Taxable income for a primary society which is not a SACCO is computed in the same manner
as in the case of Apes and Union Societies except that dividends and bonuses are allowable as
declared for that year and distribute to its members (w.e.f. 1.1.2004).
• Dividends and bonuses must have approved by the AGM and the CIT.
• They must have been authorised by the Commissioner of Cooperative development.
• They must have been actually paid out in cash, cheque, dividend, and warrants or
credited to member’s accounts. If not paid out then the auditors should guarantee that
the amount will be paid.
• Dividends paid out by designated cooperative Societies other than SACCO is non
qualifying hence are subjected to further taxation.
(b) Interest from the member’s loans.
(c) Interest income from third parties e.g banks, insurance companies and other financial
institutions.
(d) Rental income.
(e) Other gains chargeable to tax in the Act.
- Interest income from members is fully exempt from taxation.
- Administrative expenses to the SACCO are not allowable.
- Other incomes of a SACCO apart from interest from members is taxable after allowing
a prescribed percentage to cater for expenses relating to such income as follows:
• Interest from third parties is taxable up to 50% of Gross interest.
• Its gross rental income.
• Gains chargeable to tax under sec 3(2((f) of the Income Tax Act.
Notes
• Withholding tax on KCB interest is not final tax.
• Dividends from Wananchi cooperative Society is the non qualifying type hence taxed
further.
• Dividends from XYZ Ltd (Gross) suffers withholding tax at source which is Final tax.
2.8 Taxation of Trade associations
A trade association is a body of persons which is an association of persons separately engaged
in any business with the main object of safeguarding or promoting the business interests of such
persons. However, members of taxable trade associations are allowed to deduct the subscriptions
in their income tax computation.
Generally trade associations are not considered to be carrying out trading activities. However,
they may engage in trade. Under section 21(2)of the Income Tax Act, such an association can
choose or elect by notice in writing to the CDT to be considered to be carrying out business
chargeable to tax in respect to any year of income. In which case, it’s gross receipts from
the transactions with members (including entrance fees and subscription fees) and with other
persons is deemed to be income from the business for that year of income at the corporate tax
rate.
2.9 Taxation of Clubs
Under Section21 of the Income Tax Act, a members club means a club or similar institution
with all its assets owned by, or held in trust for the members thereof. The income of clubs is made
up of the gross receipts, including entrance fees, and subscriptions and such receipts are taxed
in the name of the club at the corporation tax rate.
However, when ¾ or more of such investment is derived from members, the body will not be
taken to be carrying on business and no part of such non investment income will be taxed i.e
income from members is not taxable.
Investment income of a club such as dividends, interest, rents, capital gains etc are to be excluded
in the ¾ test mentioned above.-(sec 21(1)
2.10 Taxation of amateur sporting association
Under Paragraph 6 of the first schedule to the Income Tax Act, income other than income from
investment of an Amateur sporting association is not taxable. For this to be the case, the amateur
sporting association must be one:
• Whose sole aim or object is to foster outdoor sports and control any outdoor sports.
• Whose members consist of amateurs or affiliated associations the members of which
are amateurs.
• Whose memorandum of association or by laws have provisions defining an amateur or
a professional and providing that no person other than an amateur shall be a member
of that association.
2.11 Taxation of venture capital enterprises
The term ‘ venture company’ refers to a company incorporated in Kenya in which a
venture company has invested and which at the time of the first investment by the
venture company has assets with a market value or annual turnover of less than five
hundred million in Kenya shillings.
A venture capital company is a company incorporated in Kenya for the purpose of
investing in new and expanded business.
