Each company in a group is taxed as a separate entity in Kenya.
A company that has related-party transactions is required to ensure such transactions are at arm’s length. The company is therefore required to prepare a transfer pricing policy to justify the pricing arrangements. The Commissioner is allowed to specify conditions and procedures on the application of the methods for determining the arm's-length price and to adjust the prices if they do not conform to the arm’s-length principle. The policy should be prepared and submitted to the KRA upon request.
Interest deduction restriction (previously thin capitalisation)
In Kenya, the previous thin capitalisation rules were replaced with the use of fixed profit ratios (i.e Earnings Before Interest Tax, Depreciation and Amortization( “EBITDA”)) to determine the permissible level of interest deductibility.
The Act limits the deduction of interest expenses to a maximum of 30% of EBITDA of the company or branch. The new provisions are not applicable to banks or financial institutions licensed under the Banking Act or micro and small enterprises registered under the Micro and Small Enterprises Act;
However, the thin capitalisation rules are still applicable when determining the deduction/ deferral of any foreign exchange loss realised by the company with respect to any loans from its shareholders. Where a company is thinly capitalised i.e. the debt to equity ratio exceeds 3:1, any foreign exchange loss realised by the company with respect to any loans from its shareholders should be deferred until the company ceases to be thinly capitalised.
'Deemed interest' is applicable on interest-free borrowings received by foreign-controlled entities in Kenya. The ‘deemed interest’ is based on the Commissioner's prescribed rates.
WHT is due on the ‘deemed interest’.
Controlled foreign companies (CFCs)
Kenya has no specialised rules regarding CFCs. However, entities that are managed and controlled in Kenya are considered resident entities.
There are restrictions on the deductibility of interest and foreign exchange losses of companies that are foreign controlled and thinly capitalised.