Residency raises tax burden

Kenya has a source based taxation system, which levies taxation on all income accrued irrespective of the residence of income earner.

The opposite of this is the income- based taxation system, which taxes residents irrespective of where the income is accrued or derived from.

It is important to determine the residency status of the taxpayer with a view to determining whether taxation is applicable or not, and in case of a source based taxation system to determine how the tax is applicable if sourced from the country.

There are a number of rules that determine residency.

Any person with a permanent home in Kenya is deemed to be a resident, particularly when he is present in the country during the year of income (January to December).

Unfortunately, the law does not quite explain what a “permanent home” is and it is generally accepted that all citizens are deemed to have permanent homes.

A person without a permanent home (read, non-citizen) will be deemed to be a resident either when he is in the country for 188 days in any year of income, or an aggregate of 122 days in the current year and in each of the preceding two years.

There are three residency provisions, i.e. incorporation in Kenya, management and control is exercised in Kenya, or when the Finance minister declares the person a resident.

There are subtle differences between the taxation of residents and non-residents.

To begin with, employees who are residents are taxed on their employment incomes while non-residents are not taxable in Kenya.

Goods providers

While resident service providers are taxed through the income tax system, non-resident service providers are taxed through the withholding tax system.

For goods providers, other than import taxes which affect both residents and non-residents depending on how carrier terms are negotiated, non-residents do not suffer Kenyan taxes.

There are situations when one does not wish to reside in a country but nevertheless wishes to declare his presence.

Such presence (permanent establishment) is recognised in Kenyan law and is often in the form of registration as a non-resident.