Venture capital companies enjoy certain tax exemptions as follows:
• Dividends received by a registered venture capital company is tax exempt. ( A registered
venture capital company is a venture capital company registered by the CDT as such)
• Gains arising from trade in shares of a venture company earned by a registered venture
capital company within the first ten years from the date of first investment in that venture
company by the venture capital company are tax exempt.: Provided that the venture
company has not been listed in any securities Exchange operating in Kenya for a period
of more than two years
2.11.1 Registration of a venture capital company
Under the Income Tax Venture Capital rules, a ‘venture capital company ‘shall, upon application
for registration, be registered by the Commissioner for the purposes of this Act if the Commissioner
is satisfied that –
(a) It is incorporated in Kenya; and
(b) It is incorporated for the purpose of investing in new or expanding venture companies;
and
(c) It is approved by Capital Markets Authority; and
(d It is managed by a fund manager; and
(e) Seventy-five percent or more of its portfolio of investable funds is invested in the equity
shares of venture companies; and
(f) The primary activities of the venture company in which it has invested are approved
activities.
2.11.2 Prohibited services
The primary activities of a Venture Capital Enterprise shall not include -
(a) trading in real property;
(b) banking and financial services; or
(c) retail and wholesale trading services
2.12 Taxation of Charitable trusts
A Charitable Institutions is defined as non profit making organization established in Kenya
which
• Is of public character and
• Has been established for purposes of the relief of poverty or distress of the public or
advancement of education.
The income of charitable trusts is exempt under paragraph 10 of the First Schedule to the Income
Tax Act. Under this section, the income of an institution, body of persons, or irrevocable trust, of
a public character established: solely for the purposes of:
• The relief of the poverty or
• Distress of the public, or
• For the advancement of religion or education established in Kenya
For the income to be exempt, any of the following conditions must also be met:
(i) the business is carried on in the course of the actual execution of those purposes; or
(ii) the work in connection with the business is mainly carried on by beneficiaries under
those purposes; or
(iii) the gains or profits consist of rents (including premiums or similar consideration in the
nature of rent) received from the leasing or letting of land and chattels leased or let
therewith.
In summary, therefore, the income of a charitable trust is exempted from tax if:
(i) It is public in character
(ii) If it is established for relief of distress or poverty to the public.
(iii) If it is established to advance religion or education.
(iv) Its total income is used or spent for charitable purposes.
If a charitable trust runs a business then profits thereof is not taxed if proceeds are used for
purposes 2 and 3 above.
2.13 Taxation of Trust bodies, settlements and estates under administration
The term ‘settlement" includes a disposition, trust, covenant, agreement, arrangement, or transfer
of assets, other than -(a) a settlement made for valuable and sufficient consideration;(b) an
agreement made by an employer to confer a pension upon an employee in respect of a period
after the cessation of employment with that employer, or to provide an annual payment for the
benefit of the widow or any relative or dependant of that employee after his death, or to provide
a lump sum to an employee on the cessation of that employment. It also does not include a
disposition, trust, covenant, agreement, arrangement, or transfer of assets, resulting from an
order of a court unless that order is made in contemplation of this provision;
The term "child" means a child under the age of nineteen years and includes a step-child, an
adopted child and an illegitimate child;
The term "settlor", in relation to a settlement, includes a person by whom the settlement was
made or entered into directly or indirectly, and a person who has provided or undertaken to
provide funds directly or indirectly for the purpose of the settlement, or has made with another
person a reciprocal arrangement for that person to make or enter into the settlement;
2.13.1Income Settled on Children
Under section 25. of the Income Tax Act, where, under a settlement, income is paid during the life
of the settlor to or for the benefit of a child of the settlor in a year of income, that income shall be
deemed to be income of the settlor for that year of income and not income of any other person.
Provided that it shall not apply to any year of income in which -
(i) the income so paid does not exceed one hundred shillings; or
(ii) the child attains the age of nineteen years.
The income which is dealt with under a settlement so that it, or assets representing it, will or may
become payable or applicable to or for the benefit of a child of the settlor in the future (whether on
the fulfilment of a condition, or the happening of a contingency, or as the result of the exercise of
a power of discretion, or otherwise) shall be deemed to be paid to or for the benefit of that child;
income so dealt with which is not required by the settlement to be allocated, at the time when it is
so dealt with, to any particular child or children of the settlor shall be deemed to be paid in equal
shares to or for the benefit of each of the children to or for the benefit of whom or any of whom
the income or assets representing it will or may become payable or applicable;
in relation to a settlor, only income originating from that settlor shall be taken into account as
income paid under the settlement to or for the benefit of a child of the settlor.
