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Results: 4 Answers
Corporate Tax
Investment in capital assets
How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
The general principle in Kenya is that, unless expressly provided otherwise, expenses are tax deductible if they are incurred wholly and exclusively to generate taxable income, save for any expenditure that is capital in nature, and any loss, diminution or exhaustion of capital such as depreciation or impairment. There are no specific rules governing depreciation and impairment, and the rates applied largely follow the accounts.

However, wear and tear allowance is permitted at varying rates (on a straight-line basis), ranging from 12.5% to 37.5% for certain asset classes used for business purposes. Investment deduction is applicable on the construction of a building and on the purchase and installation therein of new machinery, where the owner of that machinery – being also the owner or lessee of that building – uses that machinery in that building for the purposes of manufacture. Investment deduction can be claimed in the year of income in which the building and equipment are first used. The rate of investment deduction is 100%. Where an investment in excess of KES 200 million ($2 million) is made outside the municipalities of Mombasa, Kisumu or the City of Nairobi, the applicable investment deduction rate is 150%.

Where a party incurs capital expenditure on the construction of an industrial building to be used in a business carried on by it or its lessee, a deduction known as ‘industrial building allowance’ shall be made in computing the gains or profits of that party for any year of income in which the building is used, at a rate of 10% on a straight-line basis. ‘Industrial building’, for the purposes of the Income Tax Act, means a building in use as a transport, dock, bridge, tunnel, inland navigation, water, electricity or hydraulic power undertaking.

A commercial building allowance at the rate of 25% is applicable on the construction of a commercial building (defined as a building for use as an office, shop or showroom, but excluding buildings which qualify for any other deduction), on condition that roads, power, water, sewers and other social infrastructure are provided.

For tax purposes, a taxpayer that disposes of assets which benefited from wear and tear deductions must make a balancing deduction (where a loss is made) or a balancing charge (where a gain or profit is made) upon ceasing to be the owner of those assets. A balancing charge has the effect of increasing the taxable profits of a company, while a balancing deduction reduces the taxable profits of a company.

For more information about this answer please contact: Daniel Ngumy from Anjarwalla & Khanna
Are there research and development credits or other tax incentives for investment?
Pursuant to the Income Tax Act, expenditure of a capital or non-capital nature incurred by a person in scientific research for business purposes is wholly deductible for tax purposes in the year in which the amount is incurred. The term ‘scientific research’ refers to activities in the fields of natural or applied science for the extension of human knowledge and, when applied to any particular business, includes scientific research that may lead to or facilitate an extension of that business.

For more information about this answer please contact: Daniel Ngumy from Anjarwalla & Khanna
Are inventories subject to special tax or valuation rules?
Inventory or stock in trade is not subject to any special tax rules. Income tax is charged on the adjusted profit derived from the sale of inventory.

For more information about this answer please contact: Daniel Ngumy from Anjarwalla & Khanna
Are derivatives subject to any specific tax rules?
Derivatives are not subject to any specific tax rules in Kenya. The tax applicable to a derivative transaction will depend on the characterisation of the income (eg, interest or capital gains) that is derived from the relevant derivative transaction.

For more information about this answer please contact: Daniel Ngumy from Anjarwalla & Khanna