On 27 December 2024, Kenya introduced provisions imposing minimum top-up tax. Despite the introduction of the provisions, there is limited clarity on the implementation of the minimum top-up tax in Kenya.
We set out below some of the questions regarding this tax:
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How is minimum top-up tax in Kenya imposed and who is liable?
In Kenya, it is imposed when the following two conditions are met:
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- The entity in question is a Kenyan subsidiary or permanent establishment that is a member of a multinational group with a consolidated annual turnover of EUR 750 million; and
- The effective tax rate paid by the Kenyan entity or permanent establishment in a year of income is less than 15%.
- How do you determine the effective tax rate of a Kenyan entity or permanent establishment?
The computation is based on the following formula:
Effective tax rate = sum of adjusted taxes paid by the Kenyan entity or permanent establishment  X 100%
sum of all the net income or loss
The sum of adjusted taxes is comprised of all taxes recorded in the financial accounts of the Kenyan entity or permanent establishment including deferred tax expense and tax on distributions.
The net income or loss is as captured in the audited financial statements prior to any income tax expense.
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How do you determine whether an entity is liable for minimum top-up tax?
Minimum top-up tax is based on the position that the Kenyan entity or permanent establishment should be taxed at the rate of 15% on its net income with some adjustments to the net income as follows:
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- The net income is reduced by 10% of the employee costs; and
- The net income is further reduced by 8% of the net book value of the tangible assets.
This adjusted net income is referred to as the Excess profit.
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How would a simplistic sample computation look like?
Minimum top-up would then be computed as follows:
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First determine the effective tax rate
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Total taxes paid by Kenyan entity = KES 1 000
Total net income by the Kenyan entity = KES 10 000
Effective tax rate = 10%
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Compute the top-up percentage
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Minimum top-up tax rate = 15%
Effective tax rate = 10%
Top-up rate to achieve the minimum tax rate of 15% = 5%
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Compute the excess profit
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Total net income = KES 10 000. This is then adjusted by deducting 10% of the employee costs and 8% of the book value of tangible assets.
Assuming a reduction of KES 2 000, the Excess profit = KES 8 000
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The minimum top-up tax liability
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(minimum top-up tax rate – effective tax rate) * excess profit
(15% – 10%) * 8,000 = 400
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How would a Kenyan entity or permanent establishment be subject to minimum top-up tax yet the corporate income tax rate is 30%?
Corporate income tax applies in Kenya at the rate of 30% and thus Kenyan entities and permanent establishments should not, ideally, be subject to minimum top-up tax.
However, Kenyan entities and permanent establishments that are claiming investment allowances at an accelerated rate, operating in a special economic zone or export processing zone or whose income is partly or wholly exempt from tax in Kenya may have an effective tax rate that is lower than 15%. In this regard, Kenyan entities that are members of multinational groups that exceed the turnover threshold, should confirm whether they would be subject to minimum top-up tax in Kenya.
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Who is exempted from the minimum top-up tax?
The Income Tax Act provides that minimum top-up tax does not apply to a public entity that is not engaged in business, charitable entities, a real estate investment vehicle that is an ultimate parent entity, Â a non-operating investment holding company,) an investment fund that is an ultimate parent company, or to a sovereign wealth fund.
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What is the way forward in Kenya with respect to the minimum top-up tax in Kenya?
The Minimum Top Tax Regulations (Draft Regulations) are still in draft form and have not been regulated. In this regard, though in law there is a requirement to comply with the minimum top-up tax, it is unlikely that entities would practically be able to comply since the guiding regulations are not in force.
However, entities should take into account the following provisions as contained in the Draft Regulations with respect to notification and payment of the minimum top-up tax:
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- Requirement to notify the Kenya Revenue Authority (KRA): Pursuant to the Draft Regulations, Kenyan entities and permanent establishments liable to pay minimum top-up tax in Kenya would be required to notify the KRA within 60 days from the date that the Draft Regulations come into force or within six months from the first day of the year of income for subsequent years of income;
- Requirement to file the minimum top-up tax return – This is to be done by the last day of the sixth month following the end of the financial income year.
