Kenya

Corporate - Deductions

Last reviewed - 03 August 2020

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 Second Schedule of the ITA has been overhauled, and new capital/investment allowance rates are as follows:

Capital/Investment allowance Rate
Capital expenditure on buildings:  
Hotel buildings 50% in first year of use and 25% per year on a reducing balance for the residual value
Building used for manufacture
Hospital buildings
Petroleum or gas storage facilities
Educational buildings including student hostels 10% per year on reducing balance
Commercial building
Capital expenditure on machinery:
Machinery used for manufacture 50% in first year of use and 25% per year on a reducing balance for the residual value
Hospital equipment
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 on reducing balance
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 on reducing balance
Telecommunications equipment
Purchase or an acquisition of an indefeasible right to use fibre optic cable by a telecommunication operator
Other machinery
Farm works  50% in first year of use and 25% per year on a reducing balance for the residual value 

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.

Goodwill

Cost of acquisition of goodwill and amortisation of goodwill are not deductible as they are capital in nature.

Start-up expenses

There is a specific provision allowing the deduction of certain start-up expenses, provided that the required conditions have been met.

Interest expenses

A deduction for interest is allowed only to the extent that the borrowings are used for the purpose of trade. Where a non-resident person controls a company alone or with four or fewer other persons, interest restriction or ‘thin capitalisation’ rules apply (see Thin capitalisation in the Group taxation section). Companies involved in the affordable housing scheme are exempted, subject to Cabinet Secretary’s approval.

Bad debts

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.

Charitable contributions

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.

Taxes

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 for a maximum of ten years, including the year in which the losses arise. The Cabinet Secretary may extend this period on application by the taxpayer. Losses cannot be carried back, except for petroleum companies, where losses can be carried back 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.