Corporation Tax
Income tax on company profits and gains. Comprehensive guide to corporate tax obligations, rates, deductions, and compliance requirements for businesses operating in Kenya.
What is Corporation Tax?
Understanding corporate income tax in Kenya
Corporation Tax is income tax charged on the profits of companies incorporated in Kenya or foreign companies with permanent establishments in Kenya. It applies to all forms of business income including trading profits, investment income, and capital gains, ensuring comprehensive taxation of corporate earnings.
Who Pays Corporation Tax?
All companies incorporated in Kenya, foreign companies with permanent establishments, partnerships with corporate partners, and trusts earning business income must pay corporation tax.
Filing Requirements
Annual returns must be filed within 6 months after year-end. Companies must also pay advance tax in quarterly installments and submit monthly PAYE returns for employees.
Tax Rates
Standard rate of 30% for resident companies and 37.5% for non-resident companies. Minimum tax of 1% of gross turnover applies when corporate tax is lower.
Compliance Benefits
Proper compliance enables access to government contracts, bank facilities, licensing, and protects against penalties while building credibility with stakeholders.
Company Types & Tax Rates
Different rates for different company categories
Corporation Tax Rates 2024
Current rates and minimum tax provisions
| Company Category | Corporation Tax Rate | Minimum Tax Rate | Additional Provisions |
|---|---|---|---|
| Resident Companies | 30% | 1% of Gross Turnover | Standard rate applies |
| Non-Resident Companies | 37.5% | 1.5% of Gross Turnover | Higher rate for foreign entities |
| Branch Profits (Additional) | 15% | N/A | On repatriated profits after tax |
| Shipping Companies | 2% | N/A | On gross freight earnings |
| Air Transport | 5% | N/A | On gross receipts from Kenya |
Minimum Tax Provisions
- Minimum Tax: Payable when corporation tax is less than 1% of gross turnover
- Exemptions: First year of operation, companies in tax loss position
- Credit: Minimum tax paid can be offset against future corporation tax
- Special Rates: Apply to specific industries like shipping and aviation
Allowable Deductions
Expenses that reduce taxable income
Corporation Tax Filing Process
Step-by-step compliance guide
Prepare Financial Statements
Prepare audited financial statements including profit & loss, balance sheet, cash flow statement, and notes. Ensure compliance with applicable accounting standards.
Calculate Taxable Income
Adjust accounting profit for tax purposes by adding back non-deductible expenses and deducting allowable expenses not in accounts.
Complete Tax Computation
Calculate corporation tax using applicable rates, determine minimum tax liability, and offset advance tax payments and withholding taxes.
File CT1 Return
Submit corporation tax return (CT1) via iTax portal within 6 months after year-end, attaching financial statements and supporting schedules.
Pay Outstanding Tax
Pay any balance of tax due after offsetting advance tax payments. Late payment attracts penalties and interest at prescribed rates.
Maintain Compliance
Keep proper books of account, pay advance tax quarterly, file monthly PAYE returns, and respond promptly to KRA inquiries.
Common Compliance Issues
Avoid these costly mistakes and penalties
Late Filing of Returns
Filing corporation tax returns after the 6-month deadline attracts penalties of 25% of tax due or KSh 20,000 (whichever is higher), plus 1% monthly interest.
Solution: Plan filing process early and engage qualified professionals to ensure timely compliance.
Inadequate Record Keeping
Poor documentation of expenses and transactions leads to disallowed deductions during audits and potential additional tax assessments.
Solution: Implement robust accounting systems and maintain supporting documents for all transactions.
Advance Tax Defaults
Failure to pay quarterly advance tax installments results in penalties and interest charges, increasing the overall tax burden significantly.
Solution: Set up quarterly payment schedules and base estimates on realistic profit projections.
Transfer Pricing Issues
Related party transactions not conducted at arm's length can trigger transfer pricing adjustments and substantial penalties.
Solution: Maintain proper transfer pricing documentation and ensure arm's length pricing for related party transactions.
Frequently Asked Questions
Common corporation tax questions answered
When is minimum tax applicable and how is it calculated?
Minimum tax applies when your corporation tax liability is less than 1% of gross turnover (1.5% for non-residents). It's calculated as 1% of gross turnover for the year. Companies in their first year of operation or in a tax loss position are exempt. Minimum tax paid can be offset against future corporation tax liabilities.
How do thin capitalization rules affect interest deductions?
Under thin capitalization rules, interest deductions are limited to 30% of EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). This prevents excessive debt financing to reduce taxable income. Interest exceeding this limit is not deductible in the current year but can be carried forward to future years subject to the same limitation.
What are the advance tax payment requirements for companies?
Companies must pay advance tax in four equal quarterly installments by 20th April, 20th June, 20th September, and 20th December. The total advance tax should be 100% of the previous year's corporation tax or 110% if turnover exceeds KSh 1 billion. New companies estimate based on expected profits for the first year.
Can losses be carried forward and how long?
Tax losses can be carried forward indefinitely and offset against future profits from the same source. However, losses cannot be carried back to previous years. Investment losses can only be offset against investment income, while business losses can be offset against business income. Proper documentation of losses is essential for future claims.
What is branch profits tax and when does it apply?
Branch profits tax at 15% applies to after-tax profits of Kenyan branches of foreign companies when profits are repatriated to the head office. This is in addition to the 37.5% corporation tax on branch profits. The tax ensures that branch profits face similar taxation to dividend distributions by subsidiary companies.
How are capital allowances calculated for different assets?
Capital allowances vary by asset type: computers and software (37.5%), general plant and machinery (25%), motor vehicles (25%), furniture and fittings (10%), industrial buildings (10%), and commercial buildings (2.5%). Allowances are calculated on a reducing balance basis except for buildings which use straight-line method. Assets must be used for business purposes to qualify.