The general principle in Kenya is that, unless expressly provided otherwise, expenses are tax deductible if they are incurred wholly and exclusively to generate taxable income.
Depreciation and depletion
No deduction is allowed for accounting depreciation or impairment. However, capital allowances are permitted at varying rates (on a straight-line basis) for certain assets used for business purposes, including buildings and machinery used in manufacturing, industrial buildings and hotels, machinery and plant, agricultural works, and mining.
The capital/investment allowance rates are as follows:
|Capital expenditure on buildings:|
|Hotel buildings||50% in first year of use and 25% per year in equal instalments|
|Building used for manufacture|
|Petroleum or gas storage facilities|
|Educational buildings including student hostels||10% per year in equal instalments|
|Capital expenditure on machinery:|
|Machinery used for manufacture||50% in first year of use and 25% per year in equal instalments|
|Ships or aircraft|
|Machinery used to undertake exploration operations under a prospecting right|
|Machinery used to undertake exploration operations under a mining right|
|Motor vehicle and heavy earth moving equipment||25% per year in equal instalments|
|Computer and peripheral computer hardware and software, calculators, copiers and duplicating machines|
|Filming equipment by a local film producer licensed by the Cabinet Secretary responsible for filming|
|Furniture and fittings||10% per year in equal instalments|
|Purchase or an acquisition of an indefeasible right to use fibre optic cable by a telecommunication operator|
|Farm works||50% in first year of use and 25% per year in equal instalments|
No transition provisions have been included in the new Second Schedule. Transition provisions would provide guidance on the treatment of the tax written down balances that will be carried forward from previous years.
Cost of acquisition of goodwill and amortisation of goodwill are not deductible as they are capital in nature.
There is a specific provision allowing the deduction of certain start-up expenses, provided that the required conditions have been met.
A deduction for interest is allowed only to the extent that the borrowings are used for the purpose of trade (see Interest deduction restriction in the Group taxation section).
The Act limits the deduction of interest expenses to a maximum of 30% of EBITDA (i.e earnings before interest, tax, depreciation, and amortisation) of the company or branch.The Finance Act 2023 has amended changes to the interest restriction provisions. Interest on loans sourced from non-resident persons will be restricted in accordance with the interest restriction provisions, but interest on loans obtained from resident persons will be exempt from these restrictions. The interest restriction provisions are not applicable to:
- financial institutions licensed under the Banking Act
- micro and small enterprises registered under the Micro and Small Enterprises Act
- microfinance institutions licensed and non-deposit taking microfinance businesses under the Microfinance Act, 2006 or entities licensed under the Hire Purchase Act or non-deposit taking institutions involved in lending and leasing business
- companies undertaking the manufacture of human vaccines
- companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least KES 5 billion
- companies engaged in manufacturing whose cumulative investment is at least KES 5 billion, provided that the investment shall have been made outside Nairobi City County and Mombasa County
- holding companies that are regulated under the Capital Markets Act, and
- Companies involved in the affordable housing scheme are exempted, subject to Cabinet Secretary’s approval.
Further, the Finance Act 2023 has also introduced a provision allowing taxpayers to defer and carry forward restricted interest for up to three years. During this period, previously restricted interest will be deductible if the company's interest on loans from non-resident persons does not exceed 30% of EBITDA.
In addition, where a person does not meet the threshold set out under the interest restriction provisions, they will defer the realised foreign exchange loss and claim over a period not more than five years from the date the foreign exchange loss was realised.
Bad debts are deductible in the year in which the debt has become irrecoverable in accordance with detailed rules under the ITA for making this determination.
Donations to qualifying charities and for certain public works are deductible, subject to certain conditions.
With effect from 3 April 2017, the Finance Act, 2017 provides that expenditure incurred by a taxpayer on donations for the alleviation of distress during national disaster as declared by the President will be deductible expenses for the taxpayer when determining taxable income. Deductible donations will be those made to:
- the Kenya Red Cross
- county governments, or
- any other institution responsible for the management of national disasters to alleviate the effects of a national disaster declared by the President.
Fines and penalties
Generally, fines and penalties are not deductible as they are not considered to be expenses incurred for producing profits chargeable to tax.
Kenyan income taxes are not deductible while computing income tax of a person. However, foreign income taxes incurred are generally deductible as an expense if tax credit relief is not available under a double tax treaty (DTT).
Net operating losses
Losses calculated under the tax rules may be carried forward against income from the same source indefinitely.
Payments to foreign affiliates
Transfer pricing rules apply to transactions with foreign affiliates (both companies and branches/PEs). Additionally, there are restrictions on the deductibility of expenses incurred outside of Kenya by non-residents with a Kenyan PE.