IT 1

Charge to income tax, residence and sources of income

1Scope and legal basis

Section 3(1) of the Income Tax Act (Cap 470) charges income tax for each year of income on all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. Section 3(2) lists what that income includes: gains or profits from a business, employment or services rendered, a right granted for the use or occupation of property (rent), dividends and interest, pensions and annuities, income from a digital marketplace, and, through the Eighth Schedule, gains on the transfer of property. Section 4 sets the rules for business income, section 5 for employment income, and sections 6 to 12H add the special charges: rental income (6A), the digital economy (12E), minimum top-up tax (12G), turnover tax (12C), and others. A resident person is also taxed on employment income earned outside Kenya and on business income of a business carried on partly outside Kenya; other foreign-source income of a resident is outside the charge, which makes Kenya a source-based system with a residence overlay rather than a worldwide system.

The year of income is the calendar year for individuals; a company may adopt its own accounting date and is assessed on the accounting year ending in the year of income. The tax is charged on 'total income', the aggregate of the amounts under each source after the deductions the Act allows against that source, and losses from one specified source (rent, employment, business, farming, investment) may only be set against income from the same source.

2Key definitions

Person

An individual, a company, a partnership (for some purposes), a trust, an estate, a club or association, and any other body of persons; the Act taxes companies and individuals separately and looks through partnerships to the partners.

Resident individual (s.2)

An individual who has a permanent home in Kenya and was present in Kenya for any period in the year of income; or who has no permanent home in Kenya but was present for 183 days or more in the year of income, or was present in that year and in each of the two preceding years for periods averaging more than 122 days a year.

Resident company (s.2)

A body corporate incorporated under a Kenyan law; or a body whose management and control is exercised in Kenya in the year of income; or a body declared resident by the Cabinet Secretary by notice in the Gazette.

Permanent establishment

A fixed place of business through which the business of a non-resident is wholly or partly carried on: a place of management, a branch, an office, a factory, a workshop, a mine, a building site or construction or installation project lasting more than 183 days, a dependent agent who habitually concludes contracts, and a warehouse for a person providing storage to others. A non-resident with a PE is taxed on the income attributable to it at the company rate.

Accrued in or derived from Kenya

Income has a Kenyan source when the activity or property that produces it is in Kenya: employment exercised in Kenya (or for a Kenyan employer or government, wherever exercised), a business carried on in Kenya, property situated in Kenya, dividends from a Kenyan company, interest and royalties paid by a resident or a PE, and services rendered to a resident or a PE.

Total income and taxable income

Total income is the sum of income from all sources less the deductions the Act allows against each source; taxable income is total income less the personal deductions an individual may claim (pension contributions, mortgage interest, SHIF and AHL). Tax is then computed on taxable income and reduced by reliefs.

3Charge, computation and rates

Applying the residence tests

Three individuals, one year of income

Amina owns a house in Nairobi where her family lives and spent 40 days in Kenya in 2026, working the rest of the year in Dubai: resident (permanent home plus presence for any period). Her Dubai employment income is taxed in Kenya because a resident is taxed on foreign employment income; she claims relief for any Dubai tax under section 42 only if a treaty applies (there is one with the UAE).

Brian, a Ugandan engineer with no home in Kenya, worked on a Nairobi project from 1 February to 15 September 2026 (227 days): resident by the 183-day test, so his Kenyan employment income is taxed at the graduated rates with personal relief, not at non-resident withholding rates.

Chen, a consultant with no Kenyan home, was present 130 days in each of 2024, 2025 and 2026 (average 130, above 122, with presence in the current year): resident from 2026 onwards under the averaging test.

The rates that apply to the person

Person	Basis	Rate in force
Resident individual	Total income from all sources, less personal deductions, less reliefs	10% on the first KES 288,000 a year; 25% on the next KES 100,000; 30% on the next KES 5,612,000; 32.5% on the next KES 3,600,000; 35% above KES 9,600,000. Personal relief KES 28,800 a year (KES 2,400 a month)
Non-resident individual	Kenyan-source income; employment income taxed at the graduated rates through PAYE without personal relief; other income mostly by final withholding tax	Graduated rates on employment income; withholding rates on the rest (20% fees, 15% dividends and interest, 30% rent)
Resident company	Taxable profit of the accounting year	30%
Non-resident company with a permanent establishment	Profit attributable to the PE	30%, plus 15% repatriation tax on repatriated income (since the Finance Act 2025, replacing the 37.5% branch rate)
Non-resident without a PE	Kenyan-source payments	Final withholding tax at the non-resident rates; SEP tax at an effective 3% on digital marketplace income
Partnership	Not taxed as such; each partner is taxed on their share of partnership income plus salary and interest from the partnership	Partner's own rate
Trust and estate	Income of the trustee; from the Finance Act 2026 trust income is deemed income of the trustee and qualifying dividends and interest already taxed are not taxed again on distribution	30% on the trustee, or the beneficiary's rate on distributions of other income

The specified sources and loss rules

Section 15(7) requires gains and losses to be computed separately for each specified source: rights granted to others for use of property (rent), employment, business (by each separate business), farming, investment income, and the surplus on retirement fund withdrawals. A loss from one source is deducted only from income of the same source, in the same year and, if unused, carried forward for up to five years (Finance Act 2025), extendable on application to the Cabinet Secretary.
Employment losses do not arise; an expense of employment is deductible only if wholly and exclusively incurred in producing the income, and in practice only the statutory deductions (pension, SHIF, AHL, mortgage interest) are allowed against employment income.
Rental income of an individual from residential property within the KES 288,000 to KES 15 million band is outside total income altogether: it is taxed on gross at 7.5% as a final tax under section 6A, unless the landlord elects into the normal regime.
Income taxed at source as a final tax (qualifying dividends, qualifying interest, winnings, residential rental income, SEP income) is excluded from total income, and the withholding tax is not creditable; other withholding tax is a credit against the tax on total income.

4Compliance: returns, payment and penalties

Every person with a Kenyan source of income must have a PIN and file a return: individuals file the annual income tax return on iTax by 30 June of the following year (a nil return is required even where PAYE has settled everything); companies file within six months of the accounting year end (four months for years starting on or after 1 January 2027, under the Finance Act 2026) and pay instalment tax on the 20th of the fourth, sixth, ninth and twelfth months at 25% each of the lower of 110% of the prior year's tax and the current year estimate, with the balance within four months of the year end. A non-resident with a PE files as a company; a non-resident without one is discharged by the withholding tax, and a person whose only income is employment is exempt from instalment tax. The late filing penalty is the higher of 5% of the tax due and KES 2,000 for an individual or KES 20,000 for a company; late payment carries a 5% penalty and interest at 1% a month. Residence is a question of fact determined year by year; a person who becomes or ceases to be resident is taxed for the whole year on the basis that applies.

5Examinable focus

What KASNEB tests

The residence tests are examined every sitting, usually as short scenarios (days present, a permanent home, a company incorporated abroad but managed from Nairobi): apply the 183-day and 122-day average tests and the management-and-control test precisely and state the tax consequence. Know the difference between source and worldwide taxation and the two exceptions for residents (foreign employment income, business carried on partly outside Kenya), the definition of a permanent establishment with the 183-day construction rule, and the specified-source loss rule with the five-year carry-forward. Learn the rate table: examiners expect the individual bands, the 30% company rate, the branch position and the final-tax treatment of qualifying dividends and interest without being told them.