Where tax is charged on and is paid by the person by whom the settlement was made, that person
shall be entitled to recover from a trustee or other person to whom the income is payable under
the settlement the amount of the tax so paid, and for that purpose to require the Commissioner to
furnish to him a certificate specifying the amount of the tax so paid, and a certificate so furnished
shall be conclusive evidence of the facts appearing therein.
Where the amount of the tax chargeable upon a person for a year of income is affected by
withholding tax deducted from the income, the amount by which the tax is affected shall, if
the amount of tax is thereby reduced, be paid by him to the trustee or other person to whom
the income is payable under the settlement or, where there are two or more of them, shall be
apportioned among those persons as the case may require; and if any question arises as to the
amount of a payment or as to an apportionment to be made under this subsection, that question
shall be decided by the Commissioner whose decision thereon shall be final.
2.13.2 Income deemed to be income of settlor
The income of certain settlements may be deemed to be income of settlor. Under Section 26.(1)
of the Income Tax Act, all income which in a year of income accrued to or was received by a
person under a settlement from assets remaining the property of the settlor shall, unless that
income is deemed under section 25 to be income of the settlor for an earlier year of income, be
deemed to be income of the settlor for the year of income in which it so accrued to or was received
by that person and not income of another person whether or not the settlement is revocable and
whether it was made or entered into before or after the commencement of this Act.
Further, all income, which in a year of income accrued to or was received by a person under a
revocable settlement shall be deemed to be income of the settlor for that year of income and not
income of another person.
Where in a year of income the settlor, or a relative of the settlor, or any other person, under the
direct or indirect control of the settlor or any of his relatives or the settlor and any of his relatives,
by agreement with the trustees of a settlement in any way, whether by borrowing or otherwise,
makes use of income arising, or of accumulated income which has arisen, under the settlement
to which he is not entitled thereunder, then the amount of that income or accumulated income so
made use of shall be deemed to be income of the settlor for that year of income and not income
of any other person.
A settlement is deemed to be revocable if under its terms the settlor -
(a) has a right to reassume control, directly or indirectly, over the whole or any part of the
income arising under the settlement or of the assets comprised therein; or
(b) is able to have access, by borrowing or otherwise, to the whole or any part of the
income arising under the settlement or of the assets comprised therein; or
(c) has power, whether immediately or in the future and whether with or without the consent
of any other person, to revoke or otherwise determine the settlement and in the event
of the exercise of that power, the settlor or the wife or husband of the settlor will or may
become beneficially entitled to the whole or any part of the property comprised in the
settlement or to the income from the whole or any part of that property:
• Provided that a settlement shall not be deemed to be revocable by reason only
that under its terms the settlor has a right to reassume control, directly or indirectly,
over income or assets relating to the interest of a beneficiary under the settlement
in the event that the beneficiary should predecease him.
• Where, under this section, tax is charged on and is paid by the settlor, the settlor
shall be entitled to recover from the trustees or other person to whom the income
is payable under the settlement the amount of the tax so paid, and for that purpose
to require the Commissioner to furnish to him a certificate specifying the amount of
the tax so paid, and a certificate so furnished shall be conclusive evidence of the
facts appearing therein.
• Where, under this section, income is deemed to be income of the settlor, it shall
be deemed to be income received by him as a person beneficially entitled thereto
under the settlement.
2.14 Taxation of Petroleum companies
2.14.1 Introduction
In Kenya, petroleum companies are regulated by the Petroleum (Exploration and production)
Act, (Cap 308, Laws of Kenya). A "petroleum company" means a corporate body that carries out,
in addition to any other activities, operations under a petroleum agreement entered into under
the Petroleum (Exploration and Production) Act. A “contractor" means the person with whom the
Government concludes a petroleum agreement. A "petroleum service subcontractor" means a
non-resident person who provides services in Kenya to a petroleum company.
