittance is complete, the iTax system automatically generates a withholding tax certificate, which is sent to the recipient’s iTax account and email. This certificate is crucial for recipients when filing their annual returns.
- Reporting
Both payers and recipients must include withholding tax transactions in their annual tax returns. Payers report all withholding tax deducted and remitted, while recipients declare the gross income received and claim the withheld tax as a credit where applicable.
Kenya Withholding Tax Compliance Requirements
For proper compliance:
- Payers must register for withholding tax obligations with the KRA
- All withheld amounts must be remitted via the iTax system
- Records of all withholding transactions must be maintained for at least 5 years
- Both parties should reconcile withholding certificates against payment records
I’ve observed that many businesses in Kenya struggle with timely remittance. Setting up automated tracking systems for withholding tax obligations can help avoid the steep penalties for late payment.
Exemptions from Withholding Tax
Not all payments are subject to withholding tax in Kenya. Understanding the exemptions can help businesses optimize their tax planning. Here are the key exemptions:
- Dividends received by resident companies: When a company resident in Kenya receives dividends from a local subsidiary where it controls 12.5% or more of the voting power
- Marketing commissions for exports: Commissions paid to foreign agents for the export of flowers, fruits, and vegetables
- Interest payments to financial institutions: Interest paid to banks and insurance companies
- Payments to tax-exempt bodies: Organizations with tax-exempt status
- Local management and professional fees below threshold: Fees whose aggregate value is below KSh 24,000 in a month
- Air travel commissions: Commissions paid by local air operators to overseas agents
- Special Economic Zone enterprises: Dividends paid by SEZ enterprises, developers, and operators licensed under the SEZ Act
Special Cases and Recent Developments
Kenya’s withholding tax landscape continues to evolve. Here are some notable recent developments:
- Deemed Interest on Interest-Free Loans
In March 2024, the High Court of Kenya affirmed the KRA’s right to levy withholding tax on deemed interest for loans from non-residents, even when no actual interest is charged. This ruling has significant implications for multinational companies with cross-border financing arrangements.
The Court clarified that:
- Withholding tax applies to any indebtedness to a non-resident entity, regardless of whether interest is payable
- The ordinary meaning of “loan” should apply rather than requiring specific terms like a fixed charge, interest, discount, or premium.
- Digital Economy Taxation
Kenya has incorporated digital economy aspects into its withholding tax framework:
- 5% withholding tax for residents earning from digital content monetization
- 20% for non-residents in the same category
- These provisions affect social media influencers, streaming platforms, and digital marketplaces
- Special Economic Zones (SEZ)
Payments made by SEZ developers, operators, or enterprises enjoy special withholding tax treatment:
- Royalties, interest, and technical service fees paid to non-residents are exempt from withholding tax in the first 10 years of operation
- After this period, these payments are subject to a reduced rate of 5%
- Double Taxation Agreements (DTAs)
Kenya has DTAs with several countries that may provide relief from withholding tax.
For example, the Kenya-UAE DTA reduces dividend withholding tax from 15% to 10%.
These agreements can significantly impact cross-border transactions and should be considered in international business planning.
Penalties for Non-Compliance
The KRA takes withholding tax compliance seriously, and the penalties can be severe:
- Failure to Deduct: If a payer fails to withhold tax, the tax shall be deemed to be due and payable by the payer as though they were the person who earned the income. This essentially shifts the tax burden to the payer.
- Late Payment: Late payment attracts a penalty of 5% of the tax due, plus a late payment interest of 1% per month for the period that the tax remains unpaid. This is lower than the previously applied 20% penalty, reflecting recent tax administration reforms.
- Non-Deductible Expenses: The service recipient must subject amounts payable to withholding tax, as these expenses will not be allowed as deductions if they have not been subjected to withholding tax.
I’ve seen businesses face significant financial strain due to accumulated penalties and interest on withholding tax. The compound effect of the 1% monthly interest can be substantial over time, making timely compliance crucial.
Managing Withholding Tax with Accounting Software
One of the biggest challenges for businesses in Kenya is keeping track of withholding tax obligations across multiple transactions and ensuring timely remittance. This is where digital accounting solutions like ProfitBooks can make a significant difference.
With ProfitBooks’ invoicing software, you can:
- Automatically calculate withholding tax on invoices
- Track which invoices have had tax withheld
- Generate reports specifically for withholding tax obligations
- Set reminders for withholding tax payment deadlines
- Store digital copies of withholding certificates
ProfitBooks – Invoicing Home Page UI
For businesses dealing with multiple suppliers and service providers, our expense tracking features help ensure you’re deducting the correct withholding tax amounts and maintaining proper documentation.
ProfitBooks – Expense Management
The system can also generate reports showing your withholding tax liability for each month, making it easier to comply with the 20th-day remittance deadline.
Frequently Asked Questions (FAQs)
Q1. What are the exemptions from the Kenya withholding tax?
In navigating the intricacies of Kenya’s withholding tax landscape, certain transactions enjoy exemptions, fostering a more nuanced understanding of financial obligations.
