KASNEB · AdvancedAdvanced TaxationBETA — flag if wrong

Taxation of Non-Residents

This topic covers the taxation of non-residents in Kenya, including withholding taxes and the implications of residency status.

3objectives

3revision lessons

12practice questions

What you’ll learn

Aligned to the KASNEB Advanced Taxation syllabus.

CA35.10.A Define residency status for tax purposes.
CA35.10.B Compute withholding tax liabilities for non-residents.
CA35.10.C Discuss the implications of non-residency on tax obligations.

Defining Residency Status for Tax Purposes in Kenya

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In Kenya, residency status for tax purposes is defined under the Income Tax Act, Cap 470. An individual is considered a resident for tax purposes if they meet either of the following criteria:

They are physically present in Kenya for at least 183 days in a tax year.
They are physically present for a period aggregating to 90 days or more in the current tax year and have been present in Kenya for at least 180 days in the preceding four years.

For companies, a resident is defined as a company that is incorporated under the Companies Act, 2015 or has its management and control exercised in Kenya. Non-residents are taxed only on income that is sourced within Kenya, while residents are taxed on their worldwide income.

It is crucial for non-residents to understand their tax obligations, as they may be subject to withholding tax on certain types of income, such as dividends, interest, and royalties, at the prevailing rates set by the Kenya Revenue Authority (KRA). Non-residents must file tax returns if they have taxable income in Kenya, and they should be aware of any double taxation agreements (DTAs) that Kenya has with their home countries, which may affect their tax liabilities.

Key points

Residents are taxed on worldwide income; non-residents on Kenyan-sourced income.
Individuals qualify as residents by 183 days or 90 days plus 180 days in 4 years.
Companies are residents if incorporated in Kenya or controlled from Kenya.
Non-residents face withholding tax on dividends, interest, and royalties.
Double taxation agreements may reduce tax liabilities for non-residents.

Worked example

Example of Residency Status Determination

Scenario: John, a UK citizen, worked in Kenya for the following periods:

1 January 2022 to 30 June 2022: 180 days
1 July 2022 to 31 December 2022: 120 days

Analysis:

Total days in 2022 = 180 + 120 = 300 days.
John meets the 183-day rule in 2022, thus he is a tax resident for that year.

Tax Implications: As a tax resident, John will be taxed on his worldwide income for the year 2022, while any income sourced from the UK will also be subject to the provisions of any applicable DTA between Kenya and the UK.

More on this topic

CA35.10.B Computing Withholding Tax for Non-Residents in KenyaBETA — flag if wrongAI 100

Withholding tax is a tax deducted at source from payments made to non-residents. In Kenya, this is governed by the Income Tax Act, Cap 470. Non-residents are taxed on income sourced in Kenya, including dividends, interest, and royalties. The withholding tax rates vary depending on the type of income. For example, the withholding tax rate on dividends is 15%, while interest and royalties are taxed at 15% and 5% respectively, unless a lower rate is provided under a double taxation agreement (DTA).

When computing withholding tax, the payer must first determine the gross amount of the payment. Then, apply the relevant withholding tax rate to calculate the tax liability. This tax must be remitted to the Kenya Revenue Authority (KRA) by the 20th of the following month. Failure to remit may attract penalties and interest.

It's essential to keep accurate records of these transactions for compliance and reporting purposes. Non-residents may also need to apply for a Tax Compliance Certificate (TCC) to ensure they are in good standing with KRA.

Understanding the implications of withholding tax on non-residents is crucial for businesses engaging in cross-border transactions.

CA35.10.C Tax obligations for non-residents in KenyaBETA — flag if wrongAI 100

Non-residents in Kenya are subject to specific tax obligations under the Income Tax Act, 2015. A non-resident is defined as an individual who is not a resident in Kenya for tax purposes, usually someone who spends less than 183 days in a year in the country. Non-residents are taxed only on income that is sourced within Kenya. This includes income from employment, business activities, and property located in Kenya.

The tax rate for non-residents is typically a flat rate of 30% on employment income, while business income is taxed at the corporate tax rate of 30%. Non-residents are also subject to withholding taxes on various income types, such as dividends, interest, and royalties, which are withheld at source. For instance, withholding tax on dividends is 15%, while interest and royalties are taxed at 15% as well.

It's crucial for non-residents to comply with tax obligations to avoid penalties and ensure proper documentation is maintained. They may also be eligible for tax treaties that Kenya has with other countries, which can reduce the withholding tax rates. Non-residents should consult with tax professionals to navigate these obligations effectively.

Sample KASNEB-style questions

3 of 12 questions. Beta-flagged questions are AI-drafted and pending CPA review — flag anything that looks wrong.

Q1 · MCQ · easyBETA — flag if wrongAI 90

Which of the following best defines a resident for tax purposes in Kenya?

A.A person who spends more than 183 days in Kenya in a year.✓ correct
B.A person who is a citizen of Kenya.
C.A person who has a permanent home in Kenya.
D.A person who earns income from Kenyan sources.

Q2 · MCQ · mediumBETA — flag if wrongAI 93

What is the primary criterion for determining the residency status of an individual in Kenya?

A.Citizenship.
B.Duration of stay.✓ correct
C.Income source.
D.Ownership of property.

Q3 · SHORT ANSWER · mediumBETA — flag if wrongAI 93

Explain two circumstances under which an individual may be considered a resident for tax purposes in Kenya.

Model answer

1. An individual who resides in Kenya for a period of more than 183 days during a tax year is considered a resident. 2. An individual who has a permanent home in Kenya and is present in the country for any part of the tax year is also classified as a resident.

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Common questions

Define residency status for tax purposes.

Residents are taxed on worldwide income; non-residents on Kenyan-sourced income.

Compute withholding tax liabilities for non-residents.

Withholding tax is deducted at source from non-resident payments.

Discuss the implications of non-residency on tax obligations.

Non-residents taxed on Kenya-sourced income only.