Kenya

Corporate - Group taxation

Last reviewed - 26 September 2022

Each company in a group is taxed as a separate entity in Kenya.

Transfer pricing

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.

Country-by-country (CbC) reporting

The Finance Act, 2022 introduced rules for preparation and filing of CbC reports as well as Master and Local Files by members of multinational enterprise (MNE) groups operating in Kenya.  

The CbC rules are broadly aligned to the Organisation for Economic Co-operation and Development's (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 13, dealing with transfer pricing documentation, which recommend a three-tiered approach consisting of a CbC report, Master File, and Local File in preparation of transfer pricing documentation as a measure to promote tax transparency by MNE groups.  

The CbC filing requirements will apply to MNE groups with a gross turnover of more than KES 95 billion. The threshold is consistent with the threshold of EUR 750 million contained in the OECD’s BEPS Action 13 report as it is the KES near equivalent to EUR 750 million as at April 2022.  

The rules for preparing and filing CbC reports became effective 1 July 2022 and will apply to returns for the year of income 2022 and subsequent years. For MNE groups with a December year-end, the first CbC return will apply for the 2022 year of income and will be due on 31 December 2023.

Kenya has not yet signed up to the Multilateral Competent Authority Agreement on Exchange of County-by-Country reports (commonly referred to as the CbC MCAA). This means that, even where the CbC report is filed by the ultimate parent entity, the local constituent entity will still be required to obtain the CbC report and file it in Kenya.

In addition, local entities that are part of an MNE group with an annual consolidated group turnover of more than EUR 750 million will be required to file, on an annual basis and within six months of the reporting year-end, the Master File and Local File.

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 amortisation [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 interest restriction provisions are not applicable to banks, 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, and holding companies that are regulated under the Capital Markets Act. 

Deemed interest

'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.