These exemptions encompass:
- Dividends from Local Subsidiaries: Companies resident in Kenya are exempt from withholding tax on dividends received from local subsidiaries or associated companies where control, either direct or indirect, encompasses 12.5% or more of the voting power.
- Export-related Commissions and Fees: Marketing commissions and residue audit fees disbursed to foreign agents facilitating the export of flowers, fruits, and vegetables are exempt from withholding tax, contributing to the encouragement of international trade.
- Interest Payments to Financial Institutions: Interest payments directed towards banks and insurance companies fall under withholding tax exemptions, promoting fluid financial transactions within the banking and insurance sectors.
- Transactions with Tax Exempt Bodies: Payments made to entities enjoying tax-exempt status are exempt from withholding tax obligations, recognizing and facilitating the operations of such bodies within the Kenyan fiscal framework.
- Local Management and Professional Fees: Withholding tax exemptions apply to local management and professional fees, provided their aggregate does not surpass Sh. 24,000 within a month, offering leeway for smaller-scale transactions.
- Air Travel Commissions for Local Operators: Commissions disbursed by local air operators to overseas agents for air travel services are exempt from Kenya withholding tax, supporting the aviation industry’s international collaborations and operations.
Q2. What if I don’t pay my withholding tax in Kenya?
If the payer neglects to withhold tax, they are considered responsible for the payment, as if they were the one who earned the income.
The payment deadline becomes the date when the tax should have been sent to the Kenya Revenue Authority (KRA).
Additionally, a penalty of 5% and a monthly late payment interest of 1% will be levied on the outstanding tax amount until it is settled.
Q3. Can we pay the tax under the PAYE regime?
Workers are liable to PAYE taxes, with rates determined by individual tax brackets. Employers have the flexibility to consider allowable deductions (like mortgage interest) and reliefs (such as personal and insurance relief) in the calculation of PAYE.
Q4. Is withholding tax a final tax in Kenya?
In certain scenarios, withholding tax serves as the ultimate tax.
- When deducted for payments to non-residents without a permanent establishment in Kenya.
- For winnings, qualifying interest, qualifying dividends, and pensions paid to resident individuals.
In all other instances, withholding tax isn’t final. The taxpayer must declare income and withholding tax details during annual tax returns, settling any remaining tax balance.
Q5. What types of transactions does it apply to?
Withholding Income Tax refers to tax retained at the source.
When specific payments are made, the payer deducts tax at the relevant rate and sends it to the Commissioner on behalf of the payee.
Payments subject to withholding tax encompass various categories, such as:
- Management, professional, or training fees
- Consultancy fees, Legal fees, Audit fees
- Contractual fees
- Winnings
- Appearance at or performance to entertain
- Royalties
- Interest and deemed interest
- Dividends
Q6. How do I check my withholding certificates on the iTax portal?
To check your withholding certificates on iTax:
- Log in to your iTax account
- Go to the “Certificates” tab
- Select “Reprint Withholding Tax Certificate.”
- Click on “Consul.t This will display all the certificates that have been withheld by parties you’ve dealt with.
Q7. Does withholding tax apply to freelancers in Kenya?
Yes, freelancers in Kenya are subject to withholding tax, typically at the rate of 5% for residents and 20% for non-residents, depending on the nature of their services. Additionally, freelancers earning income from digital platforms may be subject to Digital Service Tax at 1.5% of gross income.
Q8. How does withholding tax apply to interest-free loans in Kenya?
Following the March 2024 High Court ruling, withholding tax applies to deemed interest on interest-free loans provided by non-resident persons. This means that even if no actual interest is charged, the KRA can assess withholding tax based on deemed interest on these borrowings.
Q9. Are there any special withholding tax rates for East African Community citizens?
Yes, consultancy fees paid to citizens of East African Community partner states are subject to a reduced withholding tax rate of 15%, compared to the standard 20% for other non-residents.
Q10. How do Double Taxation Agreements affect withholding tax in Kenya?
DTAs can reduce or eliminate withholding tax on certain types of income. For example, under the Kenya-UAE DTA, the withholding tax rate on dividends is reduced from 15% to 10%. Businesses engaged in cross-border transactions should review applicable DTAs to understand potential tax benefits.
Conclusion
Kenya’s withholding tax system plays a crucial role in the country’s revenue collection mechanism, affecting individuals, businesses, and foreign entities operating within its economic ecosystem. Understanding the rates, compliance requirements, and recent developments is essential for proper tax planning and avoiding penalties.
As with most tax matters, staying informed about changes in legislation and court rulings is critical. The March 2024 High Court ruling on deemed interest for interest-free loans, for instance, has significant implications for international financing structures.
For businesses operating in Kenya, implementing robust systems to track, calculate, and remit withholding tax is not just a compliance necessity but also a financial management best practice. Cloud-based accounting solutions can help streamline this process, ensuring you stay compliant while minimizing the administrative burden.
Want to simplify your withholding tax management? Try ProfitBooks free for 14 days and see how our accounting software can help you handle tax compliance with ease.
Have you encountered challenges with withholding tax in Kenya? Share your experiences in the comments below, and let’s learn from each other!
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