Under the Act, the Minister for Energy has power to authorise any person to commence
exploration activities in Kenya. Under Section 4 of the Petroleum Act, no person shall engage
in any petroleum operations in Kenya without having previously obtained the permission of the
Minister. All petroleum operations shall be conducted in accordance with the provisions of this
Act, the regulations made thereunder and the terms and conditions of a petroleum agreement.
"petroleum operations" means all or any of the operations related to the exploration for,
development, extraction, production, separation and treatment, storage, transportation and sale
or disposal of, petroleum up to the point of export, or the agreed delivery point in Kenya or the
point of entry into a refinery, and includes natural gas processing operations but does not include
petroleum refining operations. The term "petroleum" means mineral oil and includes crude oil,
natural gas and hydrocarbons produced or capable of being produced from oil shales or tar
sands;
The Government may conduct petroleum operations either—
(a) Through an oil company established by the Government to conduct those operations;
or
(b) Through contractors in accordance with petroleum agreements. A "petroleum agreement"
means the agreement, contract, or other arrangement between the Government and a
contractor to conduct operations in accordance with the provisions of this Act; or
(c) In such other manner as may be necessary or appropriate.
The Government may authorize a contractor to engage in petroleum operations within a specified
area, in accordance with the terms and conditions set out in the petroleum agreement.
Notwithstanding the provisions of this section, the Government may grant to any person, other
than the contractor, a permit for the prospecting and mining of minerals or other natural resources
other than petroleum or the conduct of operations other than petroleum operations within an area
which is the subject of a petroleum agreement, provided that the prospecting, mining and the
other operations shall not interfere with petroleum operations.
2.14.2Income tax provisions on taxation of petroleum companies
Part 2 of the 9th schedule to the Income Tax Act provides guidance on the taxation of petroleum
companies.
Determination of income
(1) Under the section, in determining the gains or profits of a petroleum company for a year
of income for the purposes of this Act there shall be brought into account the value of the
production to which a petroleum company is entitled under a petroleum agreement in that
year of income.
(2) For the purposes of subparagraph (1), the value of production shall be the total of-
(a) The price receivable for that production disposed of by a petroleum company in sales
at arm's length; and
(b) The market value, calculated in accordance of production not disposed of by a petroleum
company in sales at arm's length.
Sales of petroleum at arms length
(1) A sale of petroleum is a sale at arm's length if the following conditions are satisfied -
(a) The price is the sole consideration for the sale;
(b) The terms of the sale are not affected by any commercial relationship, other than that
created by the contract of sale itself, between the seller or an affiliate and the buyer or
an affiliate; and
(c) The seller or an affiliate do not have, directly or indirectly, an interest in the subsequent
resale or disposal of the petroleum or any product derived therefrom.
(2) For the purposes of this Schedule, the market value of petroleum shall be determined in
accordance with the petroleum agreement entered into with the petroleum company but
where the terms of the petroleum agreement do not in any case provide a valuation, the
market value shall be -
(a) where petroleum is disposed of to third parties at arm's length, the amount actually
receivable for that sale, at the FOB point of export, or at the point that title and risk pass
to the buyer;
(b) in any other case-
(i) If there have been sales to third parties at arm's length during the current calendar
quarter, the weighted average per unit price paid in those sales, at the FOB point
of export, or at the point that title and risk pass to the buyer, adjusted for quality,
grade and gravity, and any special circumstances;
(ii) If there have been no sales to third parties at arm's length during the current
calendar quarter, the weighted average per unit price at the FOB point of export,
or at the point that title and risk pass to the buyer, paid elsewhere in arm's length
sales of petroleum of a similar quality, grade and quantity, adjusted for any special
circumstances of those sales.
Disposal of petroleum
Where a person disposes of petroleum and, for the purposes of ascertaining the gains or profits
of that person, the market value of the petroleum is calculated at arm’s length, the consideration
for the acquisition of that petroleum, for the purposes of ascertaining the gains, profits or losses
of the person acquiring that petroleum, shall be that market value.
