The government has published the proposed Income Tax Bill, 2018 (“the Bill”) which if enacted will repeal the current Income Tax Act. The Bill is currently at the public participation stage after which it will be presented to the National Assembly for debate.

The following are some of the changes that will come into force if the Bill is enacted into law:

Capital gains tax

The Bill introduces the concept of indexation in the calculation of capital gains which caters for the impact of inflation in the increase of value of an asset. The index proposed to be used is the Consumer Price Index published by the Kenya National Bureau of Statistics. In what may be seen as a case of giving with one hand and taking away with the other, the Bill also proposes an increase in capital gains tax from the current rate of five (5) percent to twenty (20) percent.

The Bill has also exempted transfer of property to Real Investment Trusts (REITs) from capital gains which move is likely to increase the uptake of REITs.

Income tax

The Bill maintains the current tax bands but proposes an additional rate of tax of 35% for individuals who earn more than Kshs. 9,000,000 (approximately US$ 90,000) in a year.

The Bill allows a company to apply to the National Treasury for the extension of carry forward period for tax losses for up to two years.

The Bill has also expanded the definition of dividend to include any benefit that a shareholder accrues from a company for example any loan that a company settles on behalf of its shareholder, any asset distributed by the company for the benefit of the shareholder or any amount used by the company in any manner for the benefit of the shareholder. This is a notable clause as it is likely to widen the tax net in relation to dividend income.

The Bill also proposes that the Commissioner of Domestic Taxes may direct that a company distribute at least sixty percent of its profits as dividend where he/she is of the opinion that the same may be distributed without prejudice to the interests of the company. This provision is meant to curb avoidance of tax by non-payment of dividend.

The Bill also provides that dividends paid to a resident company from a company in which it owns more than 25% of the shares are exempt from taxation; this threshold has been increased from 12.5%.

The Bill has also proposes a number of changes to the rates of tax for companies and individuals; for example, companies licensed to operate in the Export Processing Zones (EPZ) will not have a tax holiday for the first ten years but will instead be subject to 10% tax for that period. A non-resident company with a permanent establishment in Kenya will be subject to a corporate tax of 30% (similar to resident companies) unless it has income in excess of Kshs. 500,000,000 (approximately US$ 500,000), in which case the rate of tax shall be 35%.

Investment allowances

The income tax framework allows investors in various sectors to recoup their investments by allowing them to deduct the costs of their investments from their profits. The following are some of the proposals in the Bill regarding investment allowances:

• It has introduced an investment allowance of 100% for hospital buildings.
• It has changed the rate of investment allowance for petroleum gas storage facilities from 150% to 60% in the first year of use and the remaining 40% spread out equally over the next four years.
• It has changed the rate of investment allowance for hotel buildings from 150% to 60% in the first year of use and the remaining 40% spread out equally over the next four years.
• It has changed the rate of investment allowance for filming equipment by a local film producer licensed by the minister responsible for communication from 100% to 50% per annum in equal instalments.

The Bill also introduces a new schedule on the taxation of cross border transactions. This schedule has provisions on the determination of gains and profits in transactions between associated entities.

We shall keep you updated on the progress of the Bill.

Please contact us at Info@cfllegal.com should you require further information.