Withholding Tax and Presumptive Tax

Withholding Tax and Presumptive Tax

Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation

1. What is withholding tax?

Withholding tax (WHT) is a mechanism by which the payer deducts tax at source from specified payments and remits it to the KRA on behalf of the recipient. It reduces the risk of tax evasion and brings tax collection forward. WHT may be a final tax (the recipient has no further liability on that income) or a credit (offset against the recipient's final assessment).

2. Key WHT rates under the ITA

Payment type                    Resident rate  Non-resident rate
Dividends                             5%            15% (or treaty rate)
Interest (banks)                      15%           15%
Interest (others)                     15%           15%
Royalties                             5%            20% (or treaty rate)
Management fees                       5%            20% (or treaty rate)
Professional fees (companies)         5%            20%
Rental income                         10%           30%
Service fees (specified)              5%             5%
Winnings (betting)                    20% (final)    —

WHT must be deducted at the time of payment and remitted to the KRA by the 20th of the following month.

3. Final WHT

WHT is a final tax for non-residents on most payments (dividends, interest, royalties, management fees) — the non-resident has no further obligation to file a Kenyan tax return for that income.

For residents, WHT on dividends and certain interest payments is also a final tax. WHT on professional fees and management fees paid to residents is a tax credit (not final) — the recipient includes the income in their return and claims the WHT as a credit.

4. Exemptions from WHT

Certain payments are exempt from WHT: payments to institutions exempt from tax (e.g. churches, parastatals); payments between group companies in some circumstances; interest paid by the government on its borrowings.

5. Presumptive tax

Introduced to bring the informal sector into the tax net. Turnover tax (ToT) applies to businesses with annual gross turnover between KES 500,000 and KES 15,000,000. Rate: 1.5% of gross turnover per quarter. ToT is a final tax — no deductions are allowed and no other income tax return is required for that source.

Businesses below KES 500,000 turnover: exempt. Businesses above KES 15,000,000: subject to full income tax regime.

6. Digital service tax

Non-resident persons providing digital services to persons in Kenya are subject to digital service tax (DST) at 1.5% of gross transaction value. The obligation is on the non-resident to register and file. This addresses the taxation of the digital economy where no physical PE exists.