Allowable deductions
(1) For the purposes of ascertaining the gains or profits for a petroleum company for a year of
income, there shall be deducted the expenditure referred to in subparagraph (2) incurred in
that year, but this shall not prevent other deductions authorized by the Income Tax Act, and
where an item of expenditure is specifically deductible under a provision of this Schedule,
that item shall not be deductible under another provision of the Income Tax Act.
(2) For the purposes of subparagraph (1), there shall be deducted –
(a) intangible drilling costs;
(b) Geological and geophysical costs;
(c) Payments to the Government, or any agency thereof, pursuant to the provisions of the
petroleum agreement entered into with the petroleum company;
(d) Production expenditure;
(e) Executive and general administrative expenses wholly and exclusively incurred in
Kenya by a petroleum company;
(f) Where a non-resident petroleum company operates in Kenya through a permanent
establishment in Kenya, only those reasonable executive and general administrative
expenses incurred outside Kenya by that person, including management or professional
fees, but limited to the amount that is attributable to the permanent establishment in
Kenya and is fairly and reasonably allocated thereto;
(g) Management or professional fees, including those paid to persons outside Kenya limited
to the amount that is attributable to the petroleum company and is fairly and reasonably
payable thereby; and
(h) Interest paid, including interest paid by a non-resident petroleum company and fairly
and reasonably allocated to a permanent establishment maintained in Kenya by that
company, but no interest paid shall be deductible unless -
(i) The payment does not exceed the amount that would have been payable on a loan
concluded at arm's length where the loan, repayment thereof, and the interest payable
constitute the only consideration for the making of the loan;
(j) the loan, in respect of which interest is paid, is applied for operations by the petroleum
company in Kenya, but where only part of the loan is applied in accordance with this
paragraph only the interest payable in respect of that part shall be deductible;
(k) Withholding tax on interest has been deducted and paid to the Commissioner.
(3) Where expenditure is incurred on an asset representing qualifying expenditure, there shall
be made, in ascertaining the gain or profits for the year of income in which that asset is first
brought into use in Kenya, or in which production commences, whichever is the later, and
the four following years of income, a deduction equal to one-fifty of the expenditure.
(4) Where a well which fails to discover petroleum is drilled and abandoned, the expenditure
incurred in drilling the well, which has not been deducted under another provision of this Act,
shall be deducted in the year of income in which the well is abandoned.
(5) Where in ascertaining the gains or profits of a petroleum company in a year of income, there
results a deficit, the amount of that deficit shall be an allowable deduction in ascertaining the
gains or profits of the previous year of income but the deficit may only be carried back -
(a) from a year of income which the petroleum company has ceased permanently to
produce petroleum; and
(b) for not more than three years of income from the year in which the deficit occurred
Transactions with affiliates
Where a transaction takes place between a petroleum company and an affiliate, the income
chargeable, or the deduction allowable to that company, shall be deemed to be the amount that
might have been expected to accrue if that transaction had been conducted by independent
persons dealing at arm's length.
Assignment of petroleum agreement and disposal of assets
An assignment of a right under a petroleum agreement shall not give rise to Capital gains tax but,
subject to this paragraph, the consideration for the assignment shall be treated as a receipt of
the petroleum company, and tax shall be charged accordingly.
Further, where an assignment of a right under a petroleum agreement involves the disposal of
assets which represent qualifying expenditure, there will be deducted from the consideration for
the assignment the amount of the qualifying expenditure not yet allowed against income.
The assignment is of part only of the rights held by a petroleum company, or where not all
the assets which represent qualifying expenditure are included in the assignment, the amount
of qualifying expenditure not yet allowed against income which is to be deducted from the
consideration for the assignment shall be apportioned by the Commissioner.
