In an increasingly globalized world, individuals and businesses frequently engage in cross-border activities, resulting in income generation from foreign sources. In Kenya, the taxation of foreign income is a complex area governed by domestic tax laws, double taxation treaties, and international tax principles. This article explores the tax implications of receiving foreign income in Kenya, supported by practical examples and relevant case studies.
Kenyan Tax Framework for Foreign Income
Kenya operates a residence-based tax system, meaning that residents are taxed on their worldwide income, while non-residents are taxed only on income sourced from Kenya. The main legislative framework governing taxation in Kenya is the Income Tax Act (Cap 470), administered by the Kenya Revenue Authority (KRA).
Key Definitions
Resident Individual: Under Section 2 of the Income Tax Act, an individual is considered a resident for tax purposes if they:
Have a permanent home in Kenya and were present in the country for any part of the year; or
Were present in Kenya for 183 days or more in a calendar year; or
Were present for an average of 122 days per year over the preceding three years.
Foreign Income: This includes earnings such as salaries, dividends, interest, royalties, or business profits generated outside Kenya.
Double Taxation: Occurs when the same income is taxed in two jurisdictions, typically mitigated by double taxation agreements (DTAs).
Tax Obligations for Foreign Income
1. Declaration of Foreign Income
Kenyan residents are required to declare all foreign income in their annual tax returns. Failure to do so may result in penalties and interest for non-disclosure.
2. Tax Rates and Reliefs
Foreign income is taxed at the same rates applicable to local income. For individuals, the rates range from 10% to 30%, while corporations are taxed at 30% (or 37.5% for non-resident entities).
To avoid double taxation, taxpayers can claim foreign tax credits if the foreign income has already been taxed in the source country. This relief is only available if Kenya has a DTA with the source country.
3. Exchange Rate Conversion
Foreign income must be reported in Kenyan Shillings (KES). The exchange rate used should align with rates provided by the Central Bank of Kenya (CBK) or other acceptable sources.
4. Withholding Tax on Foreign Income
Certain types of foreign income, such as dividends and royalties, may be subject to withholding tax in the source country. The Kenyan taxpayer must ensure that these amounts are appropriately credited in their tax returns.
Practical Examples
Example 1: Employment Income
John, a Kenyan resident, works for an international organization in the United States and earns USD 100,000 annually. The United States deducts 20% in taxes, leaving him with USD 80,000.
John converts his income into KES using the CBK rate (e.g., 1 USD = 140 KES).
Total income in KES: 100,000 × 140 = KES 14,000,000.
John reports KES 14,000,000 as gross income in Kenya.
He claims a foreign tax credit of USD 20,000 (KES 2,800,000).
John pays additional taxes in Kenya if applicable, ensuring the total tax burden does not exceed the Kenyan tax liability.
Example 2: Dividend Income
Mary, a Kenyan resident, receives dividends from shares held in a South African company. South Africa imposes a 15% withholding tax, while Kenya taxes dividends at a flat rate of 5%.
Mary’s gross dividend income is ZAR 500,000.
South Africa withholds 15% (ZAR 75,000), leaving Mary with ZAR 425,000.
Mary converts her income to KES and claims a foreign tax credit for ZAR 75,000 against her Kenyan tax liability.
Example 3: Business Income
A Kenyan company provides consultancy services to clients in the UK and earns GBP 50,000. The UK withholds 20% in taxes.
The company reports its gross income in KES, claiming the UK tax as a credit.
If a DTA exists, the tax rate may be reduced, and the company must adhere to treaty provisions.
Case Studies
Case Study 1: Nyaga’s Case
Nyaga, a Kenyan citizen, worked in Dubai and earned tax-free income for five years. Upon returning to Kenya, KRA audited him and assessed tax on his foreign earnings, arguing that he remained a Kenyan resident due to maintaining ties such as a permanent home and bank accounts in Kenya. This case highlights the importance of understanding residency rules and their implications on foreign income.
Case Study 2: XYZ Ltd.
XYZ Ltd., a Kenyan entity, received royalty payments from a Tanzanian company. Tanzania withheld 10% tax, as per the Kenya-Tanzania DTA. XYZ Ltd. applied for a foreign tax credit but was required to provide proof of tax deduction in Tanzania. The case underscores the need for documentation to support tax relief claims.
Challenges in Taxing Foreign Income
Complexity of DTAs: Understanding and applying DTA provisions can be challenging for taxpayers.
Currency Fluctuations: Exchange rate volatility affects income reporting and tax calculations.
Compliance Costs: Maintaining records and obtaining necessary documentation from foreign jurisdictions can be burdensome.
Mismatch in Tax Systems: Differences in tax rates, rules, and definitions across jurisdictions create compliance difficulties.
Conclusion and Recommendations
Receiving foreign income comes with significant tax obligations for Kenyan residents. To ensure compliance:
Maintain accurate records of all foreign earnings and related taxes.
Understand Kenya’s DTAs with relevant jurisdictions.
Seek professional tax advice from tax professionals - like David and Associates and others - to navigate complex rules and optimize tax reliefs.
Regularly review tax obligations to align with evolving laws and regulations.
As Kenya enhances its focus on global income transparency, taxpayers must remain vigilant and proactive in meeting their obligations. Understanding the tax implications of foreign income not only ensures compliance but also facilitates effective financial planning in a globalized economy.
About the Author
Dr. David Onguka brings more than 26 years of expertise in finance, tax, audit, and management to his role as Managing Partner at David & Associates - Certified Public Accountants. His extensive experience includes serving as General Manager and Group Chief Financial Officer at Ainushamsi Energy Limited for 6 years, as well as holding similar positions at Jaguar Petroleum Limited for five years. He began his career as an Audit Senior at PKF Kenya and was Finance Manager at Gapco Kenya Limited for seven years. He holds PhD in Finance from University of Nairobi (UON), MBA in Finance, CPA(K) and CPS(K). He is also a researcher, author, publisher and practicing member of ICPAK and Institute of Certified Secretary (ICS).
For inquiries, you can reach him at or link to our website: www.davidandassociates.co.ke or visit at at West Park Towers, 2nd floor, Mpesi Lane off Muthithi Road, Westlands.
