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.
In Kenya, a company is thinly capitalised if all of the following occur:
- The company is controlled by a non-resident person alone or together with four or fewer persons.
- The company is not a bank or financial institution.
- The highest amount of all loans held by the company at any time exceeds the sum of three times the revenue reserves (including accumulated losses) and the issued and paid up share capital of all classes of shares of the company.
A company that is thinly capitalised cannot claim a deduction on the interest expense incurred by the company on loans in excess of three times the sum of revenue reserves and issued and paid up capital of all classes of shares of the company. The company also cannot claim a deduction for any foreign exchange loss realised by the company with respect to any loans from its shareholders in the period that the company remains thinly capitalised.
For companies in the extractive sector, the debt-to-equity ratio is 2:1.
The Finance Act, 2019 exempts companies with projects aimed at implementing the affordable housing scheme from thin capitalisation provisions. The eligible companies can raise capital through debt without occasioning the thin capitalization measures whose effect is to subject interest payable on the loans to corporate income tax.
“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. Entities that are however managed 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.