Taxation of Companies and Partnerships
Income Tax
Taxation of Companies and Partnerships
Syllabus tag: KASNEB CPA | Intermediate Level | CA26 Public Finance and Taxation | Topic 6 Taxation of Companies and Partnerships
Rates check. The rates below are those in force in 2026, following the Finance Act 2026. Tax rates change annually, so confirm the current position on the KRA website before relying on them.
Lesson objectives
By the end of this topic, you will be able to:
- Compute adjusted taxable profit from accounting profit
- Apply the corporation tax rate and the special rates
- Compute instalment tax and the balance of tax
- Explain how a partnership is taxed
- Distinguish a branch from a subsidiary for tax purposes
Why this matters
The accounts show profit prepared under IFRS. The tax computation converts it into taxable profit under the Income Tax Act. The two are rarely the same, and the reconciliation between them is the single most examinable computation in this paper.
Corporation tax rates
| Entity | Rate |
|---|---|
| Resident company | 30% |
| Branch or permanent establishment of a non-resident | 30% |
| Special Economic Zone enterprise | 10% for 10 years, then 15% |
| Export Processing Zone enterprise | 0% for 10 years, then 25% for 10 years |
| Turnover tax (gross turnover between the statutory limits) | 3% of gross sales |
A point worth knowing precisely. Branches were taxed at 37.5% until the Finance Act 2023 aligned them with resident companies at 30%, effective 1 January 2024. The Finance Act 2026 completed the alignment by bringing non-resident extractive-industry contractors down from 37.5% to 30% as well. Older textbooks and some published summaries still quote 37.5%.
From accounting profit to taxable profit
Start with the profit per the accounts and adjust.
Add back expenses charged in the accounts but not allowable:
- Depreciation and amortisation — replaced by capital allowances
- Fines, penalties and interest on late tax
- Donations to bodies that are not approved
- General provisions, as opposed to specific ones
- Capital expenditure charged as revenue
- Private or personal expenditure of directors
Deduct items allowable for tax but not charged, or income taxed elsewhere:
- Capital allowances
- Income exempt from tax or already taxed at source, such as qualifying dividends
- Profit on disposal of assets, which is dealt with under the capital allowance rules
A worked computation
Nyati Ltd reports a net profit of KES 24,600,000.
| KES | |
|---|---|
| Net profit per accounts | 24,600,000 |
| Add: depreciation | 3,200,000 |
| Add: donations to unapproved bodies | 1,800,000 |
| Add: fines and penalties | 900,000 |
| Less: capital allowances | (2,400,000) |
| Less: exempt dividend income | (1,100,000) |
| Adjusted taxable profit | 27,000,000 |
| Corporation tax at 30% | 8,100,000 |
The logic underneath: add back what the accounts deducted but tax does not allow; deduct what tax allows but the accounts did not. Every adjustment falls into one of those two categories.
Instalment tax
Companies do not wait until the year end to pay.
Instalments are due in the 4th, 6th, 9th and 12th months of the accounting period, at 25% of the estimated liability each.
The estimate is the lower of:
- the current year's estimated tax, or
- 110% of the previous year's tax
Nyati Ltd's current-year tax is 8,100,000 and last year's was 7,400,000. 110% of last year is 8,140,000, so the current-year estimate of 8,100,000 is lower and is used: 2,025,000 per instalment.
The balance of tax is due by the last day of the 4th month after the year end, and the return by the last day of the 6th month.
Agricultural companies pay in two instalments — 75% in the 9th month and 25% in the 12th — because their income is seasonal.
:::checkpoint A company's profit collapses in the current year, but 110% of last year's tax is far higher than this year's likely liability. Which basis should it use for instalments, and what is the risk of estimating too low? :::
Partnerships
A partnership is not a taxable person. It files a return showing how the profit is divided, but the tax is assessed on each partner individually.
A partnership earns 18,000,000, shared 3:2:
- Partner A: 3/5 × 18,000,000 = 10,800,000
- Partner B: 2/5 × 18,000,000 = 7,200,000
Each partner adds their share to their other income and pays at the graduated individual rates.
Salaries and interest on capital paid to partners are not deductible expenses of the partnership. They are an appropriation of profit, added back and then allocated to the partner who received them.
Branch or subsidiary
Both now pay corporation tax at 30%, so the choice turns on what happens when money goes home.
| Subsidiary | Branch | |
|---|---|---|
| Legal status | Separate legal person | Extension of the parent |
| Corporation tax | 30% | 30% |
| Sending profit home | 15% withholding tax on dividends | 15% repatriation tax on deemed repatriated income |
| Payments to parent | Interest and royalties deductible, subject to WHT | Internal management fees and royalties not deductible |
The repatriation tax is the sharper difference. It is computed by reference to the movement in the branch's net assets, so it falls due whether or not any cash is actually sent to the head office. A branch with 5,600,000 of deemed repatriated income pays 840,000 regardless of what it remitted.
Other rates a candidate should know
| Tax | Rate |
|---|---|
| Capital gains tax | 15% of the net gain |
| Withholding tax, management or professional fees — resident | 5% |
| Withholding tax, management or professional fees — non-resident | 20% |
| Withholding tax on dividends to non-residents | 15% |
| Turnover tax | 3% of gross sales |
:::checkpoint A foreign group must choose between a Kenyan subsidiary and a branch. Both pay 30% corporation tax and both face 15% on money sent home. Give two reasons the group might still prefer a subsidiary. :::