What Tax Incentives do Businesses get?
These are tax incentives offered for capital expenditures.
They include wear and tear allowances, industrial building deduction, investment deduction and farm-works deductions.
Wear and tear allowances
The wear and tear allowances are charged on capital expenditure on machinery and equipment where they are classified into five classes all of which are offered the allowances at different rates.
- Class 1 – includes heavy earth moving equipment and self-propelling vehicles e.g. Lorries above 3 tonnes, forklifts, trucks. The rate is 37.5 % p.a.
- Class 2 – computers, photocopiers, scanners. The rate is 30%
- Class 3 – includes light self-propelling vehicles and other machines such as aircrafts, motorbikes, Lorries under 3 tonnes. The rate is 25%.
- Class 4 – e.g telephone sets, switch boards, bicycles. The rate is 12.5%
- An investor who incurs capital expenditure on building and/or machinery used for manufacture is entitled to an investment deduction equal to 100% of the cost.
- For capital expenditures on building and/or machinery exceeding sh.200 million if the investment is outside Nairobi the investor can claim 150% allowance.
Industrial Building Deduction
This is an allowance granted to an investor who incurs capital expenditure on a building used as an industrial building at the rate of 10% of the cost (net of investment deduction, if any)
Expenditures of a capital nature incurred in that year of income (with the prior approval by the Minister) by the person on the construction of a public school, hospital, road or any similar infrastructure will be an allowable deduction.
An investor in the telecoms industry who incurs capital expenditure on telecommunications equipment purchased and used by him in business is entitled to a straight line deduction at the rate of 20% of such cost.
An investor who incurs capital expenditure on the purchase of the right to use a computer software used by him in business is entitled to a straight line deduction at the rate of 20% of such cost.
Farm Works Deductions
This deduction is a capital allowance granted to a farmer who incurs capital expenditure on the construction of farm works at the rate of 100% of the cost.
A farm work is any structure constructed to enhance the operations of a farm.
Special Economic Zones
Capital expenditure on buildings and machinery for use in a Special Economic Zone shall be entitled to Investment deduction equal to one hundred percent of the capital expenditure.
Corporate taxation at rate of
- 10% for first 10 years
- 15%for the next 10 years
Withholding tax rates on payments made to non-residents (royalties, interest, management fees) ? 5%; Dividends paid to non- residents by the SEZ entity, exempt from tax.
Export Processing Zones Incentives
- A 10-year corporate income tax holiday is available to certain designated enterprises that undertake activities consisting of the manufacture of goods for exports only (under the Export Processing Zones) and a 25% tax rate for a further 10 years
- 10 year withholding tax holiday on dividends and other remittances to non-resident parties (except for EPZ commercial licence enterprises)
- 100% investment deduction on new investment in EPZ buildings and machinery.
Incentives for Newly Listed Companies
For newly listed companies, there are preferential corporate tax rates dependent on the percentage of listed shares as follows-
- 20% rate if 40% of issued share capital is listed (for 5 year period).
- 25% rate if 30% of issued share capital is listed (for 5 year period).
- 27% rate if 20% of issued share capital is listed (for 3 year period).
Incentives through Double Tax Agreement
Where there are negotiated Double tax agreement between Kenya and any other state, there are usually concessionary tax rates on various categories of payments. For information on these, reference to be made to the individual agreements through this link.
In the case of a full time employee including whole time service directors, the value of medical services provided by the employer or medical insurance provided by an insurance provider approved by the Commissioner and paid for by the employer on behalf of a full time employee.
- With effect from 2003, any life insurance cover taken by an individual on self, spouse or child will qualify for relief at rate 15% of premium paid up to up to a maximum of KShs 60,000/= per year.
- An education policy with a maturity period of at least 10 years shall also qualify for relief in a similar manner
Any person who borrows money from a registered financial institution to purchase a home or to improve a home as long as he/she occupies the home, will be entitled to a interest deduction of up to a maximum of KShs 300,000/= per annum of interest paid to the approved and registered financial institutions.
Home Ownership Savings Plan (Hosp)
An individual will be entitled to relief/deductions on funds deposited under a registered Home Ownership Savings Plan subject to a maximum of KShs 8,000/= per month or KShs 96,000/= per year for 10 years. Any interest income earned by a depositor on deposits of up to a maximum of KShs 3 million shall be exempt from tax.
Any individual who purchases housing bonds will be granted tax exemption on interest accruing on housing bonds up to a maximum of KShs 300,000/=.
Retirement Benefits Savings
Contributions in to a a registered retirement benefits scheme is tax deductible to a maximum of ksh 20000 pm or ksh 240000 pa. First ksh 600000 of lumpsum upon withdrawal of benefits and ksh 25000 monthly pension received from such scheme is tax free.
Collective investment schemes (Unit Trusts, Real Estate Investment Trusts, Employee Share Ownership Plans)
Collective Investment schemes registered with Commissioner are exempt from tax on their incomes except for payment of withholding tax on dividends or interest paid to unit holders who are not tax exempt.
Exemptions on VAT
This is granted to Donor Funded project upon recommendation by National Treasury, Diplomats (DA 1s) upon recommendation by CS for Foreign affairs, and privileged persons e.g. KDF