The amount to be treated as a receipt shall be, in the case of an assignment at arm's length, the
consideration therefore and in any other case, the market value of that which is assigned, but
where part of the consideration consists of the undertaking by the assignee of a work obligation,
no amount in respect thereof shall be taken into account under this paragraph.
Where a right under a petroleum agreement is assigned, the Assignee shall be treated as having
incurred, at the date of the assignment, qualifying expenditure equal to the lesser of the total
amount of the consideration paid for the assignment and the market value of rights and assets
representing qualifying expenditure assigned.
Where a petroleum company sells, disposes or removes from Kenya an asset which represents
qualifying expenditure, otherwise than on an assignment of a right under a petroleum agreement,
and the net proceeds of the sale are –
(a) Less than the qualifying expenditure not yet allowed against income, a deduction, in
this Schedule referred to as a "balancing deduction", shall be made to the company, in
the year of income in which the sale or disposal takes place, equal to the difference;
(b) More than the qualifying expenditure not yet allowed against income, a charge, in this
Schedule referred to as a "balancing charge", shall be made to the company, in the year
of income in which the sale or disposal takes place, equal to the difference.
Where an asset representing qualifying expenditure is brought into use without being purchased,
or, without being sold, ceases permanently to be used, by a petroleum company, it shall be
deemed to have been purchased or sold at market value.
Taxation of petroleum service subcontractors
The profits or gains of a petroleum service subcontractor (PSS) in respect of services rendered
in Kenya to the petroleum company is specifically taxed in accordance with Part III of the 9th
Schedule regardless of any other provision of the Act. Some of the salient provisions of the
Schedule are inter alia:
“Paragraph 9: PSS shall be deemed to have made a taxable profit equal to 15%, assumed
profit rate, of all the moneys paid by a Petroleum company (taxable service fee), which
profits shall be taxed at the rates set out in the Third Schedule applicable to nonresident companies which have a permanent establishment in Kenya.
The taxable service fee does not include moneys paid as reimbursement to PSS for the cost
of mobilization and demobilization and reimbursement of expenses.
Paragraph 10: when paying a taxable service fee, the petroleum company (PC) shall:-
- Deduct an amount of tax equal to the sum produced by applying the income tax rate
referred to in paragraph 9 to the assumed profit;
Paragraph11: the tax collected by the PC under this paragraph in a month shall be remitted
within 30 days to the Commissioner with a return of amounts paid and tax deducted,
hereinafter referred to as the “subcontractors return” showing…
- The total taxable service fee paid;
- The total tax deducted and remitted;
- The total amount paid for mobilization and demobilization; and
- The total amount paid for reimbursement of expenses.”
In line with the above provisions, where for instance the Petroleum Company is required to
pay Kshs 100 to the Petroleum service subcontractor the assumed profits which are subject to
taxation for services deemed to have been rendered in Kenya shall be Kshs 15 (being 15% of
Kshs 100). The taxes payable on this amount and for which the petroleum company is subject to
withhold and remit to the revenue authorities is Kshs. 5.625 (37.5% of Kshs 15).
The aforesaid taxes ought to be remitted to the tax authorities within 30 days by the PC with a
return referred in the Schedule as “the subcontractor’s return” in respect of that month amounts
as outlined above
2.14.3 Value Added Tax Rules on Taxation of petroleum companies
Some of the goods and supplies used by a petroleum companies to carry out its exploration
activities either by itself or by an subcontractor attract VAT at 16%. Under Section 23 of the VAT
Act, a petroleum company can apply for VAT remission on imports for exploration activities.
2.14.4 Customs & excise rules on taxation of petroleum companies
Under the Customs & excise rules, a petroleum company can make an application for duty
remission on its imports.
Illustration
Titanic Limited, a company incorporated in Kenya has recently concluded a petroleum agreement
with the government of Kenya. Under the terms of the petroleum agreement, the company has
been allowed to explore along the Kenyan waters and share the proceeds with the government
on a 50: 50 basis. The company has subcontracted TNM Ltd to carry out exploration surveys
along waters for a period of 3 months. You are provided with the following information with regard
to Titanic limited.
